Fixing the Problems of the Bailout

Reviewing Larry Summers' Letter to Congressional Leadership

Jan 13, 2009

The $700 billion bailout has been criticized universally for failing to solve the credit crisis in America. How will the Obama Administration address this problem?

On January 12, 2009, Larry Summers (Director-designate of the National Economic Council) released an open letter to the Democratic and Republican leaders of Congress detailing the position of Obama's transition team toward fixing the problems of the American Recovery and Reinvestment plan, known popularly as "the Bailout."

Problems with the Bailout

Summers describes Obama's frustration with the ineffectiveness of the Baiout. While $350 of the $700 billion dollar bailout has already been distributed, Americans continue to lose their jobs, sustain lowered income, and face foreclosure on a regular basis.

Summers highlights the need for transparency in a revised bailout package, where the government would know where the money is being spent, and manage how the money is spent. Many banks have taken the funds, intended to increase the amount of credit available to American families and businesses, and used them to pay off debts and reward CEOs with lavish bonuses. These reports have frustrated many.

Increase Credit Flow to Families and Businesses

Because small businesses create more than two-thirds of jobs in the U.S., Congress and the Federal Reserve should help financial institutions to lend money to entrepreneurs, small businesspeople, and other individual interests, instead of helping only corporate interests.

Improve Management and Oversight of the Financial Crisis

The companies who receive money from the plan should become accountable for the money they have spent and will receive. Also, because lax regulation led to the abuses which precipitated the financial crisis, increased regulation and transparency for the financial industry should protect Americans better than it has.

Help People Facing Foreclosure

Obama wants "smart, aggressive policies to reduce the number of preventable foreclosures" through decreasing mortgage payments, reforming bankruptcy laws, and increasing funding programs which help homeowners, such as "Hope for Homeowners."

Monitor Companies Receiving Government Assistance

Summers wants the resources of the Bailout devoted to increasing the credit flow to American businesses and preventing future financial crises, not to helping shareholder value or compensating CEOs. To do this, the companies which receive assistance must comply with a series of limits on executive salary and stock buyback.

Limit Use of Government Intervention

Taxpayer money should only be utilized when private investment is impossible. Summers states the intention of the rescue is to "replace investments made by the U.S. Govenrnment with private investment as quickly as possible."

"Until We Pass through this Economic Storm"

With these actions, Summers believes that the course of the bailout may be changed.

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