The United States experienced a significant economic problem in 2008. Similar to a hurricane striking the nation, it had an enormous impact on people's lives, businesses, and the financial sector. In order to deal with this issue, the government approved the Emergency Economic Stabilization Act, which intended to set the nation's economic system right.
In this article, we will discuss the major provisions of this act and how it supported the nation during these difficult circumstances. Let's get started!
Understanding the Emergency Economic Stabilization Act of 2008
An extraordinary piece of legislation is the Emergency Economic Stabilization Act. The act was approved by the council in the United States and signed by President George W. Bush on October 3, 2008. It was established in order to prevent the crisis caused by mortgages. The crisis resulted in an abrupt decrease in international credit market stability due to enormous losses in the residential mortgage industry.
The Emergency Economic Stabilization Act (EESA) was intended to restore flexibility in financial markets. It was done by allowing the secretary of finance to purchase up to 700 billion dollars in mortgage-related securities and other problematic assets from the nation's banks. It also included another financial instrument the secretary considered necessary to promote financial market stability.
The bill included measures to reduce the number of bank-owned properties on legally owned mortgages and recover possible future losses on government loan investments. It also keeps an eye on treasury department investments through reports to lawmakers and a newly established regulation board.
Significant Provisions of the Emergency Economic Stabilization Act
The Emergency Economic Stabilization Act of 2008 had several key provisions aimed at stabilizing the U.S. economy during the financial crisis. Here are some of its crucial components.
Troubled Asset Relief Program
The Troubled Asset Relief Program, which is also known as TARP, is the key component of the act. The secretary can purchase troubled assets from any financial institution or can offer and support pledges to buy them under the conditions of the TARP. Any problematic asset purchased under the TARP may be controlled, invested in, sold, lent, or transferred in any other way, depending on the secretary's decision.
The secretary may decide to guarantee troubled assets rather than buy them simply. In doing so, the secretary has the authority to assess the level of risk associated with each troubled asset or property portfolio. In accordance with that assessment, they demand an additional fee from each participating financial institution.
Despite having extensive flexibility in carrying out the TARP, the secretary has to implement all necessary precautions. The purpose is to prevent financial companies from taking advantage of the program through unfair profits. One of these actions is to stop buying troubled assets for more money than the banks had originally paid for them. Limiting the CEO's salary is one of them as well.
Homeowner Assistance and Protection
The act also provides greater immediate support to homeowners. It demands that the providers of mortgages should be encouraged by the secretary and any federal property management responsible for mortgages or associated securities to take part in the National Housing Act for Homeowners program. The secretary would encourage the providers to reconsider lowering interest rates or making other changes. It will prevent foreclosures while optimizing support to homeowners through the use of loan assurances and credit upgrades.
The act offers homeowners additional support in the form of tax relief. By helping people stay in their homes, the government aimed to stabilize the housing market and, in turn, the overall economy.
Oversight and Reporting
The act additionally established strict rules and regulations to make sure that the funds received from the EESA were correctly utilized. In addition to reporting to lawmakers, the secretary is required to assess the current status of the financial markets and the regulatory framework. The purpose is to make recommendations on how to include hedge-fund companies and other currently unregulated market participants in the regulatory framework. This oversight and reporting could alter the future bills passed by lawmakers and regulations issued by the secretary.
The act imposed some restrictions on salaries for executives at companies that sell assets to the government in order to promote accountability. Among these is a restriction on handing out large payments to senior managers who are leaving during the period that the secretary holds an investment in the financial institution. Additionally, businesses would have to return previous bonuses that were found to be based on false financial statements.
The bill additionally allows the federal government to purchase warrants for the purpose of purchasing common stock or preferred stock from companies that profit from the bailout. It allows the companies to take advantage of the improved financial condition of institutions supported by the TARP.
Bank Recapitalization
One of the most significant steps taken to support the stability of financial institutions was bank recapitalization under the Emergency Economic Stabilization Act of 2008. Many banks faced massive losses during the financial crisis, mostly as a result of their exposure to risky assets connected to the uncertain housing market. These organizations' ability to remain stable was in danger due to the reduction of bank capital.
The EESA's bank recapitalization component provided the U.S. administration the authority to directly invest capital into failing financial institutions. This funding infusion fulfilled two crucial goals. One of them was to improve the banks' economic condition and, as a result, raise their ability to provide money to people and companies.
Conclusion
During a period of financial crisis, the Emergency Economic Stabilization Act of 2008 acted as some kind of rescue operation. It saved the financial system from completely breaking down, stabilized the economy, and gave small businesses and households a great deal of relief. Even if there were still some complications of the 2008 financial crisis, the EESA was essential in preventing a more severe and persistent economic collapse.
