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With No Bailout Package Federal Government Taking Action

Published 10/01/08 Dustin Ensinger - Print Article
E-mail - editor@economyincisis.org

As the proposed $700 billion bailout package stalls in Congress, other government entities are taking steps to try and unfreeze the credit markets, according to CNNMoney.

The Federal Deposit Insurance Corporation announced Tuesday that it supports raising the current cap on bank deposits it insures. In most cases that cap is only $100,000, which has remained unchanged since 1980. In 1991 that limit covered 82 percent of depositors. Today it covers just 63 percent. Many analysts believe this step would alleviate the fears of many investors and prevent further runs on banks like the ones that caused Wachovia and Washington Mutual to collapse just this week.

"A temporary broadening of the FDIC's guarantee will provide some additional needed confidence in the marketplace," said Sheila Bair, FDIC chairman.

Another action taken Tuesday by the Security and Exchange Commission and the Federal Accounting Standards Board will change the way companies value securities when markets for them no longer exist because no one is buying. Many believe the previous practice called “mark-to-market” valuing is responsible for the current credit crisis; banks and securities firms were forced to write down $500 billion worth of mortgage-backed securities as home foreclosures rose. Now, according to the new guidance, companies can value those securities based on future cash flows, which will ease capital burdens on banks.

"The SEC has destroyed about $500 billion of capital by their continued insistence that mortgage-backed securities be valued at market value when there is no market," said William Isaac, a former chairman of the FDIC. "It's way below their economic value. And because banks essentially lend $10 for every dollar of capital they have, they've essentially destroyed $5 trillion in lending capacity."

However, many believe increasing the cap limit and changing the way companies value securities will not be enough to stave off economic problems. On Wednesday the Senate is expected to vote on the bailout package. The House will once again take up the issue Thursday when it reconvenes.

Source CNNMoney.com:

A day after the House's surprise defeat of a $700 billion financial rescue bill, talk grew louder about alternative government steps that could help battered credit markets and stave off broader problems in the economy.

Among the proposals policymakers are discussing: Change rules to ease the capital burdens on banks; make more FDIC insurance available to bank customers; and cut short-term interest rates.

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