The Liquidity Crisis and Government Reaction

This chapter begins with a discussion of the buildup to the crisis and the background of the Dodd-Frank Act. On July 21, 2010, President Obama signed the Wall Street Reform and Consumer Protection Act (WSRCPA), widely known as the “Dodd-Frank Act,” a massive piece of financial legislation encompassing a wide range of reforms intended to stabilize financial markets through enhanced oversight, reduction of risk, and improved consumer protection. Its 2,200 pages direct enactment of over 200 new or expanded regulations by federal agencies. The remainder of the chapter covers the Federal Reserve's provision of liquidity and stabilization of financial markets, and regulatory reaction at the height of the financial crisis (Emergency Economic Stabilization Act (EESA) and American Recovery and Reinvestment Act (ARRA)).

Clogged systems and toxic assets

The Emergency Economic Stabilization Act, also known as the “Wall Street Bailout,” authorized the allocation of $700B US to address the financial crisis of 2008. The “bailout” did not pass easily; members of the United States Congress reported feedback from angry constituents urging them to vote against it, and the measure failed its first vote in the House of Representatives. This essay focuses on metaphors used in public discourse to describe the “bailout” in the ten days between its introduction to Congress and its failure in the House. Advocates of the economic stimulus plan relied on metaphors that evacuated human agency, portraying the plan as an emergency measure necessitated by crises such as illness, natural disasters, and mechanical failures. Opponents to the plan extended and modified the administration’s metaphors to communicate a critique of the transfer of federal funds to private entities for the good of the public.

The Political Economy of the US Mortgage Default Crisis

We examine the effects of constituents, special interests, and ideology on congressional voting on two of the most significant pieces of legislation in US economic history. Representatives whose constituents experience a sharp increase in mortgage defaults are more likely to support the Foreclosure Prevention Act, especially in competitive districts. Interestingly, representatives are more sensitive to defaults of their own-party constituents. Special interests in the form of higher campaign contributions from the financial industry increase the likelihood of supporting the Emergency Economic Stabilization Act. However, ideologically conservative representatives are less responsive to both constituent and special interests. (JEL D72, G21, G28)

Sound Body, Sound Mind—The Impact of the Mental Health Parity Act of 2008

On October 3, 2008, in response to bank and lending house failures and the worst economic downturn since the Great Depression, President Bush signed into law the Emergency Economic Stabilization Act of 2008, more commonly known as the “bailout bill.” As funds 1 from the financial relief program created by the bailout bill, the Troubled Assets Relief Program (TARP), are spent to slowly reverse the economic recession, another positive effect of the bailout bill has already taken hold in an area having nothing to do with financial markets—health insurance coverage for Americans suffering from mental illness. This is because, buried within the Emergency Economic Stabilization Act, is the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Act of 2008 (the “2008 Act”)—legislation that requires parity in insurance coverage for physical and mental illness.