On this day in economic and business history...
President George W. Bush signed the Emergency Economic Stabilization Act into law on Oct. 3, 2008. The bailout bill's final passage capped a tumultuous week of legislative efforts that already produced one titanic failure -- the rejection of a similar bill on Sept. 29 had caused the first trillion-dollar loss in American market history. The turnabout in the House of Representatives, from rejection by a vote of 228 to 205 to passage with a 263 against 171, was spurred in large part by the utter panic then sweeping through the global financial system in the wake of the earlier rejection. A few added provisions, including $150 billion in tax credits for pet projects and an adjustment to the alternative minimum tax, also greased the bill's wheels as it sped through the halls of Congress.
The $700 billion bailout plan led to the creation of the Troubled Asset Relief Program, or TARP, which was in charge of a firehose of bailout funds to be sprayed throughout the failing American financial system. It also implemented a new policy of increased interest payments on bank funds kept at the Federal Reserve, and by the second week of 2009, total deposits held at the Fed had exploded from nearly nothing to almost $900 billion. This additional feature, added after the rejection of the original bill and barely noticed at first, served as a stealth stimulus to banks for years after the crisis ended, as cumulative interest payments on bank reserves held at the Fed reached $13 billion in the first four years following the implementation of the new policy. Fed policy makers have projected that the central bank could eventually pay out over $77 billion a year in interest by 2015 under the highest-rate scenario envisioned in early 2013.
TARP itself eventually disbursed $418 billion in bailout funds, which is a large part -- but still only a part -- of the estimated $608 billion in total financial-crisis bailout funds tracked by public-interest watchdog ProPublica. Citigroup (NYSE:C) and Bank of America (NYSE:BAC) soon emerged as recipients of the largest amounts of TARP funding, with $45 billion committed to each megabank.
The bailout did not stop the slide in either megabank's share price, nor did it do much to assist their recovery. Five years after the fact, Citi remained 75% below, and Bank of America remained 60% below, their closing prices on the day before the bailout passed. Nor did the bailout arrest a precipitous worldwide market slide that continued into the following year. The Dow Jones Industrial Average (DJINDICES:^DJI), then in the third day of an uninterrupted eight-day collapse, dropped beneath 10,000 points the following day and did not stop sliding until a sharp rebound on Oct. 13, having lost 22% along the way. The index did not reach the four-digit level again until the tail end of 2009.
We can rebuild it
The fall of the Berlin Wall in 1989 was followed by a tumultuous period of protests and free elections in the former Communist half of the nation. This liberalization led to negotiations with the West, and ultimately resulted in a reunification treaty between East and West hat reforged the long-sundered halves of Germany on Oct. 3, 1990. The healing process, and the rebuilding of a ruined East Germany, would take years. In many ways, that process is still ongoing.
The costs of reunification have been staggering. An estimated $1.9 trillion in transfers were required to rebuild the former East German territory, and much of that sum was disbursed as welfare payments to long-impoverished residents of the former Soviet nation.
The East remained less prosperous than the West two decades after reunification. Per-capita GDP levels have been estimated to be 29% lower than those of the western regions. One in five East Germans lived in poverty in 2009. The two halves of the country still feel alien to each other -- only a quarter of East Germany felt like ein Volk (one people) with the West in 2010, according to a poll my German magazine Stern, and less than half of the West felt that way about the East.
The size of Germany's economy has doubled since reunification, but shockingly, this is not near Europe's best growth rate. Of the five largest European economies, only Italy has grown at a slower pace since 1990. Spain, before its recent troubles, saw its GDP nearly triple over the same time frame.
The Revenue Act of 1913 was signed into law on Oct. 3, reinstating income taxes for the first time since they had been declared unconstitutional in 1895. Backed by the newly ratified Sixteenth Amendment, which granted Congress broad powers of taxation on income, 1913's Revenue Act ushered in the modern era of U.S. taxation, which has continued uninterrupted to the present day.
The lowest amount of income subject to tax at that time was $20,000, on which was imposed a 1% tax rate. Few people had incomes high enough to be taxed, as $20,000 in 1913 would be equivalent to $465,000 today. The highest tax rate of 6% was reserved only for those making more than half a million dollars, or about $11.6 million in modern terms. The Los Angeles Times estimated that only 4% of the country's population would be subject to the tax in its first year. That number has grown quite a lot in the 100 years the act's passage -- an estimated 57% of American households will pay income taxes in 2013, and an additional 29% of those who do not pay income taxes will still pay some payroll taxes to support Social Security, Medicare, and Medicaid.
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