The expectations for Barack Obama’s presidency were very high, having succeeded a government that was funding two on-going wars, with big financial institutions being nationalized and very high debt obligations.
As a campaign promise, he rallied to fight the financial crisis, bring economic prosperity to middle-class Americans, and revoke the Bush tax cuts.
The Bush tax cuts were meant to address the looming recession during Obama’s time. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001 and the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) in 2003 were fiscal stimulus policies that had the goal of increasing savings, investment, and consumption.
The Bush government had a large government surplus, so there was a huge money supply in the market. With higher disposable income, US citizens chose to invest largely in real estate while enjoying low interest rates.
When the recession came, they were unable to pay their mortgages, creating a huge credit bubble. With no payment, banks were devaluing homes that no one wanted to buy. Eventually, the US financial sector got badly hit, covering (1) the entire investment banking industry, (2) the biggest insurance company, (3) two government-chartered enterprises that facilitated mortgage lending, (4) the largest mortgage lender, and (5) the two largest commercial banks. A crisis of confidence ensued as companies and individual investors did not trust one another or the very institutions they had built. Companies that heavily relied on credit were unable to secure the loans needed to regulate their cash flows, and without these loans, they could hardly sustain business. So, the bailout for the private companies was necessary because these businesses were so big that their failure would greatly affect the country's economy. Similarly, the Federal Reserve-issued Treasury bonds and notes, intended to lessen money in circulation and further increase interest rates, were not well received, thus failing to stimulate more investments.
Obama recognized that he needed to use government and fiscal policy to address the big issues he had at hand. As much as he wanted to revoke the tax cuts from the previous administration, he just could not because the people might not survive the recession with a reduced net income. Specifically, his plan was to:
Impose tax cuts on those earning below $250,000.
Reduce household taxes.
$50 billion in state and local government support and infrastructure
He could not rely on investment either, as evidenced by the stock market's de-levered performance. There was reduced confidence in the economy due to the 9/11 tragedy and the on-going second Gulf War.
With the increasing rate of unemployment, Obama could not also rely on consumption as citizens had very little money to spend, having invested greatly in real estate and then having to forfeit their investment, resulting in a loss of savings. Those who had estates at their disposal could not liquidate their assets after the collapse of real estate.
All these conditions result in a further increase in the government deficit, which would affect funding for entitlement programs in Social Security and Medicare. With his big plans to stimulate the economy through government spending on infrastructure and social services, he would not have any source for funding except to increase borrowings.
In summary, while the government needed to save the financial institutions, we think it is still important to make them responsible for the loss and impose a repayment, especially when the money that was used to save their business came from foreign debt. Thus, given the magnitude of the crisis, securing a foreign loan is essential for Obama’s administration to pursue its commitments and likewise boost their economy.
Additional sources: https://www.thebalance.com/president-george-bush-tax-cuts-3306331
https://www.thebalance.com/economic-growth-and-tax-relief-reconciliation-act-3305764
https://www.thebalance.com/2008-financial-crisis-3305679
https://www.thebalance.com/what-has-obama-done-11-major-accomplishments-3306158