Why the bail-out should happen
I’m pretty irritated.
Firstly, that there is no leadership emerging in the US take control and stem the panic that is spreading throughout the financial markets. When no one knows what’s going on, someone has to step up (and I don’t just mean reading from a tele-prompter, Bush) and provide some direction. We are seeing nothing. I guess it just reinforces that the current President is a big fat fail. The sad thing is, he’d have no credibility anyway.
Secondly, I’m irritated by this knee-jerk anti-bailout reaction (”$700bn to the fat cats!”). Check this diagram which I’m borrowing from the BBC:
It doesn’t help when the media sensationalises things. There is no $700bn going into some Wall Street bankers pockets. First off, $450bn of this bailout money is conditional.
Also, see that arrow pointing from the Banks to the Gov’t? That’s a stake in the banks being given to the taxpayers. So you’re not just losing money, you’re gaining an asset, and the chances are, at a very good price.
There’s a chance the US Gov’t could end up making a profit out of the situation when the housing market recovers, which it inevitably will. This credit bust is definitely a mess, but this doesn’t mean there won’t be any credit in the future. We need to think 5-10 years into the future. Things will recover, they always do.
The closest thing to this I’ve ever studied were the currency crises that happened in Asia in 1998 (indeed they were my savior in my final international economics exam). The big lesson I learned was that self-fulfilling prophecies can occur in the markets. If everyone loses faith in a currency, then it will crash, even if nothing has fundamentally changed.
The same thing can happen with banks. If we think some are going to fail, sell its shares, then we can help make it fail. So to counter-act that you need some pretty aggressive action, and even if it isn’t perfect, people are misunderstanding that doing nothing could be much, much worse (I mentioned that US Gov’t debt is not looking as secure as it once was – and that underpins everything in the current global economy).
If this credit problem is not solved and confidence restored, then it is easy for the effects to spill over to the main economy. The worst would be for otherwise healthy firms to stop receiving credit, be forced to lay people off in a downturn, add to unemployment, and then just make the whole macro condition worse for everyone. Credit plays a vital role in smoothing out consumption and investment cycles – so the banks that facilitate this and are otherwise healthy need to be backed up.
It turns out that the bill not passing may have been because of political fighting/posturing – not economic concerns. This is frankly infuriating:
“Rep. Roy Blunt, R-Mo., the whip, estimated that Pelosi’s speech changed the minds of a dozen Republicans who might otherwise have supported the plan.
Frank said that was a remarkable accusation by Republicans against Republicans: “Because somebody hurt their feelings, they decided to punish the country.”
I guess I’m incredibly lucky to have left banking, and moved to Canada. The funny thing is I actually interned on a credit structuring desk – the very people that created this mess.
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Tags: bailout, credit crunch
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I think you summed up all the points correctly re why there should be a bailout. I don’t know why Paulson didn’t have the leadership to pull his plan together, which although it was short on detail did at least provide a floor. The problem with representative democracy in the US is that during an election cycle most non-safe seats do lots of posturing to appeal to the many. My view as a US citizen is that this whole credit issue was quite simple if you equate easy credit to some sort of controlled substance like heroin, where the bankers were the pushers, the junkies bought houses in California, Arizona, and Florida, and the police at the doughnut shop were the regulators. Voters like to blame the pushers and next the police, but don’t look at themselves as part of the problem…JCC
So now that the bailout went through, and turned out to accomplish nothing, how do you feel about the second round?
So it’s all your fault huh?
It’s certainly a fair point about self-fulfilling prophecies – the market is all about ‘talking up’ and ‘talking down’ however the attempts by Government and Industry to talk down the recession have failed badly – they forgot the golden rule that people have to actually believe you for this to work…which brings me on to thinking that for all the ‘talking up’ there has to be a truth behind it otherwise the talk has no substance and will just invite ridicule – I suppose what I am saying is that Yes there is talk, but the talk alone does not move the markets…
you are completely ignoring the role that the US government/congress has to bear in the current financial crisis. i cite the following:
http://www.youtube.com/watch?v=hxMInSfanqg
the conservatives in the government tried in teh order of 7 or 9 times to tighten controls on the banking sector, each time being quashed by those on the ‘get-everyone-in-a-house’ side. listen to the above testimonies and you will see that red flags were sounded over and over, and each time mr. frank and others on the liberal side insisted that fannie/freddie were just fine, they were strong and solvent. hindsight is 20/20, apparently.
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mr. frank has no credibiility. he is the foremost blame-holder in my book. mr. dodd is the other. both turned a blind eye to the obvious problems, and mr. dodd especially, as this was his committee.
blaming the president – if you know anything about the US government, you will know that the president has NO power in spending money. none. the only thing he can do is sign ‘yes’ or ‘no’. it’s all on the congress to decide where/who/how much. investigate the ‘housing and urban development’ movements in the course of our political system. it started w/ mr. carter, mr. clinton enriched it, as well as mr. g.w. bush. all are cullpable. it was a failed policy to begin with – putting people in homes that couldn’t afford them. the US citizenry as a very general rule are dreamers, ‘me-generational’ (we want what we want when we want it) and consumers vs savers. if someone is standing over the head and saying ‘you can do it!’, they will believe that voice instead of actually doing the hard work of doing the math (which many actually can’t do) to see if they really can afford it. banks have always been in the market to get people into houses up to the extreme that they can afford. its ultimately the RESPONSIBILITY of hte individual to look out for themselves and look out for any eventuality that might occur.
in my opinion, it’s the congress and the individual that hold total blame in this. consider that out housing greed has caused the destruction of the global markets, it wouldn’t surprise me in the least to see the world walk away from our ‘gold standard’.