Tuesday, September 23, 2008

What if the bailout doesn't stop market meltdown?

Supposedly the idea is that by buying hundreds of billions of dollars of shares in failing financial companies, the U.S. government hopes to halt the down spin on Wall Street.

If we distill the meaning, the hope is mainly to stop the instability in the stock markets. By shoring up the investment companies, the idea is that confidence will be restored and the indexes will stop plunging or swinging wildly. This is an idea that seems to register on Wall Street itself, or at least among the day and swing traders. After news of the bailout, not only did the markets rebound but oil prices dropped sharply.

The drop in oil seemed to indicate that people thought the economy would rebound after the bailout and that demand in oil would go up.

However, long-time observers of stock markets will know that taking any drastic action based on perceived future action of these markets is very risky.

The markets themselves showed uncertainly when Monday stocks went in the opposite direction and oil prices experienced a record rise. And that was just over one weekend! What happens if taxpayers get stuck with half a trillion in toxic assets, but the market does not respond in the manner that the administration hopes it will?

There may be more to this economic crisis than appears on the surface. It may not be long before other companies from different sectors also show signs of failing en masse. Does the government keep borrowing money to bail out these companies also.

Supporters of the bailout claim the action is needed to prevent a "run on the banks" were people rush to withdraw money from retirement accounts and money market funds. The use of the phrase "run on the bank" probably is not being used accidentally. It's something most people understand from watching Hollywood movies.

However, one must ask whether the government's buying of bad stock can in any way stop people from relocating their assets to safer havens. In a free market, one has to consider that investors may not react in the way you are assuming they will.

However, with an election coming up in November, it is certain that Congress and the administration must do something to show that they are on top of the situation. Most experts agree they will pass some type of package. The details though could differ widely. They may decide, for example, to put more money into helping struggling homeowners.

Whatever they do, all eyes will be focused on the stock markets after the legislation goes into action.


StarPhoenix

Congress balks at banks bailout plan
guardian.co.uk, UK - 2 hours ago

But the key problem not addressed by the bailout – a point also made by Krugman – is that some banks remain under-capitalised, ie they don't have enough ...

Bush offers $500 billion bailout Minneapolis Star Tribune
US financial rescue plan could cost one trillion dlrs: senator AFP

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Saturday, September 20, 2008

Comment: Should U.S. taxpayers bail out financial companies?

The price tag is $500 billion, but many analysts think the final cost for taxpayers could end up somewhere closer to a trillion dollars.

Should the taxpayer bear this burden with interest to the lenders in order to "save" the financial system. Why didn't the government come to the rescue of millions of Americans who lost their homes in foreclosures, many obviously the victims of a predatory lending system? Now many of these same people will have to share the burden of bailing out the some of the same companies involved in their home loans.

Will the financial system "melt down" if the government doesn't step in? Unfortunately the people making the decisions are likely to be those most effected by the current crisis. They are the ones with the large and often risky stock portfolios.

As the mess was caused mainly by the bad mortgages in the first place, wouldn't saving those homeowners first have averted this situation in a more desirable fashion? Now the U.S. taxpayer is stuck with borrowing more money on top of an already record deficit to cover the bad lending practices of these deregulated institutions.

One could argue that the financial collapse of millions of American families over a short period of time is just as risky as the bankruptcy of several Wall Street firms. Aren't there other companies capable of picking up the slack?

Another thing to remember is that the quasi-governmental Federal Reserve Bank is made up of members that are commercial lending institutions and are unlikely to become any less richer whenever the government borrows money directly from the Fed.

The only lesson we seem to learn from this crisis is that financial companies will now know the government is there to rescue them if they are so large and important that they supposedly cannot be allowed to fail to avert various doomsday scenarios. The person on the street, unfortunately, is to expendable to expect similar treatment.

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