Arbitary Obsessionist's Blog : Ambition is redundant. In life, mission is everything.

$ 700,000,000,000 ! ! !

with 2 comments

Yes you read it right. A staggering $ 700 billion bailout package. The biggest ever in history.


The Treasury Department and Federal Reserve have planned to buy troubled mortgage securities in “wholesale”, from banks and other financial firms. Now this seems a much better way of bailing out distressed organizations in a more systematic way, rather than randomly helping them out and ‘not’ helping them out [..Read Lehman Brothers..].

Systematic does sound very prudent. But here the price tag is very very steep. So why such a large amount? Treasury Secretary Hank Paulson said at a press conference –

“This needs to be big enough to make a real difference and get at the heart of the problem.”

So is this all that needs to be done. No say a few of the highly reputed economists. According to them, it might need more than $ 1 trillion to solve the current crisis!

Once again I ask that why should government (and after all, the taxpayers) even be contemplating such action? The clearest explanation is probably that of Paul McCulley, a managing director of the money-management firm PIMCo.

When a debt-fueled investment bubble bursts, financial institutions that make their living off borrowed money (banks, investment banks, hedge funds) tend to want to reduce their leverage — their ratio of debt to equity. That’s perfectly rational. But when everybody does it at the same time, big trouble ensues. Not all leveraged lenders can shed assets and the associated debt at the same time without driving down asset prices, which has the paradoxical impact of increasing leverage by driving down lenders’ net worth. Basically, if all lenders de-leverage at once, the financial system implodes — and everybody, not just the bankers, suffers. To halt this, somebody has to leverage up, not down, and acquire assets, not sell them. The government is the institution in by far the best position to do so. The Federal Reserve System can play this role on a short-term basis — halting panics by lending dollars in exchange for momentarily hard-to-sell assets.

But it is widely agreed that this is a very bad policy in the long run. “The Fed is the guardian of the currency. That’s its job. Its job is not to subsidize people who made credit mistakes.” So who pays for Mortgage brokers, investment bankers, house flippers and other sharpies getting rich & causing this mess? You pay! Yes you, the American tax payer. But there may be a silver lining in the dark clouds. If the government buys assets when everybody’s panicked and sells them when markets have calmed down again, it could even turn a profit.

A grim-faced President Bush acknowledged risks to taxpayers in what would be the most sweeping government intervention to rescue failing financial institutions since the Great Depression. But he declared,

“The risk of not acting would be far higher. This is a pivotal moment for America’s economy. In our nation’s history, there have been moments that require us to come together across party lines to address major challenges. This is such a moment.”

And I think he is right (atleast this time. NOTE : I still do not, ‘convincingly’ support bailouts)

Now a very serious question is that will these institutions who receive the proposed 700 billion dollar “bail out” be required to pay back what they have received? No announcements have been made regarding this. Lets see if any are made in future.  😉

And will top level people in these institutions stop getting the jaw dropping “perks” or will this continue even after the bailout?

So here is my take…

The reality is that this $ 700 Billion bailout does not and cannot protect the taxpayer. You must have heard a lot from the officials that these bailouts will eventually help save the people. I ask how? The bailout bill only promises to take the taxpayer into consideration, nothing else. There wont be any guarantee that the institutions will survive even after the bailouts. Then what will happen? Nobody seems to have the answer. The whole $ 700 billion seems to be a dumping ground for all the mistakes made by those idiots at the top. The mistakes were so stupid that they cant be corrected. How can such big institutions with such legacies and missions and visions in place make such mistakes? Seems they were all drugged.

So, finally I ask and try to tell you

Who, really, is going to come up with the $700 billion?

American taxpayers will come up with the money, although if you are bullish on America in the long run, there is reason to hope that the tab will be less than $700 billion. After the Treasury buys up those troubled mortgages, it will try to resell them to investors. The Treasury’s involvement in the crisis and the speed with which Congress is responding could generate long-range optimism and raise the value of those mortgages, although it is impossible to say by how much. So it would not be correct to think of the federal government as simply writing a check for $700 billion. It is just committing itself to spend that much, if necessary. But the bottom line is, yes, this bailout could cost American taxpayers a lot of money.

So is it fair to say that Americans who are neither rich nor reckless are being asked to rescue people who are? What is in this package for responsible homeowners of modest means who might be forced out of their homes, perhaps for reasons beyond their control?

Yes, you could argue that people who cannot tell soybean futures from puts, calls and options are being asked to clean up the costly mess left by Wall Street. To make the bailout palatable to the public, it is being described as far better than inaction, which administration officials and members of Congress say could imperil the retirement savings and other investments of Americans who are anything but rich.

Americans, Keep praying. I am with you.

2 Responses

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  1. I know this, America is coming to an end very soon within months due to borrowed money. It is like a bike innertube, if you use a old busted innertube and keep patching it, you won’t get very far in riding. Good discussion.


    September 23, 2008 at 12:25 pm

  2. “$ 700,000,000,000 ! ! !” Wow this number is big. Can any one help me get 0.001 percent of this amount. If some one can I will give them 25% of it. Dude America has strong Economic foundations. With hardcore values over 200 years old. I would like to call it a short term recession. Nothing new that our leaders will have a problem figuring out…

    Pete Hudson

    September 24, 2008 at 6:05 am

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