The first paragraph from Yahoo news reads:
A half-trillion dollar bailout that the Bush administration and Congress are negotiating this weekend for faltering financial institutions could unload their bad debt on the government, and in turn the taxpayer.
So let me get this right … financial institutions made bad loans that are either delinquent or in default to people who should not have received them in the first place and now in order to keep the CREDIT markets afloat the government is going to do a massive bail out so that these same institutions can continue to loan.
Do not get me wrong I agree with the statement made by Treasury Secretary Paulson…”I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion. The financial security of all Americans … depends on our ability to restore our financial institutions to a sound footing.”
His statement is accurate, but the whole concept is that the economy is based on consumer spending and borrowing. In fact, whether we wish to admit it or not, the entire US system is based on borrowing. The government is the biggest borrower of all. And unless somehow history does not repeat itself – eventually there is a day of reckoning when you are expected to pay back what you owe. What happens when the government and/or the taxpayers can’t repay what the government has borrowed?
But enough of the big picture…what about now and the impact? First, most of us have no idea how close we have come to a major depression. In fact, while I am no doomsayer, rarely is reality what is stated by the government. More times than not the outcome is far more costly than what is predicted. So we very well may not have seen the end of this financial mess.
According to CNN: The plan: The federal government would buy up “hundreds of billions of dollars” of illiquid mortgage assets at a deep discount from banks. The Treasury Department is likely to run the program directly, unlike the savings and loan crisis of the 1990s that led to the creation of the Resolution Trust Company.
“The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy,” said Paulson.
Now what is clear about this plan is that financial institutions get to clean up their balance sheets so that they can continue to stay in business and LOAN.
Question: Wonder what consequences, if any, the bank or financial institutions will incur? Any penalties for making stupid loans to unqualified individuals in the first place?
Question: As inefficient as the government is how will they be any better at collecting on what is due than the financial institutions are? Bet, they won’t be…rather either one or two things will happen: (1) they will do just what the banks would have done – FORECLOSE and sell the property off at deep discounts; or (2) somehow FORGIVE the debt and allow the property owners to own at less than what they borrowed in the first place. Either way – people who have played by the rules PAY!
According to a CNN article: The plan will help banks shore up their balance sheets by removing hard-to-value assets. This would address the seemingly endless rounds of writedowns and capital raising that have been rocking the financial sector.
Without these bad loans weighing on their books, banks may be more willing to lend. Or at least that’s the goal.
The problem is that the bailout will not automatically make banks profitable, nor will it stop the slide in home values that is wreaking havoc on the economy.
Danger! Without the bad business on the books Banks would find it easier to raise capital and MAKE MORE LOANS. The question still remains – who or what will make sure that banks don’t repeat (in the interest of big profit) what they did (not that long ago) to get into this mess?
Over the course of two days the price tag has gone from $200 billion to $500 billion and now I see on MSNBC that it is $700 billion. Now, as Forrest Gump would say…”I’m not a smart man,” but I know that this government bail out will cost each American a lot of money.
WHAT ARE YOUR THOUGHTS?