Will the Bailout Help the Economy?
by Efin Advisor | October 9, 2008
Over these last several, angst-ridden days, the red hot political topic has been the financial crisis that looms large over the American landscape. The $700 billion dollar bailout authorized by Congress begs a great many questions of the American taxpayer and, so far, this “perfect financial storm” has provided precious few answers.
Will the $700 billion relief plan bridge the chasm, or does it address just the tip of a titanic iceberg? Should the American taxpayer be held responsible for Wall Street institutions or is the rescue effort a question of survival, fundamental to buttressing America’s economic foundation? Is there a stimulus to energize market confidence and is it psychological, political or financial?
The actions of the U.S. Treasury and the Federal Reserve appear on the face of it to be justifiable. The entities which the government has moved to protect have been those whose failure would trigger a chain reaction in both our domestic and the world’s global economy. As some would theorize, when a debt-fueled investment bubble bursts, financial institutions look to divest their bad debts. When every financial portfolio has the same goal, at the same time, turmoil can ensue.
Economists also calculate that the problem can only be solved if someone is willing to buy up, or pay off the debt that banks and investment companies are desperately trying to liquidate. The U.S. Treasury seems to be the ideal actor to perform this function, since it is, practically speaking, the only institution with enough buying power to handle the size of the transaction. The US government is also the only administrative body capable of organizing such a monumental effort at a systematic level.
Another looming question is the issue of regulation. Lawmakers of both parties have made it clear they do not want to give Wall Street a “blank check,” nor do legislators wish to sanction excessive amounts of money that may go end up as executive salaries or severance packages. Finally, the trillion dollar question is whether the bailout is merely a band-aid? How can the government and the fragile , fractured mortgage market protect future homeowners who see the value of their assets diminish and face default and foreclosure.
These are the hot topics that confront all of us in the days ahead. We invite your comments.
I always say, when things are darkest, it’s essential to look for something to smile about. Sure, we need fiscal responsibility, but there’s something to be said for keeping a positive attitude. Here’s a funny bailout video that made me laugh: http://www.youtube.com/watch?v=uZUXXSxZPhw
Reply
What a ride. The market was down several hundred points and then ended up over 400 points. Its hard to believe what we’re seeing. I think the market will improve once the elections are done. I hope.
Reply
I really don’t know what to think of the bailout at this point. I have heard several different views on this and honestly I don’t know what to think. First of all….Can a country that is already 10 Trillion dollars in debt afford a bailout of this extent? And if so… what does this mean? Does it mean that the citizens of America that have nothing to do with these financial institutions are going to have to ultimately pay for it all? This bailout may save many financial institutions from going bankrupt, but does that mean that in paying it back that the rest of us will have trouble purchasing homes in the future or financing anything for that matter?
The government can justify bailing out financial institutions that may have acted irresponsibly, but what about bailing out the millions of people that are in over their head in a faulty mortgage or interest rates that are forcing them to file for bankruptcy, foreclose on their homes, and ruin their credit and any chance of building it back up any time soon.
I am all for this bailout if the government can come out with an innovative way of stabilizing the economy afterward. If they have no way of doing this… then it seems as though it will just make things worst.
Reply
The “trillion dollar question,” I would have to say it is just a band-aid. It would be really nice if we could just throw money at our problems and make them disappear. However, in the real world it just isn’t that simple… for every action there is a reaction. The fundamental problem is the way that we treat credit and interest. Perhaps you can afford the minimum payment but that does not necessarily mean that you can afford the purchase and the interest that comes along with it. A few years ago I read a book that has changed my entire perspective on money and how to budget your income, “Money Mastery: 10 Principles That Will Change Your Financial Life Forever.”
Reply
This bailout is worthless without regulations. Fix the ratings systems on CDOs, make it harder for brokers to lure customers into bad mortgages, and make it harder for banks to dump those mortgages off on the market. If we don’t institute tougher regulations, these companies will keep doing the same things over and over again because it’s most convenient for them. You need to take away the incentive for them to screw customers, if not outright make it impossible for them to do so.
Reply
These crooks on Wall Street dont deserve a dime of my hard earned money. All they do is try to exploit hard working guys like myself to make themselves more money. This \”housing bubble\” is just another example of them taking advantage of us through sub-prime mortgages. I heard that one of the guys who is responsible for the sub-prime mortgage crisis actually exchanged emails with someone expressing shock at how easy it was to get people to buy these bad loans. Disgusting. Why are we continually bailing out these people. It hasnt helped the economy so far, so what good is it. We need to teach wall street a lesson that when they make a mistake, they have to live with it
Reply
“Anonymous”– obviously we need regulations too, but how can you criticize the government for passing this bailout plan first? Do you have any idea how long it takes for regulations like that to pass through Congress? We needed the bailout plan immediately and we can talk regulation later. If anything, those regulations won’t be necessary for a while anyway because you can be sure people will think twice about signing bad mortgages and investment banks won’t be so quick to trade with those CDOs for at least a few months. By then, we will have a new president (hopefully, fingers crossed this won’t be 2000 part 2…) and we’ll be ready to enter a new American economic era– and I trust Congress will be hard at work on those new regulations by then.
Reply
I think that Pouring a ridiculous amount of money into the top of the economic pile and hoping that it makes its way down to the masses is a very irresponsible use of taxpayer money. Why is the government sending my tax dollars to the corporations and executives who have proven that they are incapable of doing anything other than lining their pockets and miserably failing at managing any substantial assets? I am sick and tired of hearing about “Trickle Down Economics” these theories have not trickled down, they have led to the current situation. If the government must spend money at all- it should invest it directly into the failing economy, or in infrastructure. Given how far in debt we already are, I really believe that the government should be saving every penny it has, or giving it back to the taxpayers.
Reply
I think that in general, the bailout was a necessary step to stabilize the market. The last thing that we need is for the major financial structures of our economy to fail at such a crucial time. I do worry, however, about the fact that we seem to be sending the message that if you mis-manage your business, as long as you control a significant share of the market, it’s ok- the government is here to bail you out. It is an important part of the economic process that people feel that they are accountable for their actions, otherwise what is to stop them from driving a company into the ground and skimming a profit off the top?
Reply
I agree with one of the anonymous posters. Regulation is needed. I think that we have put a good number of safeguards in place that protect american taxpayers and joe six-packs like myself and Sarah Palin, but if money actually goes to executive bonuses, then I’m going to be pretty pissed. What about buying up the bad mortgages? I think that would bail out the economy without actually giving money to people and paying their salaries.
Reply
Are you kidding me Andrew? Buying up bad mortgages?!?!?!?!?!? Whenever someone mentions buying something, and that something has the word bad in it, that should strike you as a problem. The bailout was definitely the only option for America. If we were to buy bad mortgages, like John McCain wants to, then we will just buy worthless assets, and hand over money to the very people who got us into this mess. At the same time, you are definitively putting all the stress on tax payers, since there is no ability to gain from this investment.
With the bailout, we have regulation in place that restrict how corrupt the financial district can be, and it provides the opportunity for long term investment. If we treat this as an investment, we will get ourselves out of this mess and most likely make money off of it as a result
Reply
I think that the bailout is a necessary step to securing our economy. If the financial giants go under, nobody will win. In fact, those hardest hit will not be the people who have been a part of the financial institutions, but those who rely upon them for their houses, retirement/college funds, and savings. If we are able to restore some stability to the major financial players, perhaps confidence in the market will rebound, and the market will begin to right its self. Although I would rather see the taxpayer’s dollars doing more productive things, I appreciate the caliber of this situation and respect the tough decisions that our leaders have made.
Reply
I’ll repeat what I said on another thread for those of you who haven’t read that: its all about oil! We need to get oil prices down NOW!! Our worst times, in the modern world, has been when we let oil skyrocket. Think about how bad the economy was during Carter’s administration when oil prices sky-rocketted. We need to deal with oil first and foremost
Reply
This entire bailout is absurd. The proof is right there in the name: “bailout.” If the government hands out any money, it should be to the people who lost their life savings due to the greediness of these corporations. All this shows is that companies can do whatever they want and then the government will help them out later when they’re down and out. If the government really wanted to help, they’d take a hardline stance and let these companies die. It would cause problems in the short term, but in the long term it would show companies to be careful with the way they do business because if they fail, the U.S. government isn’t messing around.
Reply