This can't be good can it? Anyone here know what all this financial means now and in the future? I mean no one knows but perhaps understands the cause and effects more so than me.
This linkgot me researching what it proposed. Seems like a lot of people are pissed at the idea of it.
So my big question is this: Will this keep us from going into a deep recession/depression or will this do minimal damage control and just add to our ridiculous deficit and cause more for tax payers to pay back?
Monday, September 22, 2008
Bush seeking $700 billion for financial bailout
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4 comments:
It's really hard to say whether the bailout will fix the problem without knowing the nature of the problem.
If the financial crisis is one of illiquidity, then such a plan could work. Financial illiquidity is when an entity doesn't currently have enough cash on hand to pay its creditors. When one is merely illiquid, one is well situated to have this money in the future (due to things like good investments, steady sources of income, et c.). When illiquidity occurs, what is needed is some temporary relief. This can be in the form of a cash injection, an agreement from the creditors to hold off on demanding payment, or in a number of other ways. Whatever action is taken, the goal is to make it so that the entity will be capable of resuming payment of his debts.
If the crisis is one of insolvency, though, the problem is much worse. Insolvency occurs when an entity is (a) illiquid and (b) lacks the resources to generate the capital required to satisfy creditors in the long run. A simple cash injection won't solve the problem, nor will temporary relief from creditors. The illiquidity issue must be fixed, and in addition, there would need to be some sort of relief that would cure the long-term problems that the entity is facing. If what we are experiencing is a problem of insolvency, the amount needed to solve the problem is much greater than if the issue is illiquidity.
From what I understand, the proposal is to spend a shit-ton of taxpayer money to buy up some of the toxic assets plaguing the financial market - especially the bad mortgage securities (this is what is prompting some to call the Paulson plan "cash for trash"). For the bailout to work, the government will likely have to buy these assets for more than their market value. The hope is that once the system has been purged of these securities, people will be willing to resume trading and lending money against the new, safer assets which replaced the bad ones, thus restoring the flow of credit. But this seems like it can only work if the financial institutions on the receiving end of this bailout are merely illiquid. If the institutions are insolvent due to the fact that too large of a percentage of their assets are worthless, then buying up a small portion of the worthless assets won't solve the problem.
Either way, the people get stuck with the toxic assets, and unless they become non-toxic in the future, the people will take a hit.
Krugman.
Naked Capitalism.
Economist's View.
But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.
That last comment I meant to add is this now a red flag? Especially this line:
"Mr. Paulson is also demanding dictatorial authority, plus immunity from review 'by any court of law or any administrative agency,”
From the proposal:
"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
Clearly, this is a worrisome passage. Paulson might be quite capable, but there needs to be some meaningful oversight as to how this is handled.
As for the "clean" portion, there isn't much reason for that, save ideological. Essentially, what he is looking for is a significant assumption of debt by the public without any regulation on the system or any stipulation that the taxpayers get to share in the upside of this.
None of this should be too surprising given that Paulson is the former CEO of Goldman Sachs.
But few are showing much willingness to go along with these demands. Liberals and conservatives are pissed, which raises the odds that any bailout will not look like that which Paulson has proposed.
Call your senators and representatives and ask that they not support any bailout without meaningful oversight and salary caps for CEOs whose companies are assisted.
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