Because of these hidden liabilities, banks are afraid to lend to each other. This fear is what is causing LIBOR rates to be unnaturally higher than the Fed Funds rate, stock prices to plummet, and financial firms unable to sell their debt. Without the ability to raise capital, these firms are in danger of going bankrupt, just as Lehman Brothers did last week, and AIG and Bear Stearns would have without Federal intervention.
As it should, Congress is debating the pro's and con's of such a massive intervention. Political leaders also want to protect the taxpayer, and would like to add funds to help homeowners who are at risk of defaulting on their mortgages. They don't want to let businesses off the hook for their bad decisions, and leave voters holding the bag.
However, Paulson is urging Congress to act swiftly to avoid further meltdown. It has become a case of fear feeding on fear, with banks afraid to disclose their bad debt, which will lead to a downgrade in their debt rating, which will lead to a decline in their stock price, which will lead to their inability to raise capital, which will lead to bankruptcy. This fear of disclosure has led to an overall panic, fed by rumor, which has locked up the credit markets.
Will the government be out $700 billion? No one knows, since no one understands the complex mortgage instruments well enough to say how much bad debt is out there. But, if the bailout doesn't occur, then the panic itself will be enough to further depress the housing market, which will cause more defaults. Paulson understands that the government is the only entity big enough to stop the panic. In fact, the Dow rose 9.8% on Friday in support of Paulson's announcement.
Paulson's bailout was triggered by a record $140 billion being pulled out of money-market accounts, usually considered the safest of investments. That's because investors were moving the funds to U.S. Treasuries, causing yields to drop to zero. To stem the panic, the Treasury agreed to insure these funds for a year. In addition the SEC banned short-selling of financial stocks until October 2.
Congress' approval of the bailout should be enough to stop the panic, and restore the financial markets - and the economy - to sanity. (Source: WSJ, Shock Forces Paulson's Hand, September 20, 2008)
Comments
Nothing is accomplished in panic. One usually doesnot think clearly. Before we sign that check to clean up “another fine mess” in which we have been landed…involuntarily, what are the bottom lines all the way around?
IF I agree to bail them out one more time- what is in it for me? Yes , me a 56 year old woman with no kids. “Make me an offer I cannot refuse.”
What do I WANT? Lets start with telling me the TRUTH- and I want to see who profited.
Not their version of the Truth but fiscal truth.
I want that those who thought that they were “so much smarter and more clever than I” to be revealed as more dispicable and dishonest. We all know that won’t happen.
What will I consider as a settlement?
-The players go to jail. Because the players are usually cronies of the decision makers , usually this means country club jail. I will have to live with that.
-Freezing and liquidation of their personal assets with a living allowance comparable to a wage earner of $40,000 per year. Still higher than many but one heack of a drop for them.
-Auction of mansions. minmansions, vehicles including boats and planes with a value over $20,000. Auction of personal posession- it happened at the farm auctions in the 1980’s – they are no better.
-7 year suspension of all professional licenses following completion of jail term . A ban of being a lobbyist be included on this decision.
-10 year familial gag order on all book and lecture deals- they do not get to profit from this.
This includes all family and family by marriage members. If it is written about by a neutral party – not one cent to the family ever shall go, not in any form. It may be necessary for economists to study this more deeply and the intent not to hinder them, only to stop the players from profiting further. They must take their responsibility for their downfall.
I have nothing agains a fair profit- by one’s own brain and body BUT this type of manipulation is irresponsible .
If it is necessary for the country to be in pain- the full impact of that which the players have done should be brought home to them. Also it shouldn’t be nailed on 1 little person in accounting- the CEO and CFO have responsibilty for that which occurred on their watch.
Hi Sue,
You raise an excellent point. I think this crisis really highlights the fact that people are getting fed up with the income disparity in this country. I think you should send your suggestions to Congressman Frank…it would be right up his alley!
Kimberly
I urge congress not to pass any type of bailout program for the financial institutions. When banks like Washington Mutual pay their CEO’s $19 million dollars for 3 weeks of work then they deserve to be bankrupt. When we as the funders of the CEO’s salary fall short or late on our payments we are met with relentless collection activity foreclosure and financial ruin. Allow them to experience what we experience. If congress funds this $700 billion dollar bailout that will increase the value of the stock these CEO’s hold, then we are simply giving them more money. Why not instead use the money to build our country and create jobs so those delinquent on their mortgages can have a source of income to pay the debt and put money back into the economy the right way. Giving the money to the banks will only move debt, not pay it off. The top 1% of income earners will be the only ones to benefit from this. The lower 99% of us who pay for this will still be in ruin. Congress is working for corporate interest and not in the interest of the country.
Quote,”But, if the bailout doesn’t occur, then the panic itself will be enough to further depress the housing market, which will cause more defaults.” If the bailout passed, I don’t understand how it will benefit the consumers (homeowners). The bailout will help banks taking off mortgages debts off their books but if homeowners can’t afford making payments now on their home then there is more defaults to come. Why don’t they give each homeowners $100,000 to pay towards their loans? The bank gets $100,000 from each homeowners so business can start running again. Everyone is happy and what’s left from the balance the homeowner is responsible but under one condition they can’t default. An agreement need to be signed to secure the loan. If they default, wages will be taken until the balance is paid off! So I don’t really understand how default is going to stop. Fill me in!
Hi Jada,
Now that the banks know the govt. will take the bad loans, then they will loan to each other and , more importantly, homebuyers again. As people can get mortgages to buy houses, housing prices will stop falling, and eventually start going up again. When this happens, confidence will be restored in the economy, and we can all get out of this mess.
If the govt. sends the money to homeowners,they pay their mortgages, but if the housing prices continue to fall, more and more people will default.
Kimberly
I agreed, that’s a very good point. Thank you!Keep up the good work!