Here is a good 4 minute summary of what the bailout hopes to accomplish.
As with every huge financial endeavor involving public markets, its largely a psychological gambit. There is no way a government could save all its banks. What they are basically doing is buying the debts (like your home mortgage)which are most likely to not get paid back from the banks in the worst shape. This makes the bank look stronger financially so that other banks are willing to led it money. This is necessary because no bank has enough money at any one time, they are all tied together with short-term loans (often as short as overnight); so if a bank can't take out more loans it'll default on previous loans its taken which are due. The bank then goes bankrupt.
So if money isn't in the banks, where is it?
[taps temple with concentrating look on face]
[Mindlab]
- iurodivii
- Infinite players understand the vigor of a culture has to do with the variety of its sources, the differences within itself. The unique and the surprising are not suppressed in some persons for the strength of others. The genius in you stimulates the genius in me.
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3 comments:
Indeed... however, it's interesting to see the 'European' approach, which basically replaces the purchase of debts (bonds, mortgages, etc...) with the purchase of capital, effectively making the government a partial proprietor of those banks. The idea is that the direct involvement of the government creates confidence because those banks would be further from insolvency while at the same time giving the tax payers a better chance of seeing the return on their 'investment'.
Curiously enough, after having heard this distinction for the first time earlier today, I just got a NY Times news flash that the U.S. is now considering this approach because even after the bailout bill passed there is still lack of confidence and the market continues its free fall. Apparently, since other banks in Europe are doing, Japan will follow suite, which means the U.S. may have to keep up or risk seeing capital fleeing to foreign banks.
Oh the fun never stops!
This $700 billion bailout plan will be dissected in textbooks for ages.
Even in the european method its all about creating confidence. I mean it doesn't really matter if the money is buying bank shares or buying bad debt, that bad debt is still around and will be defaulted on and whether the government is holding the bank that is holding the bad debt, or is just holding the bad debt - when it defaults its still the tax dollars going down the drain whether its in the form of lost shareholder value of the banks owned by the governments (european) or debt not paid back (american).
On the one hand it appears more like a simple economic preference where the european countries are more socialist in their paperwork than the americans.
But on the other, which is more important at this juncture, the amount of money banks have to float on while trying to collect bad debts (european) or the amount of credit that can continue to be extended if bad debts are bought by taxpayers (american)?
And also, how many years will it be that the governments are owning the banks? Those banks won't be able to buy themselves back from the government for ages, but it will prop the stock market up and with baby boomers retiring left and right, that is a huge consideration.
I agree... no matter how you look at it, it's a mess. I think it's just the right time for Oliver Stone, Charlie Sheen and Michael Douglas to produce the sequel to "Wall Street", there's so much great material!
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