Quote:
Originally Posted by WanderingKnight
And I'm not gloating at the US... I'm more than conscious that our economy will be affected.
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Good. Because it seems you're right:
Latin American economies catches cold
Quote:
Originally Posted by karasuma
Ok, so, do we have a real problem?
Recession is a real thing and it is a normal thing. Like the tech bubble happened in 2000. No one rush to government and said, "Bail me out or tons of techies are going to lose their job!" Somehow, when it happens to the bankers, they have the ear of the government. So, I said, "All in. I will call your bluff." I will save my 700B and see your bluff on economic collapse. I bet this slow down will feel no worse than the internet bubbles for techies.
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I hope, for your sake, that you are right. I am not very confident about your prognosis. The tech bubble burst was very different from the mortgage crisis that you're seeing now. The tech bubble burst wasn't going to cause credit to dry up — the collapse of the American banking system, due to its inability to liquidate toxic mortgage loans, is going to make short-term loans prohibitively expensive for many otherwise healthy businesses. That could lead to contractions that could, in turn, lead to job losses and ultimately, a very deep and painful recession for many Americans, through no fault of their own.
Meanwhile, the banks will collapse, and new banks will pick up the pieces, but along the way, ordinary Americans will suffer. In the long run, this will indeed be a healthy blood-letting. But, again, I wonder if Americans are willing to pay the likely price of this drastic get-well plan?
Quote:
Originally Posted by karasuma
(Proposed alternative to bailout)
2) Government IS going to take equity stake of the company. It will be similar to what Buffet gets from GoldmanSack. IE : 10% interest each year on 5B. For this 5B, if the market goes up, this 5B acts as stock. If the market goes down, this 5B acts like a loan. Extra option to buy 5B more share at current price.
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Except that, given America's aversion to "socialism", it'd be difficult to persuade Congress to allow the government to take an equity stake in Wall Street banks. It's different for Warren Buffett because, well, he's a private investor, so it's okay.
There is another alternative. If the United States government doesn't want to own its own institutions, why not let foreign governments buy them? The trillions that Americans have spent on imported goods have fattened many sovereign wealth funds over the years. These funds would probably be quite happy to take controlling stakes in these troubled, but potentially lucrative, assets.
Presumably, the above idea would be an even harder sell than the Great US Socialist Bailout Plan.
Quote:
Originally Posted by Vexx
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It's worth highlighting something from the reference that
Vexx quoted:
"
And the underlying issue, Baker says, is that the US has lost close to $4 trillion in housing equity. The toxic assets at the heart of the financial meltdown are mortgage-backed securities. But with house values plummeting, it's impossible to gauge how much these securities are worth."
I hope that Americans, and indeed the whole world, will now learn this important lesson: Real estate can fall in value just as easily as it can rise in value. Property-fuelled consumption has always been a leading cause of financial crises all over the world. People constantly make the mistake of thinking that property is a "safe bet" that cannot fail. Once again, we are reminded, very expensively, that there is no such thing as a "sure bet".
Credit is freezing up in the US because no one knows the value of mortgage loans any more — we only know that they are steadily declining. From the same source that
Vexx had quoted, I found this
suggestion:
Quote:
Mr Simon Johnson, a former chief economist at the International Monetary Fund, thinks there's another approach that would be superior to the Treasury's plan — giving government loans to the struggling financial firms and taking their distressed mortgage securities as collateral.
"Think of it like this: You need some cash, and you have a second-hand car that's in pretty dubious condition; if I buy the car from you and the car turns out to be a complete dog, that's my problem," he explained. "But if I lend you money against the collateral of that car, ultimately you're going to pay back the loan, and it's still your car. So, if it's a dog it's still your problem."
So, by not buying the distressed securities that are the equivalent of the used car, taxpayers aren't holding the bag if the securities turn out to be dogs. But the financial firms do get the money they need in the form of a loan to help them get on their feet again.
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In effect, Mr Johnson wants the US Treasury to act as a lender of last resort, rather than being the
rescuer of last resort. The banks will still own their toxic mortgages, but with the help of government loans, they can hopefully recapitalise themselves, and eventually earn enough money to write off the bad debt (and pay back the government loan, with interest).
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Meanwhile, the US has a far deeper problem to resolve. American consumers cannot be allowed to continue funding their expenditure by borrowing against their properties. The mortgage crisis clearly shows that this is an unsustainable trend. Many Americans are steadily growing poorer today because they've depended too heavily on rising home values to prop up their bank accounts.
In the long run, American households must be encouraged to
start saving again, and to spend within those savings.
But that's a problem to be solved over time. The crisis on Wall Street, on the other hand, needs to be resolved
now.