Tuesday, September 30, 2008
US bailout plan rejected; worldwide impact on stocks
Current situation in the street ? Panic since there is a lot of holding in these reduced value mortgages, and as a result, banks are not able to decide whether the money they lend to other banks will return since there is no guarantee about the finances of the other banks and other institutions. As a result, lending to other banks and companies, the life-blood of the finance system of the economy is down massively. Lending, and the ability to get money from banks through loans and working capital requirements are what lets an economy work. The solution ? Take on these tainted mortgages till the credit system starts reviving, and then sell these mortgages (they still have value) when the economy has recovered. This will give confidence to the economy and its institutions. However, this runs into multiple problems.
- Ordinary citizens worried about being able to payback the loans and repay the mortgage are outraged that no one cares about them, and everybody is instead worried about some Wall Street gents who already have too much money. How does a collapse affect the ordinary Joe on the street ?
1. Tainted assets means that banks are unsure about the value of assets they hold, and make it more difficult for them to estimate their losses; this in turn causes a loss in confidence about the financial status of the bank and prevents the bank from being able to get capital - this in turn will surely and steadily lead to the bank going down the disaster bank
2. It is not just Wall Street that is affected, mainline banks in which Americans hold their deposits, are getting affected
3. The finance sector is so closely integrated with the overall economy (and is in fact a major glue of the whole economy); a crash will bring the economy down to its knees
4. People do not realize, but they are heavily involved with the stock market. Pension funds and retirement plans are typically heavily invested into the market, and downturns in the market affect the overall value of these funds
- Republicans believe that the Government needs to be small,and the market should be free. Such a bailout plan is likely to reverse both of these concepts, and this is a matter of principle
However, right now the US economy is on a major precipice, and it badly needs sentiment to be reflected. The overall aim of any ruling structure is to take measures such that it improves the life and condition of citizens, and the current situation is that a recession needs to be avoided and the economy is brought back from the brink (as stated by any number of economists and finance experts).
However, in a major setback to the President, and to the leadership of both parties, a majority of Congressmen rejected the bill. It is the treasury secretary who is responsible for ensuring that the economy remains purring, and he (and a number of experts) believe that such a plan is necessary to prevent the economy from going into a severe crisis; unfortunately a majority of the elected representatives don't agree.
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