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MARKET BAILOUT WAS AN ECONOMIC NECESSITY
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- MARKET BAILOUT PREVENTED A CREDIT LIQUIDATION CYCLE
MARKET BAILOUT WAS AN ECONOMIC NECESSITY1. THE WALL STREET BAILOUT WILL RELIEVE FINANCIAL PRESSURE ON CORPORATIONS Stephen Barlas, Staff Writer, November 2008. “Just the beginning: what's ahead now that the bailout (er, the "rescue") is being implemented?” STRATEGIC FINANCE, vol. 90, no. 5, p. 34. Obviously, though, at the moment, U.S. corporations are worried about more immediate problems such as the inability to sell commercial paper and the costs of issuing corporate bonds. The bailout package will probably help alleviate corporate borrowing pressures by the time the new Congress takes office, although it will do that indirectly because neither corporations nor their pension plans--that is, those at nonfinancial corporations--have invested heavily in the kinds of mortgage-backed securities that the Emergency Economic Stabilization Act (EESA) was aimed at. That law established a Troubled Asset Relief Program (TARP) that will purchase or insure underwater assets and whose work is being overseen by a Financial Stability Oversight Board.
David Teather, Staff Writer, September 20, 2008. “The reckoning - domino effect that reshaped global economy,” THE GUARDIAN, Accessed 12-13-2008, Paulson and Bernanke said the selling threatened to get out of control. What had started as a problem in one segment of the American mortgage market was in danger of becoming a global contagion. In Russia, the Kremlin had shut down the stock market. In Britain, the government had helped orchestrate a rescue of Britain's mortgage lenders. Gold prices had shown their biggest ever one-day rise. The rush for safe havens had pushed the interest rate on US treasury bonds negative for a brief period, suggesting that investors were willing to pay the government for the privilege of assured security. 3. NOT BAILING OUT WALL STREET WOULD HAVE LEAD TO A FINANCIAL CALAMITY Paul R. La Monica, CNNMoney.com editor at large, September 22, 2008. “Be ticked off - but get over it,” CNNMoney.com, Accessed 12-13-2008, That said, Norris believes that the bailout will shave about a percentage point of the nation's economic growth a year for at least the next five years. But he and Probyn both maintained that once people get past feeling bitter, hurt and angry about the bailout, they will hopefully realize that this is the right solution. The risk of doing nothing was an even worse financial calamity. "We couldn't just keep applying Band-Aids. We have to have a comprehensive package or we'll just stumble from crisis to crisis," Probyn said. "I don't like the bailout. It leaves a bad taste in my mouth. But it is the better of the two alternatives." 4. THE ECONOMIC ALTERNATIVES TO THE BAILOUT WERE INFINITELY WORSE MSNBC News, September 21, 2008. “Economists see financial bailout as necessary,” MSNBC.com, The economy could suffer a massive hangover from the government's efforts to rescue the financial system in the form of a soaring debt burden. But the alternatives look infinitely worse. The $700 billion the administration is seeking from Congress as the upper bounds of what it will need to take a mountain of bad loans off the books of financial firms is certainly an eye-popping figure. To get the funds to buy up the bad mortgage loans that have threatened to bring the financial system to its knees, the government will have to borrow. And that borrowing will come at a time when the federal budget deficit is already soaring. MARKET BAILOUT PREVENTED A CREDIT LIQUIDATION CYCLE1. FINANCIAL CONFIDENCE IS ESSENTIAL TO AVOID CREDIT LIQUIDATION AND COLLAPSE Mortimer Zuckerman, Staff Writer, September 19, 2008. “Wall Street's Day of Reckoning,” US NEWS & WORLD REPORT, Accessed 12-13-2008, Banks are not only providing loans to customers, they also use leverage themselves. When they make profits, they borrow more money to make more loans and book still more profits. But for every dollar of bank wealth that they lose, government-regulated commercial banks must eliminate $10 of lending, and for investment banks, the figure may be as high as $30. If the total losses across the credit markets exceed $1 trillion—and some think they will go to $2 trillion—then you have to put on a leverage multiplier of 10 or 15. This kind of gigantic number of more than $10 trillion poses a systemic risk that could drag many financial institutions down and take years to work through the system. The problem is the financial markets and firms are interconnected with increasingly complicated securities such as credit default swaps and money market instruments such as repos.
Mortimer Zuckerman, Staff Writer, September 19, 2008. “Wall Street's Day of Reckoning,” US NEWS & WORLD REPORT, Accessed 12-13-2008, The failure of one firm can send ripple effects through the whole system, but the market and regulators have limited experience in how to handle such a crisis. Credit drought. Today, the challenge is to build a new sense of trust in finance, as well as to rebuild equity. That makes it hard to predict when the credit crunch will end and how big the losses may be. This crunch is much more serious than in 1987, when the crash was confined to the equity markets and over within a few weeks. This one has greater scope to harm the real economy: Without credit, business dries up. Lower economic growth in turn makes things worse in the financial markets. It is affecting not only housing but autos, credit cards, commercial mortgages, commercial and industrial activities, and the leveraged buyout loan markets. 3. THE BAILOUT PREVENTED A GLOBAL CREDIT LIQUIDATION CYCLE AND DEPRESSION Patrick M. Fitzgibbons September 20, 2008. “U.S. readies massive toxic-debt plan,” THE U.S. DAILY, Accessed 12-13-2008, The government is preparing a sweeping bailout to mop up hundreds of billions of dollars in toxic mortgage debt, after curbing short-selling and guaranteeing money-market mutual funds in an effort to bring stability to the financial markets. The moves capped a week in which financial markets faced their most serious confluence of crises since the Great Depression in the 1930s and threatened national economies and the worldwide banking system. "It's like having a heart attack, and you go and get your chest cracked open and get it fixed, but the next morning you're still hurting," said Warren Simpson, managing director at Stephens Capital Management in Little Rock, Arkansas. "This has been a beast of biblical proportions. Nobody has seen anything like it." 4. A CREDIT LIQUIDATION CYCLE WOULD DIRECTLY JEOPARDIZE HUMAN SURVIVAL Norman A. Bailey, Consulting Economist, Senior Fellow at the Potomac Foundation and Professor at the Institute of World Politics, January 1990. “The World Economy in the 1990s,” WORLD & I, pp. 33-34. The thirties, after all, began three months after the inception of the Great Depression and ended four months after the start of World War II. This was not a coincidence. Tens of millions were killed and maimed in the Second World War. If another historical credit-liquidation cycle is allowed to take place in the usual chaotic fashion, the chances of another global armed conflict will be greatly increased – this time, not only would hundreds of millions (rather than tens of millions) be killed or wounded, but the very hopes and the future of mankind, as such, might be destroyed in the process. Download 343.42 Kb. Share with your friends:
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