Dear Friends,
This video is from MSNBC.Com and shows the Interview of Robert Reich, President Elect Obama's Economic Advisor, and former Clinton Labor Secretary, amongst others.
Now, it looks like the US$700 Billion Bailout Plan is up for debate once more, and as one interviewee said, "It's a mess."
The main argument now is that the US$700 billion bailout money is supposed to be used to help the people who are suffering, to get refinancing and a breather from mortgage defaults, where possible.
If this is so, why don't the US Government just form a new bank, and capitalize it with US$700 billion, making it possibly THE largest capitalized bank in US, and do the commercial lending from thereon?
The biggest argument against the bailout seems to be the fact that the banks are taking the money, which is hard earned by taxpayers, to pay bonuses, dividends and even buy other banks!!! Whatever the case, the banks are NOT lending; or so it is claimed.
I remember reading somewhere that the bank lending is rising, but nowhere near the good old days of Pre-Crisis, which is to be expected, because with asset prices falling, it is natural that banks have become extremely cautious.
This video is from MSNBC.Com and shows the Interview of Robert Reich, President Elect Obama's Economic Advisor, and former Clinton Labor Secretary, amongst others.
Now, it looks like the US$700 Billion Bailout Plan is up for debate once more, and as one interviewee said, "It's a mess."
The main argument now is that the US$700 billion bailout money is supposed to be used to help the people who are suffering, to get refinancing and a breather from mortgage defaults, where possible.
If this is so, why don't the US Government just form a new bank, and capitalize it with US$700 billion, making it possibly THE largest capitalized bank in US, and do the commercial lending from thereon?
The biggest argument against the bailout seems to be the fact that the banks are taking the money, which is hard earned by taxpayers, to pay bonuses, dividends and even buy other banks!!! Whatever the case, the banks are NOT lending; or so it is claimed.
I remember reading somewhere that the bank lending is rising, but nowhere near the good old days of Pre-Crisis, which is to be expected, because with asset prices falling, it is natural that banks have become extremely cautious.
In my opinion, the issue is not forcing the banks to lend. The US Government should form 2 or 3 commercial banks for that purpose if necessary, rather than put the money with the existing banks, which are still reeling from lending losses.
If forming the new commercial banks take too long, the US Government can easily nationalize 2 or 3 of existing banks, install new senior management, and start lending. Thus, getting credit to consumers is NOT a challenge.
The challenge is the eligibility of the consumer to borrow. Lending money to people who can't pay, or are intending to use the loan to invest in assets that may go much further down in value, doesn't make proper business sense. THAT, is the problem.
If forming the new commercial banks take too long, the US Government can easily nationalize 2 or 3 of existing banks, install new senior management, and start lending. Thus, getting credit to consumers is NOT a challenge.
The challenge is the eligibility of the consumer to borrow. Lending money to people who can't pay, or are intending to use the loan to invest in assets that may go much further down in value, doesn't make proper business sense. THAT, is the problem.
The two most critical issues that the US Government should consider carefully are: -
Job Creation - Lending to those who need money to do proper, profitable business is the most important strategic objective. There are genuine businesses that have been doing proper business and are still profitable, but have been badly affected by the credit crunch, and it would be a sin not to support these businesses, of all businesses.
Why put money with badly managed firms, when well managed firms are not supported? Lending MUST be linked to the important objective of Job Creation or Job Retention, whilst ensuring that the loans will be repaid properly.
Security of the Bank Customer Deposits - It doesn't do any one any good if banks start to collapse all over the place, as was the case in the 1929 to 1934 Great Depression. During this period, about 10,000 banks collapsed, and this was one of the key causes of the Great Depression.
Why? Because the general layman, who had not speculated in the stock market and property market bubbles; who had worked hard, and saved consistently with prudent family financial management, lost his / her entire life savings when the banks collapsed.
The issue is whether the US Government should guarantee the full amount of the Bank Customer Deposits, in the form of FDIC Insurance?
On the other hand, maybe, a better question is, "Can the US Government guarantee everyone? Is it even possible?"
The bubble excesses, toxic assets and credit loans losses may be so massive that this might not be possible without incurring ridiculous burdens on the taxpayers, and risking Hyper Inflation.
I don't think any one, not even the US Government, understands how much money is needed to guarantee everyone, much less, bailout all the banks. There is a difference between the two solutions.
Bailing out the banks keeps employment, and thus, the argument for it is that the money is more productive. Merely paying out the FDIC Insurance when a bank collapses would be a loss to taxpayer for no returns at all.
On the other hand, the continued funding of financial institutions that are not well managed doesn't seem to make good business sense. This predicament is much clearer in the case of General Motors which is seeking government bailout on the grounds of employment retention, but without a good plan for profitability, why do it?
The same argument goes for loss making, badly managed banks.
I really do believe that the US Government can take positive action to mitigate the risks of a Depression, and to minimize the pain as much as possible, without going overboard in risking Hyper Inflation.
Such an objective will definitely require a more strategically integrated plan that has been carefully conceived. The US Government MUST NOT be involved in charity, but may lend to potentially profitable businesses, be it banks or firms from other industries, no matter how small the firm.
Like all commercial ventures, it must take precautions to minimize the risks of loan defaults. Where a borrower is not eligible, in accordance with good, solid banking practices, there is no choice but to let such a firm fail, no matter how big it is.
As for helping individuals who face "under water" equity in their property investments, this will depend on the proposals and creditworthiness of the individuals to pay. Where an individual has no way of making good the installments on their loans, there is no choice but to go through due process.
Unfortunately, this is the reality of life; unless the US Government decides to force American taxpayers pay for the indiscretions of those in financial trouble.
Lastly, the question of security of bank customer deposits. This is a very tough problem. If there is no guarantee, there will be bank runs. If there is, what is the COST to the US Government? Obviously, the Government will need to conduct a Deposit Stratification Study to make a decision on how many people they can / should indemnify, to minimize losses, and risk of bank runs. Bank collapses are already an inevitable part of reality.
It should be noted that uncertainties will always exist. Where there are uncertainties that cannot be properly ascertained, then emergent strategizing becomes an important integral part of the solution. Thus, there cannot be a single Grand Plan, but a series of Key Plans that move the Government closer and closer to solving the economic problems.
Best wishes,
Ooi
Why put money with badly managed firms, when well managed firms are not supported? Lending MUST be linked to the important objective of Job Creation or Job Retention, whilst ensuring that the loans will be repaid properly.
Security of the Bank Customer Deposits - It doesn't do any one any good if banks start to collapse all over the place, as was the case in the 1929 to 1934 Great Depression. During this period, about 10,000 banks collapsed, and this was one of the key causes of the Great Depression.
Why? Because the general layman, who had not speculated in the stock market and property market bubbles; who had worked hard, and saved consistently with prudent family financial management, lost his / her entire life savings when the banks collapsed.
The issue is whether the US Government should guarantee the full amount of the Bank Customer Deposits, in the form of FDIC Insurance?
On the other hand, maybe, a better question is, "Can the US Government guarantee everyone? Is it even possible?"
The bubble excesses, toxic assets and credit loans losses may be so massive that this might not be possible without incurring ridiculous burdens on the taxpayers, and risking Hyper Inflation.
I don't think any one, not even the US Government, understands how much money is needed to guarantee everyone, much less, bailout all the banks. There is a difference between the two solutions.
Bailing out the banks keeps employment, and thus, the argument for it is that the money is more productive. Merely paying out the FDIC Insurance when a bank collapses would be a loss to taxpayer for no returns at all.
On the other hand, the continued funding of financial institutions that are not well managed doesn't seem to make good business sense. This predicament is much clearer in the case of General Motors which is seeking government bailout on the grounds of employment retention, but without a good plan for profitability, why do it?
The same argument goes for loss making, badly managed banks.
I really do believe that the US Government can take positive action to mitigate the risks of a Depression, and to minimize the pain as much as possible, without going overboard in risking Hyper Inflation.
Such an objective will definitely require a more strategically integrated plan that has been carefully conceived. The US Government MUST NOT be involved in charity, but may lend to potentially profitable businesses, be it banks or firms from other industries, no matter how small the firm.
Like all commercial ventures, it must take precautions to minimize the risks of loan defaults. Where a borrower is not eligible, in accordance with good, solid banking practices, there is no choice but to let such a firm fail, no matter how big it is.
As for helping individuals who face "under water" equity in their property investments, this will depend on the proposals and creditworthiness of the individuals to pay. Where an individual has no way of making good the installments on their loans, there is no choice but to go through due process.
Unfortunately, this is the reality of life; unless the US Government decides to force American taxpayers pay for the indiscretions of those in financial trouble.
Lastly, the question of security of bank customer deposits. This is a very tough problem. If there is no guarantee, there will be bank runs. If there is, what is the COST to the US Government? Obviously, the Government will need to conduct a Deposit Stratification Study to make a decision on how many people they can / should indemnify, to minimize losses, and risk of bank runs. Bank collapses are already an inevitable part of reality.
It should be noted that uncertainties will always exist. Where there are uncertainties that cannot be properly ascertained, then emergent strategizing becomes an important integral part of the solution. Thus, there cannot be a single Grand Plan, but a series of Key Plans that move the Government closer and closer to solving the economic problems.
Best wishes,
Ooi
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