Salvation
One must agree that things look really grim for the US economy. Three of the five banking giants are out cold. Bear-Stearns and Lehman Brothers collapsed while Merryl-Lynch was bought over by Bank of America. Goldman Sachs and Morgan Stanley are the only survivors but the situation isn’t rose for them either.
The beginning of this week saw heavy fluctuations on trade markets too where the price of crude oil rose, much like the price of gold.
Among the madness. the US government has come up with a simple plan that should’ve been the first reaction, that is to buy out the non-performant mortgages and credits from the market and thus give creditors a breath of fresh air that will allow them to offer more performant credits and re-launch the housing market. This will definitely be a blow to taxpayers while for the common citizen, owner of a non-performing credit, will be no difference.
For this, the head of the Treasury, Henry Paulson, demanded a free-hand into 700 billion dollars of taxpayer money from the Congress in order to conduct a selective purchase of non-performing credits. Unlike the takeover of mortgage giants Fannie Mae and Freddie Mac which provided the government with 80% shares into performing credits (mostly at least - Fannie Mae and Freddie Mac were mostly victims of “short hand resellers” rather than direct credit policy), this kind of bailout will cost the taxpayer real money, for some it will cost them twice.
For Romania, the alarming news was the bailout of AIG, an insurance group which has many customers here in Romania. Again, the US Government got the majority shares of AIG but the question is, what does AIG (insurance) have with the crisis (mortgage & loans) ? Well, AIG means insurance and in this case they did something of an awkward insurance. They insured mortgages (weird, huh?) which means that in the case a mortgage doesn’t pay out, AIG comes it and pays it out. In the heart of the crisis, there came and avalanche of such cases that AIG was out of liquidity to pay out (even though its passives could, theoretically, whitstand the storm). So the Fed (which has the authority to create money) came in and created around 85 billion dollars which then the Treasury used to buy out AIG. This didn’t really cost the taxpayers more than the paperwork done but it provided the government with a good deal since through AIG’s business the US government will get a good deal of profit (after pushing out the problematic insurances that have benn payed out now).
This is related to something I overlooked to mention in my last analysis, that is how mortgages travel around. That is, after someone gets a loan for a house, that deed becomes part of investment packages and can be bought and sold (yes, there’s a true market for this) between various banks (that’s how investment banks became affected).
The new rescue plan is sound be we can only hope it’s not too late. Bad government policies allowed instability into the system and now the wheel is turning. This looks mostly like trying to resuscitate a wounded man with charged paddles: you might get the heart started again if you use the right voltage but too many tries at wrong voltage can do more harm that good.