How will the bailout actually affect us?

The rationale was to buy up all the bad housing loans that are sinking the balance sheets of major financial institutions. Kind of like if you had bought up a whole bunch of beachfront property to flip right before the housing downturn. Uh-oh, no way you can sell those now.

Banks can’t unload these bad loans, which in turn has been clogging up the everyday business of lending.

That lending in turn affects whether businesses can expand or not, and if they can’t, that means more layoffs.

It also tightens up credit for you and me, so if you were planning on remodeling, or buying a car, suddenly loan terms aren’t so great anymore, and you may put off those plans.

All of these delayed plans have a further dampening effect on the economy. If I’m not buying from contractor X, then he’s not paying Worker Y. Etc.

Will the bailout actually work as drafted? Experts are saying no, and today’s precipitous market drop (again) suggests it’s so far not instilling global confidence in our competence. Among the main problems many see is having the government be the sole buyer of a whole bunch of bad assets, in our names, when nobody knows how to value these things.

They also argue that the bailout needs to provide clearer language about us taxpayers being first in line if the government actually makes money back on these over the next several years.

Now that Congress has demonstrated the actual will to do something, here’s hoping they will also modify it as needed along the way.

I heard George Soros being interviewed the other day on MPR along these lines, from Clusterstock:

“What Hank Paulson should do instead with his $700 billion, Soros says, is buy bank equity, not crap assets. (This is what most other smart people are saying, too.) George notes that, because banks borrow $12 for every $1 of equity, this $700 billion would produce $8.4 trillion of lending power. It would also solve the real credit problem: a lack of capital. And…here’s the kicker…it would encourage private investors, including George Soros, to step up and take advantage of low bank-stock prices to buy even more equity.”

There’s vigorous debate on that blog about whether or not that would work. (Check out the extensive comments at the bottom.)

Overall, I stand with the editors of the San Francisco Gate, who argue today that now that the bailout plan has passed, the real work of fixing it — and our economy — is just beginning.

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Tags:   credit · George Soros1 Comment