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Originally Posted by alphieb I can't believe Barak wants tax payers to bailout Wall street... |
Alphieb,
Even as it might appear that the financial rescue legislation is a "bailout for Wall Street," it is really intended to recapitalize the financial system. The financial system is increasingly strained. Credit is drying up. Interest rates for interbank lending are rising sharply e.g., overnight rates reached as high as 11% in Europe earlier today.
What the political leaders have not communicated very well are the implications of the intensifying credit crisis. Some of those implications are as follows:
• Banks could hoard cash or invest excess cash into Treasurys and cease lending to one another, businesses and individuals.
• Banks that are unable to meet their capital requirements on account of an inability to obtain overnight loans could face failure, especially if depositors learn of the issue and begin withdrawing funds.
• Banks that have a lot of long-term assets relative to short-term liabilities could shift from a profitable position to massive losses on account of the rise in interest costs on short-term borrowing.
• The commercial paper market that is key to financing auto loans, credit cards, etc., is increasingly impaired. That could translate into fewer auto loans, even for people with outstanding credit, higher credit card rates, etc.
• Banks could cease financing lines of credit to companies that often use such lines to finance inventory or meet payroll.
• Banks could exercise "market disruption" clauses that permit them to substantially raise interest rates on funds previously borrowed by corporations. That could increase financial pressures on corporations, reduce corporate investment, and lead to layoffs.
• In a worst-case scenario, the breakdown of money market functionality could trigger a systemic financial crisis. Using systemic crises in developed countries during the 1990s, the mean fiscal cost of such crises (based on % of GDP) came to the equivalent of $1.6 trillion. Economic costs (lost output) came to 1.5 to 2.0 times that figure.
All said, even as the political leaders haven't communicated very effectively on the legislation, the bill is intended to prevent a systemic financial crisis. It is intended to protect all Americans from the destructive consequences of such a crisis.