This bailout will NOT HELP! Just check what all the different economist are saying down below.
Will the TARP Bailout be Effective in Reducing Recession Risks to the U.S. Economy?
- TARP bill might prevent panic among investors and turmoil in domestic (and global) financial markets only in the short run; but by not targeting the real sector, the plan doesn’t effectively address the crux of the current crisis: housing sector and its impact on the consumer, so that home and asset prices will continue to approach market clearing levels
- Economist: Plan may help unfreeze the mortgage market, restore banks lending but even if home prices stabilize soon, liquidity squeeze in money markets and deterioration in non-mortgage credit would continue
- Paribas: $700 bn package is small relative to $50 tr credit market debt but matched up with outstanding mortgage debt of $11.2 tr and Private ABS issue of home mortgage debt of $2tr; if Treasury buys pvt debt for 50 cents, it will remove 75% of pvt mortgage debt and if Treasury buys pvt debt for 33 cents, it will all of the pvt mortgage debt, gradually soothing frozen credit markets
- Goldman Sachs (not online): Currently, given the no. of homes facing/at the risk of foreclosure, govt plan buying these mortgages at ~70 cents will be able cover almost 87% of the troubles mortgages
- Breaking Views: Amid tight credit and low investor sentiment, withdrawing $700bn from the funding pool to support failed, past investments will crowd out good investment, economic activity, efficiency
- But home prices are expected to fall further by around 10-15% until 2010 as home inventories, vacancies are still at record levels but home sales and mortgage applications are at a record low (and home starts are yet to fall below sales); home demand continues to be constrained by high mortgage rates, tighter lending standards, falling household income (from wage and assets), unemployment
- The decline in home prices will continue to push more households into negative home equity and at the risk of default, foreclosure and excess home supply, creating a vicious circle;
- This would also reduce the value of MBSs leading to further bank losses and credit tightening; tighter credit conditions (apart from falling home prices, on and income losses) will continue to impact consumer spending spending and capex by firms (apart from weak corporate earnings, elevated production costs), thus worsening the recession
- While any rate cut may not directly impact growth, it might help ease liquidity pressure in credit markets and credit access to consumers and firms; fiscal stimulus (unless directly targeted at housing sector) would also have a small impact in alleviating the impact of recession and job losses on households and firms
- After stronger than expected growth in Q2-08 boosted by rebate induced consumer spending, export growth, GDP growth is expected to weaken significantly in Q4-08/Q1-09 on contraction in consumption, slowing capex, exports (slowing G-7, EM growth, stabilizing USD); longer housing correction, financial turmoil might lengthen the recession leading to a slow and sluggish (U-shaped) recovery
- Roubini: Treasury plan doesn’t reduce household debt burden which will continue to depress consumption and exacerbate the recession
- IMF: Given the size of mortgage market and role of residential investment, the crisis will lead to a severe downturn; need substantially large recapitalization of the financial system to resume significant lending; need to contain moral hazard and fiscal costs
- Bernanke: Without the bailout plan, risks to the financial sector, tighter credit lending standards and higher rates will continue to impact consumer spending (via consumer loans, home equity lines, credit cards), residential and commercial construction, business investment (via, commercial paper, bond issues, loans) and weigh down on growth for the next few years
- Blinder, Stiglitz: Govt needs to intervene in the housing sector directly to contain foreclosures and consequent impact on banks’ MBSs rather than trying to help Wall St to reduce impact on Main St
- Kruger: Without the plan, the credit shrinkage will exacerbate the output loss, decline in employment
- Galbraith: Given the financial constraints faced be borrowers esp. due to lack of collateral, the bailout won’t be effective in improving credit flow into housing sector
- Merrill Lynch (not online): RTC experience shows govt bailout not correlated with the bottoming of housing, stock market, corporate sector woes and the recession
- Alliance Bernstein: Slowdown in growth even before financial crisis worsened will impede economic recovery resulting in a longer trough (U shaped recovery)
- FT: Intensification of housing, financial sector crisis, oil-led inflation, time lag b/w financial crisis and the impact of credit squeeze on real economy and back on financial sector may lead to negative growth at the turn of 2008
Oct 3, 2008
Associated Readings (14 Articles)
AnalysisNouriel Roubini’s Global EconoMonitorSep 28, 2008Is Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System? No! It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured Creditors of Banks
OpinionsJoint Economic CommitteeSep 24, 2008Statement of Bernanke before the Joint Economic Committee: the Economic Outlook
AnalysisAlliance BernsteinSep 19, 2008United States: Will the Economy Withstand Damage From Financial Crisis?
Filed under: Abuse, Awareness, Corruption, Critical Analysis, Economics, Education, Fake US Capitalism, Future, Henry Paulson, Impoverishment, Injustice, Market Failures, Nouriel Roubini, Policy, Politics, Research, Struggle, Stupid Ideas, TARP aka "Bail Out" Plan, US Dollar, US Economy 2008, US Rip Off!, USA, World Economy, ignorance
