Tuesday, September 23, 2008

What if the bailout doesn't stop market meltdown?

Supposedly the idea is that by buying hundreds of billions of dollars of shares in failing financial companies, the U.S. government hopes to halt the down spin on Wall Street.

If we distill the meaning, the hope is mainly to stop the instability in the stock markets. By shoring up the investment companies, the idea is that confidence will be restored and the indexes will stop plunging or swinging wildly. This is an idea that seems to register on Wall Street itself, or at least among the day and swing traders. After news of the bailout, not only did the markets rebound but oil prices dropped sharply.

The drop in oil seemed to indicate that people thought the economy would rebound after the bailout and that demand in oil would go up.

However, long-time observers of stock markets will know that taking any drastic action based on perceived future action of these markets is very risky.

The markets themselves showed uncertainly when Monday stocks went in the opposite direction and oil prices experienced a record rise. And that was just over one weekend! What happens if taxpayers get stuck with half a trillion in toxic assets, but the market does not respond in the manner that the administration hopes it will?

There may be more to this economic crisis than appears on the surface. It may not be long before other companies from different sectors also show signs of failing en masse. Does the government keep borrowing money to bail out these companies also.

Supporters of the bailout claim the action is needed to prevent a "run on the banks" were people rush to withdraw money from retirement accounts and money market funds. The use of the phrase "run on the bank" probably is not being used accidentally. It's something most people understand from watching Hollywood movies.

However, one must ask whether the government's buying of bad stock can in any way stop people from relocating their assets to safer havens. In a free market, one has to consider that investors may not react in the way you are assuming they will.

However, with an election coming up in November, it is certain that Congress and the administration must do something to show that they are on top of the situation. Most experts agree they will pass some type of package. The details though could differ widely. They may decide, for example, to put more money into helping struggling homeowners.

Whatever they do, all eyes will be focused on the stock markets after the legislation goes into action.


Congress balks at banks bailout plan
guardian.co.uk, UK - 2 hours ago

But the key problem not addressed by the bailout – a point also made by Krugman – is that some banks remain under-capitalised, ie they don't have enough ...

Bush offers $500 billion bailout Minneapolis Star Tribune
US financial rescue plan could cost one trillion dlrs: senator AFP

Labels: , , , , , , , ,

Purchase Paul Kekai Manansala's books at amazon.com


Post a Comment

<< Home

Fat Diminisher September Contest! $20,000 In Winnings! Click Here!

Add to Technorati Favorites!

Add to Google

Subscribe in NewsGator Online

If you have Google or Yahoo! toolbars, drag this link into your bookmarks toolbar to bookmark this page.

Add to reddit
Add to Digg

Press Ctrl + D to add to your browser bookmarks.