The US government bailouts and handling of the current economic crisis – (including Congress, Treasury and White House team) –
I’m not sure there is anything good about it. The US government is trying to insulate the bad financial products from the good assets in the marketplace so that hopefully no more companies or banks will fail. It might work, but might not.
The reason on a larger scale that it is causing bankruptcies at a very basic level is because the ways it has been done, it is like borrowing money from a bookie to play a bet. That works find, if the bet wins.
But, when it doesn’t and the money isn’t available to pay the borrowed money back plus the play on the bet – there is a “constrained relationship” with the bookie. Or, in other words – that bookie gets real short tempered and will collect one way or another.
A lot of really big companies and banks, and well-respected businesses were making very large bets on borrowed money and then took another bet to insure against the first bet until after awhile, the debts had to paid. Apparently, there weren’t enough real moneys to pay them, nor to continue to play in this game.
The other thing that might make sense – while most of it doesn’t make sense – is that for every one dollar that these companies and banks actually had, they were allowed to borrow twelve dollars or as much as forty dollars against it. Now, who gets to do that? This has been common practice.
This has caused many Americans to be out of work, lose their homes and has forced them into bankruptcy because when the companies where they worked started trying to make themselves look profitable, they laid off people to do it.
The fact is, many companies and banks still went bankrupt also when it was discovered that they didn’t have the money to pay off the debts called due, were no longer profitable or solvent and couldn’t get any money for things they owned.
Among the investment bankers there were a set of “assets” that weren’t any more than a contract for a bet that some homeowner somewhere would pay off their mortgage. These companies has bought huge packages of mortgages that were sold together as a lot. Then they paid someone else to insure the package for how much would be owed if some of these mortgages didn’t get paid off, which hedged the bet.
sounds like betting on football sort of, doesn’t it – except in the billions and trillions of dollars. And a lot more risky.
I think, if they had stopped at that point and not gone into the next round of stupidity – well, maybe it would be different. But, since many investment houses could borrow $40 for every $1 of assets, they did (using these packages as dollars of assets) – which converted the packaged “bets” and “insurance” to hedge the bets – into cash which they used to do some more of the same game.
It looks like after a time, there were stacks and stacks of what was being valued as if the bets had been won and that, on accounting records, appeared like the cash value of all the mortgages in the package added together (like they were the total value of what could eventually be paid off, if the homeowner made good.)
Well, if your money’s no good – you’re not going to pay off a bookie with it and that is exactly what happened. There was a piece of paper for somebody’s house in Tulsa or somewhere mortgaged for $300,000 principle plus interest with a homeowner in foreclosure. Then, that isn’t the same as $300,000 cash any longer. And, the property probably couldn’t bring more than $15,000 auction off in foreclosure.
It seems complicated, but really it isn’t. If I tell you that something is worth a certain amount and it isn’t – that is a lie. But, when businesses, assets, stocks and things like that are treated this way – it is way more than a lie. And, it means that it sure can’t be used to make good on debts as if it is cash money or a building or equipment or anything of value.
This is why so many companies are on quicksand right now and the plan offered by Secretary Paulson of the Treasury is being used to buy up the worthless things that the whole bunch of them had been using like money, when it wasn’t and they didn’t have anything real to back it up.
Obviously, everything is pretty close to the vest in the business and corporate world. So, with everybody holding these bets they couldn’t pay off and borrowed moneys they couldn’t pay back, after awhile nobody wanted to loan any of them any money to play with anymore. Who would?
The President’s advisors and the Treasury Dept. think this bailout and buyout of everybody’s bets on the table will allow them to all trust each other enough to start lending real money and paying back real money again. And, hopefully, to make real profits again. This probably would’ve worked a lot better, if other countries hadn’t been conned into buying these bets too. There’s no telling if the bailout will work to get this done or not.
By the way, the falling of the economy doesn’t absolutely cause bankruptcies. It can contribute but essentially that is up to the flexibility of the participants, whether in a household or in a business. It isn’t an absolute. And, in our day and time, bankruptcy is used sometimes as a process in which to regroup, consolidate resources, protect some opportunities and then go at things again.
But, just as in a hand of poker, it isn’t always right to hold the cards and bet on them. It isn’t always a winning hand to throw them in until the four aces or royal flush comes along to play them. It is all in how its done.