Thumbs Down on Bailout !

What follows the center stage after the bailout rejection ?


Its all started with the real estate bubble burst, many homeowners were turning defaulters on aggressive mortgages. As a result, assets that rely on steady mortgage payment flows are no longer worth anywhere near what the banks calculated they would be.

After the end of the busiest week, the outcome of the much hyped bailout plan has come out, as the the US House of Representatives dramatically rejected a 700-billion-dollar bailout plan. What followed is the panic as seen on Wall street and the blame game between Republicans and Democrats. Amid fear and uncertain selling on Wall Street, the Dow Jones Industrial Average crashed 777.68 points (6.98 percent) and the NASDAQ by 199.61 points (9.14 percent) to 1,983.73, its lowest since 2005, one of the worst single day fall.

The bailout plan, as many started to termed as junk buying and criticized because it was supposed to give discretionary (power or right to make official decisions) authority to U.S. Treasury Secretary, as far selection and purchases distressed assets were concerned, as mostly mortgage-backed bonds damaged by the real estate slump. Many said that they have lost their trust on the authority of the Present Treasury Secretary Paulson and SEC Chairman Fox as well, after their inability to check out financial problems on right time.

Now the next thing that is quite clear is the uncertainty itself. In present situation of dilemma , Treasury looks out for the alternatives remaining, with the help of other Government agencies including Federal Reserve (Central Bank of United States) that already has been spent big to support the government to control the crisis.

The Fed, as providing billions in short-term loans to help banks through the credit stress, expected to keep expanding those loans to financial institutions in the form of emergency loans and could also start cutting its key interest rates.

As mentioned earlier in the previous article Financial Markets - Watching Big Bailout , the bailout measure have been used as steroids to calm the economy, but it simply work only for a very short period, if bailout plan has passed and actually worked out as predicted, the fear could have remained that the economy might probably shrink in the medium term, like in final quarter of this year or in the first quarter of next year, as the shrink situations can aptly defined as recession.

While few months back, President Bush commented that the rising inflation has been the result of uprising consumption pattern of the developing countries with few examples! But the President just seemed to unaware that high consumption pattern is not increased by rising income only, in developing countries but also the major factor that supporting those economies are the people strong habit to save for the future, as the increased consumption comes next to the minimum standard of savings, generally in most of the cases.

Consumption and Income pattern remain unfavorable in United States from quite long time, addicted to the ‘spend now, pay later’ way of life and this become the way to go without much concern, till the last month or so, this become the big issue that none worried before, as the shocked world has no clue, how such a crisis have developed in a backwater of the US financial industry. The basic fundamentals of economy needs to be reviewed. In the US, the savings ratio (which measures the proportion of take-home pay which is saved) turned negative from some time. As a result we all know how the credit crises has taken its toll in US economy and no near term solution seems to exist to overcome this crises.

After many years, time has come to explore and reveal the basic factors that use to remain ignored and become chronic problem of the financial system. How much time and efforts will it take to treat this chronic problem is vital to come back on the smooth economic track. and the research results of how it happened continues to haunt US financial industry regulations and bank risk management practices. Bailout or not, in long term the only solution can be emerged from the root cause of this crisis and by making new policies with thorough review of the loop holes and strict implementation to overcome them, which earlier has deliberately avoided as taken them for granted.

More updates will follow soon.