Making sense of this $700 billion dollar bailout plan for the “Mainstreet” man


Trying to make sense of what is going on in congress right now for most people is damn near impossible. Are we truly on the brink of an apocalyptic worldwide economic collapse? This article will break down the following in (hopefully) relatively simple terms: What caused this mess in the first place? What is a bailout in theory attempting to do? The pros and cons of this massive bailout to the general public? Where is this money coming from?

Keep in mind that I will not get into great detail as it maybe too much too swallow for the average reader, if however, you all want a more in depth piece of work – let me know and I will dive deeper for you.

What caused this mess in the first place?

Financial Derivatives and very little government regulation. Remember Enron? Well, this is another case of companies being allowed to record profits before they actually received them. In other words, this accounting issue once benefited these companies or overstated their future earnings, when many would say they shouldn’t have been, and it is now hurting those same people as the market turns the opposite way against them. What you don’t hear about is how much money the parties involved made, now all you hear about is how their mistakes need to be fixed or hundreds of thousands will lose their jobs and retirement. In essence, you could say that the companies were way overvalued to begin with, and they’ve only come back down to reality.

Credit swaps is the greatest area of concern with regards to the recent bank,investment company, and insurance failures. Don’t understand what I’m talking about? In simple terms, these investment companies made bets and were able to recognize on paper what they thought they were going to make from them before they actually made any money. Their credit ratings remained high and in many cases went higher, allowing them to perpetuate the problem. However, when the bets started proving wrong and they didn’t make that money they thought they would, they were forced to write down those assets and future earnings, affecting their credit ratings, and the banks and insurance companies paid the price too.

What is a federal bailout in theory attempting to do?

Now you can probably guess this one, so I’ll try and add some further insight to the obvious. The federal government is attempting to step in and takeover responsibility for all of these bad bets, in hopes that the company will make up for this in the long run. The Federal government, right or wrong, is attempting to pump in liquidity (or cash to meet current bills) to keep the people of these failing companies working. By doing this, the banks that would fail as a result of defaults, can carry on as well. The government is attempting to stop the ripple affect of bad investments, right on down the line from the banks that loaned the money to the companies that insured the losses.

The pros and cons of this massive bailout to the general public?

In other words, the US public would subsidize the losses several investment managers cost their companies. It would help restore the portfolios of those with equity stakes in these companies, as well as allow the company to try and continue to make money on what I will call less risky or non speculative investments in order to help pay back Federal government and or the general public. What problem would one have with this, it’s a win-win right? You are putting your hopes in the management that caused these failures to occur in the first place. Many of the senior managers in these companies making these decisions benefited immensely in the form of bonuses, salaries and various other perks when the going was good, however, when the going got bad the only thing they could lose was their equity portion in the company (and also their jobs). Well, the government is stepping in and handing them back their stocks they would have lost and allowing them to keep their jobs. In other words, the rich get richer, and the poor working class subsidize their screw-ups to keep their measly retirement funds and jobs. In this case the general public and working class seem to have no choice in the matter, they will be screwed either way, however and in my opinion it may be better just to bite the bullet now.

Where is this money coming from?

If you haven’t figured it out already, we the taxpayers will foot the bill. How’s so? The federal government will order “The Fed” (a private institution – which could lead to another insane set of topics I will leave for you to research on your own) to print more money, thus devaluing every dollar in yours and my wallet. What, you ask!? Yep, that’s right, our Federal government will ask the “Fed” to simply print more money. Now they have different means to do this, but there are only a few ways to accomplish this and each one will hurt us in one way or another (issuing more bonds and other debt instruments” for sale or IOU’s as they are called – and or by simply printing more fiat money that is backed by nothing but our governments’ word).

In summary, “we’re damned if we do, and damned if we don’t.” We just need to make sure that this $700 billion is really covering all of their bets, or if this is simply a delay of the inevitable. Not to mention, do we really want these same assholes that ran this thing in the ground in the first place to have chance to do it again? Are there necessary regulations to prevent these speculations from once again occurring? I hope this helps you gain insight into what is going on and invokes you to ask these questions of your local senators and representatives.


Tagged as: , , , ,

Leave a Response

You must be logged in to post a comment.