There are headlines everywhere about the Bush administration’s $700 billion bailout plan these days. The bad news is that as much as $700 billion sounds, we will already be on hook for potentially $839 billion if this legislation passes. So far, our government has:
- $29 billion to support JPMorgan Chase’s buyout of Bear Sterns
- $85 billion on bailing out American Insurance Group (better known as AIG)
- $25 billion potentially for bailing out Freddie Mac and Fannie Mae
Total: $139 billion
Add $700 billion to that and it is clear that $839 billion is very well possible.
Now the Good News for US Tax Payers
It’s clear that tax payers are the one that will need to help pay for this, but not all is gloom. If you are optimistic about the future, the government can actually make money!
What the $700 billion bailout is the government’s intent to buy mortgage securities from troubled companies, then resell it back to the public. If the market turns and the mortgage securities increase in price, then the government can potentially make money on this the transaction.
In some ways, it’s the same as Warren Buffet buying a stake in Goldman Sachs. Only that Warren needs Goldman to rise in value to make money, while the government needs the whole housing market to turn around to make money. Some differences though:
- Buffet is choosing only the companies that he thinks is undervalued, while the government is buying the mortgage securities because it has to.
- Although unlikely, Buffet can probably pull out at any time while the government is on hook even if it keeps going down.
- Buffet is a proven profitable investor, while the government is a proven (insert any word that is opposite of profitable) investor.
So if you are optimistic, then try to think of the good side!
What I Think
I really want to be optimistic but I’m not so sure the government is capable of making money off this transaction even if the market turns around. As a taxpayer, I would be quite happy to just come out even. On the other hand, I do believe that the government needs to do something to bailout these companies to give the world some confidence that the US financial system will not collapse. Yes I understand it is VERY costly but I don’t want the world to lose confidence in the US as the consequences of that might mean a lack of economic growth for decades (think of Japan).
What Do You Think
Enough about what I think. Would you rather let the financial system crumble? Before you say yes, how would you feel if the government does nothing and your bank files for bankruptcy and FDIC falls apart too? Isn’t that a bigger problem?
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{ 8 comments… read them below or add one }
I think that the government is doing the right thing by ensuring confidence in the credit markets. Otherwise such things as credit card purchases that we all take for granted these days might be discontinued if the crisis deepens.
Here’s an interesting idea. If the government is buying up all the bad debt or mortgage backed securities, doesn’t it make sense that the government should own the underlying property as well? That way, if the “owner” sells the property, the government and tax payers would eventually get reimbursed for the bailout.
Man, if I knew that I could take out a ridiculous loan, and then get off scott free, I would have done the same thing!
The problem is the gov’t just keeps acting like money grows on trees. It doesn’t. Our national debt is currently at $10 Trillion dollars. So what the heck, let’s make it 11. Stacking that many one-dollar bills together could circle the earth 2 or 3 times.
Bail-outs increase risky behavior because companies begin to feel that if they just get big enough, the gov’t won’t let them fail.
If the crisis were allowed to cleanse it self, it would right itself again. It is not the gov’t job to rescue companies, banks, and homeowners that should have known better.
Knowing that it is a given that the bail-out is going through, some serious regulations should be put in place. First and foremost, no company should be allowed to get so big, that the world can’t afford for them to fail.
You asked: How would you feel if the government does nothing and your bank files for bankruptcy and FDIC falls apart too? Isn’t that a bigger problem?
I say, How about if the government does the bailout, it doesn’t work, then what happens? The banks still might file for bankruptcy, the FDIC might fall apart, and the bailout failed…. that would be a terrible problem.
Just because they do the bailout doesn’t mean that it will be successful and the catastrophe might not strike anyway. There are no ’sure things’ in this economy. One can hope for the best and be an optimist, but that doesn’t mean it will work.
That being said, yes, I believe that something HAS to be done – therefore, if the bailout is the way they are going, I will support that effort. It seems to be the only game on the table at the moment.
Why is it the big guys belittle the small guys, yet the little people has to play the bigger person when there is a crisis. Why don’t the wealthy 4% who are tax exempt or pay very little taxes bare this burden, do they not have it to spare. Why don’t some of those CEO’s that got wealthy in this give back some of what they received. Why don’t Bush get some of that money that’s floating around in Iraq to help foot this bill. I just hope none of this will be used to help build Bush Presidential Library. The government can bail these companies out, all I ask is may a righteous eye stay on this money and where every cent goes.
Unfortunately it’s so difficult to really know what would be better for our country when it comes to this so-called bailout. I’m personally of the opinion that it may do more harm than good over the long-run… but again it’s such a complicated issue. I do think that the government buying up all of these troubled assets could end up being profitable sometime in the future, but the big keyword here is that they COULD.
Things are just so uncertain right now. With that being said I just wrote a post recently that lists 5 reasons we don’t need the bailout. You should check it out!
http://debitversuscredit.com/2008/09/5-reasons-we-dont-need-no-stinking-bailout/
Can you explain what Accorn or Accord is? I was told that $140 billion was taken out of th bill for this. Isn’t this the PAC in Chicago that Obama defended when he was an attorney?
Debt Reduction: ACCORN stands for Association of Corrupted Organizations for Registration of Non-eligible
The Democrats wanted to push 20% of all profits from the bailout into the Housing Trust Fund. This fund can be used for different things but it has been used to fund political-action groups like ACCORN and the National Council of La Raza in the past.