Tuesday, February 10, 2009

Will the new bailout work? Wellll....

You might remember the first bailout, launched late last year in an effort to save financial institutions and prompt banks to start lending more freely. The first objective was somewhat accomplished, but the lending? We're still waiting on that.

Earlier today, Treasury Secretary Timothy Geithner unveiled the Obama administration's new bailout plan. Along with a proposal to let investors partner with the government to buy troubled assets from banks, Geithner announced a significant expansion of a key lending program that he hopes will loosen credit for consumers and small business, sparking some much-needed spending and reinvesting.

Will it work?

Investors seem initially iffy, with the Dow Jones industrial average dropping 290 points in midday trading. “We were told last fall that if we didn't do something immediately it would be a catastrophe. And they did something quickly and there wasn't a lot of accountability, it wasn't well spent and there wasn't a catastrophe,” said Scott Armiger, portfolio manager at Christiana Bank & Trust, told the Associated Press. “So there's a lot of skepticism in the bank plan.”

We asked economics expert John Connaughton, director of the renowned UNC Charlotte economic forecast for North Carolina, what he thought:

TS: How would the expansion of this key lending program loosen credit?

Connaughton: It will create a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration.

One of the key parts of this program is the backing of car loan which might improve the auto sales. Right now a large number of people want to buy a car but cannot get a loan. With government backing of these loans, a secondary loan (CDO) market would start to emerge and banks would be more willing to engage in car loans again.

TS: Banks haven't shown much of a willingness to lend. What incentive will investors have to take on the risk of bank's bad assets?

Connaughton: First, to get private investors to buy these troubled assets requires that they (the private investor) be able to assess the risk. Right now that is very difficult because the Treasury/Fed/FDIC kept changing the rules on the fly. Up to this point there has been no “master plan” on how to get banks back in the lending business. Because of the inconsistency in the way the Treasury/Fed/FDIC has dealt with failing banks, the surviving banks are nervous and hoarding cash.

What needs to happen now is for the Treasury/Fed/FDIC to establish a firm set of rules including some type of guarantee that is attached to the troubled assets so they will be marketable and to assure the banks that the Fed discount window will be open for banks that face liquidity issues. (No such guarantees are part of the plan yet.) Until both of these are done, I do not see it in the interest of the large banks that hold these troubled assets to begin lending in any significant way.

TS: Will it work? Will banks lend without specific bailout requirements that demand they do?

Connaughton: Yes, I think they will. Right now, they are in survival mode. They don't care about profit; they care about surviving.

Remember they don't feel they can count on the Fed. However, at some point they need to make a profit to improve their stock price and keep investor happy. Right now, investors don't want their bank to collapse so they are not that concerned with profits. They only way banks can turn a profit is to loan money and work the spread between the cost of money and the loan interest. So the short answer is they will begin lending when they feel more secure and the economy stops declining.


Anonymous said...

No it will not work. How do you bail out a quadrillion dollars worth of worthless derivatives contracts? Bank of America is holding over $35 trillion! This bailout is a loser.

The real issue is "Bankruptcy", who will have the courage to place the current system into Government supervised bankruptcy reorganization? Write off all the derivatives and other worthless paper.

Anonymous said...

In an unguarded flash of honesty, Ed Balls, British Children's and Schools Secretary and former advisor to Prime Minister Gordon Brown, told a group of Labor Party activist that that current recession "is the worst in 100 years and could lead to the rise of fascism."
"I think that this is a financial crisis more extreme and more serious than that of the 1930s and we all remember how the politics of that era were shaped by the economy...The economy is going to define our politics in this region and in British for the next year, the next five years and even the next 15 years." He went even further, "We now are seeing the realities of globalisation, though at a speed, pace and ferocity which none of us have seen before. The reality is that this is becoming the most serious global recession for over 100 years as it will turn out."
At the meeting there was a discussion on the fear that the fascist British National Party will hijack the British jobs for British workers campaign the Trade Unions, which was what prompted the above statement indicating that the British political discourse is moving towards the extreme right.
The opposition to the government is demanding immediate clarification on this statement as to whether Balls is speaking for the government or not. Balls is considered close to Prime Minister Brown, and worked as his advisor for the ten years that he was Chancellor of the Exchequer.
Last Week Brown himself used the "D" word, depression, before Parliament to describe the economic conditions, only to issue a later statement claiming it was a slip of the tongue.

Anonymous said...

azingiv eAbsolutely NOT! Keynesian policies did NOT work in the great depression and they will FAIL MISERABLY NOW! Only we suckers who pay all the d-- taxes will get the freaking bills while the feeloaderss make out like bandits with our money.

Anonymous said...

If Conaughton is such an expert on the economy, why didn't he warn us of this economic catastrophe? And I'm not convinced that "Right now a large number of people want to buy a car but cannot get a loan" because right now, a large number of people are losing their jobs at an alarming rate. How useful was this article?

Anonymous said...

CON-naughton is the same fraud the Chamber trotted out in 2001 to claim that building the Bobcats arena would create an economic boom.

You don't solve a problem of excess debt by taking on more debt, "Doctor" CON-naughton.

Anonymous said...

How in the world can you claim the first bailout "worked"? Have you watched the performance of bank stocks since it passed? Or have you been too busy watching your own McClatchy stock plummet? HAHAHAHAHA.

Anonymous said...

Here's what will happen if that monstrosity passes:

1. Banks will spend millions to lobby for the maximum for their assets.

2. As a result, they'll receive billions in taxpayer money more than what the actual value is.

3. As a result of this, inflation (already fueled by having TWICE as much money in circulation as a year ago and by rising debt, both national and personal) gets even worse than it will be.

4. Obama will blame Bush, then vote present.

Anonymous said...

One Big A$$ Mistake America read between the lines

Anonymous said...

Of course this won't work..is there any real debate about this? I find it funny when the media talks to "scholars" like Prof. Conaughton. These "experts" have no real-world experience and not a clue what will happen. And, tend to lean a wee bit to the left (actually, they all lean Way Left). So, what do you expect Conaughton to say...of course he's gonna say this will work.

The saddest part of all this is the fact that the market will equalize and right itself...without government intervention (because it always does). Unfortunatley, it will probably happen right about the the time the end of Obama's first term...and all the Dems and Libs will claim it was Obama's plan that "saved" us.

Actually....neither Obama, nor Bush, nor any politician can successfully impact a recession or a depression (did we not find that out with FDR?). Only capitalism can turn a recession around. This downturn would probably be over by 1st or 2nd quarter 2010 without government meddling. But now we are probably looking at late 2011 or early 2012 due to this idiotic plan.

Hey..all you Obama supporters...send me a note when you get a new job, or a check in the mail for a new car, or a payoff of your mortgage. Aren't those all the things Mr. Obama promised you?

Larry said...

I will never forget the video I once saw. It was made just after the Nazi's had been defeated, and an interviewer was asking a young German Woman what she thought about the Nazis. Her answer was at least they made the trains run on time.

I thinks from what I have seen the comment above is similar to a lot of comments I have seen in the Media on the passage of this bailout.

Maybe that is all we want in this country now, is for the trains to run on time. No need to worry about the other mess. Just things working, and people going about their business no matter the politics or who else is being persecuted by those who make these trains run. And of course no need to worry about the real costs.

But in this country we are possessions people and only buying stuff makes us feel good.

Watching new stuff being built makes us feel good.

So by mega spending just like people did during the good ole days over the last few years, may do just that, make them feel better. Create jobs of course, excellent Government Jobs for sure but other jobs will be fleeting.

But as far as helping we will have to see if maxing out the credit cards and borrowing from every possible source is a way to get our overspent economy back into the spending mode, then we will have to wait and see if people go crazy and start spending money they don't have in the first place again.

Anonymous said...

**My Christmas List**
To Whom It May Concern:
I would like my house to be paid for.
I would like a new car [my current one is 1995].
I would like my college loans paid off.
I would like a better paying job that matches my education [please notice the college loans part].
I would like Conaughton to mind his own business.

Thank you.