Why can't we just face the music. Recessions are essentially corrective economic happenings when things get inflated, especially when artificially inflated (economically speaking). It needs to run it's course. I feel we are just delaying the inevitable. When things hit the fan (major recession/depression), if this goes through, it will be that much worse. The whole system could collapse.
I would agree with you if these bank problems had anything to do with traditional recessionary forces... but they don't. They have a lot to do with bad investments, but they are 100% due to two major problems- A lack of liquidity and a failure in confidence. Like I said in my post the other day in the Enron thread, liquidity for financial institutions is like air and water for human beings, if they cannot access cash they are doomed, and due to the credit crunch there's just not enough money to go around.
Part of the problem is that the securities that these companies hold as assets need to be marked to market- for you non-finance types, this means that the value of the assets changes constantly based on the value in the marketplace, unlike say a piece of machinery which is valued at it's purchase price and then slowly depreciated over time. If you have a asset where the market has completely deteriorated (e.g. mortgage backed securities) it is very hard to determine the value of the asset. Should it be worth nothing? Maybe, since nobody wants to buy it right now. OTOH, if the security is backed by a solid asset (e.g. a pool of mortgages that are current and is constantly paying fee streams) then at some point in the future there is GUARANTEED value in the security because all of the money on the mortgages will be paid, so clearly the security is not worth nothing- it most likely will be worth full value.
The uncertainty in the values of these assets is causing banks to have to write-down their values, in-turn reducing the value of the total assets on their balance sheet, increasing their leverage ratio, reducing their credit-worthiness, and increasing their need for additional cash & collateral. And if you cannot sell your assets to raise capital because there's no market, or sell your stock to raise capital because short sellers are capitalizing on your poor liquidity and driving your share price down, and if you cannot borrow to raise money because you're not going to get any value against your assets... how does your company survive??
We've watched over the past 6 months as 5 major companies have been totally destroyed and at least 20 more have teetered.... not because they have bad business models (in fact, AIG has many outstanding businesses), but because confidence has plummeted and nobody wants to lend anybody else short-term money. Long term rates have shot through the roof. The best most financial institutions have been able to do is to borrow money overnight and to constantly roll it over day to day... eventually you're going to wake up one morning and there will be too much bad news and you realize that you cannot finance your business.
Letting this "play out" would be an even more unmitigated disaster than the bailout plan. The next stop would be the major commercial banks. Imagine what would happen if people thought Chase was going to go under? With Lehman/Bear it was only hedge funds and high wealth folks pulling their accounts... can you picture the run on the bank that Chase would experience??? Talk about armageddon!! The only way to solve this problem is to take all of the troubled assets off the books of banks, recreate a market for them, and then sit back and wait for the value to grow. If done right, the government will make TONS of money off of these distressed assets. They made money on Chrysler & they made money on S&Ls- once the housing market turns around... whether it's 2, 5, or 10 years, the mortgage securities that the government will buy will be worth much more than they pay for them- considering they're only paying cents on the dollar, it's an even better bargain.
I don't like the bailout, I think it sets a horrible precedence, but I think it's better than the alternative. I think some of the new regulations they are setting are a great idea, and one unintended positive consequence is that we will no longer have unregulated stand-alone investment banks. The most important thing is to make sure that liquidity actually gets injected back into the system, which will raise confidence, which in the end should reinvigorate securities markets to the point where a market actually
exists (Doesn't have to go up, just has to be liquid).
