US Government's $700 billion bank bail out.

[Swedes]

It's so wrong. The vast majority of the money will bail-out people who really don't need government support. I think they should fund their welfare system (to the tune of $700 billion if necessary) so that there is a safety net for people at the bottom who really do need government assistance. The shareholders and the like should be allowed to lose their shirts as I'm sure they have a spare in the wardrobe. I'm not sure it matters that the odd bank will bubble under.

Am I the only free marketeer?

Threadie - Agreed. But those rules and regulations are already in existence and should be followed. New ones should not be set up to suit certain classes of business.

Expat - they sound very savvy investors. Whenever you post that sort of stuff, always makes me wish they could be more generous with you (with no strings attached).

Earlybird. The purchase of shares is a private contract between two consenting parties. It is an accepted legal principle that the law will not seek to repair bad bargains.

I will await your email in the drawing rooom wearing my best bonnet.

Seriously, don't spend any time on it if you are busy, please.

I bear them no ill will at all, though, EB. The string is my mother's, but the money is hers as well. And my father has to live with her . She has some strange ideas but I was brought up to believe that one is entitled to not much of anything and certainly not to moneys which one has never earned.

I am very grateful they have been so savvy and made good provisions for themselves if and when they become too ill to care for themselves, that their estate is in order and that they have planned their funerals as they see fit. All is in order and I'm glad they faced up to the fact that death happens to everyone sooner or later.

My father grew up very, very poor, I think he has the tendancy of many who grew up so impoverished to hang onto money as much as possible as a sort of insurance. Our landlord grew up similarly and he behaves similarly to my father. It has served him well, too. He could give this house over to his daughter if he wanted to and have plenty to get some other place, but it is his to give.

I do wonder if this bailout, although it is a loan, involves indebting the nation. In other words, robbing Peter to pay Paul, and if that is a good idea in and of itself.

But it's a complex situation.

Swedes - You mention repeatedly about investors taking risks - and of course that is a fact. But the issue is whether or not the stock was manipulated downward in a possibly illegal way by hedge funds seeking to profit from the company's demise (or virtual demise). The Attorney General of New York State is currently investigating that very issue, and is seeking to determine if fraud and other illegal activities were largely responsible for what happened.

I also think that they shouldn't be bailed in NORMAL circumstances ie a one off bank which has run into trouble through its own reckless practice but this is different and is on such a scale that awell as letting the investors go to the wall lots of ordinary peoploe will lose their savings and pensions so it is neccesary.And if the bail out doesn't get passed it won't be long before the fallout reaches us

Just curious - is shorting stocks acceptable practise in the UK? Do any regulations exist that prevent Hedge Funds from shorting stock in the UK? Could the same thing happen to companies/banks here?

Shorting stocks is perfectly acceptable here and goes on the whole time, although GB has put in place some rules to prevent stocks in certain vulnerable institutions from being shorted, temporarily.

Has anyone considered what is going to happen to all the other debt that the US has which upto now hasn't had a big impact on the situation? what about all the people in the Uk that live in debt, not just mortgates but credit and store card debt? This is all also traded debt! when people don't have money or jobs they can't pay off this debt.

Also where is this 700bn coming from?

My understanding is that the money will be used to buy the bad debt not pay off shareholders as someone here has said.

The ratings agencies should also be held accountable for their useless ratings.

Just a little point - as I understand it the proposal is for $700 billion of debt at any one time not in total. So Paulson could push thru' trillions as long as there was only $700 billion at any one time. I don't know much but from what I do know the main reason they're in such a hurry to push things thru is to cover the Fed because of their involvement in derivatives. Think it's arse protection for the same crowd of rich people but doesn't mean that it might not be the least bad solution iykwim. Read Reuters report on a link from a news site that China had told it's banks to stop lending to US banks - is this true? Don't want to be doomster but personally think we are all headed for a really bad time - we need some clever and principled people to sort this one out - rather depressed to realise can't think of anyone (no, not Gordon Brown imho)

Until the uncertainties re Congressional approval of the $700 billion last night, the BBC coverage has been rather upbeat recently. Is this because they are very afraid of talking down the situation and causing panics -- in other words, can we can an accurate picture of the extent of the crisis from the media?

In the Daily Telegraph business pages yesterday there was a really good article about the trillion dollar debt ($700 plus the Fanny Mae business as well). It said that to raise the funds to lend the US Govt would have to issues bonds to sell on the market however currently interest rates are low so the returns on the bonds would be low so making them harder to sell. One way to help sell the bonds is to raise interest rates which means that they can offer a better rate of return (So making the more attractive to investors). However there are two issues here; 1) Is that if the US Treasury has to raise interest rates to make the money it will be at a time when most likely the US economy is in a recession and that will have a long term economic impact; and 2) There is already a large current account deficit in the Treasury's account ($720b annually)and again this borrowing will also have to be paid for at some point.
All in all it does not bode well and I think the global economy will be in for a very rough ride for quite some time. Unfortunately I think History will be the judge of whether the US govt has done the right thing as people can only guess as to what the right thing is to do now.

I do wonder if in fact it is always wise long-term to try to head off recessions.

I do understand, however, that they can launch paradigm shifts which can be painful for many.

BUT at the same time, is the level of consumerism that supported this economy before this crisis sustainable long-term?

Because if the construct of that economy is not sustainable long-term, then perhaps the recession is not entirely bad, but a much-needed correction.

I agree with that expat. Consumerism, fed by a culture of credit, has run wild in UK. It is a bad thing in so many ways, not least ethically and environmentally.

But even with ethics aside, it may be just plain old unsustainable, hence, factors have acted on it to correct it.

A little like how forces act on populations that grow too large.

Again, theoretical and way out there and just musing, but recessions do result in part from factors that are beyond anyone's control as well as market forces that are somewhat controllable.

I think labour's boast about the end of boom and bust will come back to haunt them. They had the opportunity to regulate the credit supply but chose not to as it stopped the country going into a slight recession 4-5 yrs ago and we are paying the consequences now.

I think, to be clear here, what Paulson is trying to do here is not save investors from significant losses, not save the banks from significant losses and not stave off recession. All of these will happen almost regardless of any bail-out. What he is trying to do (albeit in an immensely cack-handed and ill-thought out manner) is put together a rescue package that puts confidence backs into the markets and stops it going (back) into free-fall.

The impact of this happening would affect every single person, be it the bank executive, the corporate shareholder, the pension holder and the single parent trying to get her flat remortaged. Yes, in true free market fashion we could stand-back and say "okay folks, this is the market in action, suck it up and live with it" however I'd say we should only be comfortable doing that if we're happy to expose every single person in the economy to the downside it would create - including those who had absolutely no role in this.

We are, I fear, between something of a rock and a hard place - whilst the vast majority of people would like to see the banks and funds (in part) responsible for this to suffer, there is no way of them doing so without hurting everyone. We may, of course, think that is a good idea from a purely free market perspective, however, try telling that to the single mum who ends up on the street with her kid because she can't find anyone willing to remortgage her flat.

Swedes, the bailout is not to protect shareholders' stock values.
Sticky, I wouldn't think any banks anywhere would be lending money to US banks. They aren't even lending money to each other domestically (that's what the credit crunch is).

Cestlavie, good post. But my point is that all this borrowing will potentially have a huge cost to the public not now but at some point in the future (these loans will have to be paid for somehow i.e. higher interest rates/taxes etc). So don't think that people will get off lightly. I never thought I would say this as it will affect my livlehood but to me this economic uncertainty could be lasting for five or more years.

The whole thing is actually very karma.

The banks are in trouble because a load of americans spent their money on petrol for their SUVs, instead of on mortgage repayments.

The money they spent on petrol is all now residing in the sovereign wealth funds of a number of gulf petro-states.

Those same sovereign wealth funds are the ones who will be buying up the bonds that the US treasury will issue in order to raise the cash to bail out the banks.

What goes around, comes around.

dhat

'The banks are in trouble because a load of americans spent their money on petrol for their SUVs, instead of on mortgage repayments.'

Um, no, the banks are in trouble because they loaned irresponsibly to people who were risky customers - i.e., didn't have a JOB, not because of cars and petrol.

here in the UK, where there aren't as many SUVs, the banks did the same thing - loaned huge multiples to people, 100-125% mortgages, endowment mortgages, etc.

insecure and irresponsible lending.

not much to do with what kind of car the borrower drives.