Posts Tagged ‘bailout’
A new Bank Bailout Plan unveiled last week may give new hope to distressed homeowners and communities. Treasury Secretary Tim Geithner recently announced the government’s plan to commit over $1 trillion in reforms aimed at rescuing the country’s financial system. The program would amend weaknesses in the bailout plan proposed by the Bush administration, and override other previous reforms.
Much of the funding would go into financing loan purchases and reviving the economy through increased lending activity. The key points of the program include:
Support for bank lending
The Treasury aims to advance the capital position of major banks to boost lending activity. This would entail a three-part process:
“Stress test”: Banks and financial institutions will be checked to ensure they have enough capital to keep lending, and whether they can survive future economic downturns. The government will tighten its rules on public disclosure of a bank’s holdings, and those with assets over $100 billion will be assessed individually.
“Capital Assistance Program”: The CAP will build on previous efforts by theTroubled Asset Relief Program (TARP), which has put $250 billion in capital purchases. The Treasury will continue to help banks rebuild their capital following the stress test, and take preferred shares in banks taking part in the CAP program. According to Geithner, this will serve as a buffer for banks that can benefit from increased lending.
“Financial Stability Trust”: The FST is a separate trust to hold the investments made by the Treasury under the program, and will be maintained by a group of fund managers.
Buying up troubled assets
This section is designed to help relieve banks of “toxic” or hard-to-sell assets and put more of their efforts into private lending. The goal is to buy up these assets using a combination of public funds and private capital, with the private sector taking charge of the price assessments. The costs of this goal are still uncertain, but the Treasury expects to generate up to $1 trillion from the investments.
Consumer and business lending
The Treasury also plans to restore the flow of credit by increasing lending in the consumer and business levels. This goal builds on the proposed Term Asset-Backed Securities Loan Facility (TALF), but will increase funding from $200 billion to $1 trillion in federal lending. Under the plan, the government will purchase securities backed by consumer and business loans, such as auto loans, small business loans and credit cards. The plan will put a premium on higher-quality securities to minimize losses for taxpayers.
Improved transparency and accountability
Banks and financial institutions who benefit from taxpayers’ money will be closely watched to ensure they don’t misuse public funds. Any companies receiving bailout funds will have to meet new requirements and operate under tighter restrictions. For instance, they will need to submit a plan for spending the government aid to increase lending, and upload monthly reports on the website www.financialstability.gov. Details of all transactions will also be posted on the website 5-10 days after each one is completed.
Companies receiving federal loans will also have to limit dividends to 1% per quarter until the debt is paid. Until then, they cannot re-buy private shares or buy up other banks without consent from the Treasury. A cap will also be imposed on executive pay for CEOs, and lobbyists will be banned to keep them from influencing the Treasury’s decisions.
Housing and foreclosure assistance
The new plan will lower interest rates to provide more affordable housing and reduce the risk of foreclosure. This program will cost $50 billion in the first weeks following implementation, during which loan modification guidelines will be established and existing programs will be adjusted. Under this plan, all companies receiving financial assistance will need to participate in the foreclosure mitigation plan (currently, only Citigroup and the Bank of America are taking part).
For homeowners, the government plans to spend $600 billion to buy up existing mortgage-backed securities from Fannie Mae and Freddie Mac. This will allow them to lower mortgage rates and make housing more affordable for families in distressed communities.
Small business lending
Small businesses and community lenders will also benefit from the bailout plan through lower borrowing costs and increased lending activity. Key elements will include buying up loans from the Small Business Administration (SBA), reducing fees, and increasing loan guarantees up to 90%.
Loan modification options
The new bailout plan may offer new options to homeowners seeking Loan Modification and other forms of mortgage assistance. Luckily, most loan modification companies have adjusted their programs to better comply with public policies. To know more about your options under this bailout plan, visit : http://www.cdloanmod.com/loss-mitigation-news
It’s only been a few weeks since Congress signed off on Treasury Secretary Henry Paulson’s big $700 billion bailout plan—the Troubled Asset Relief Program (TARP). What exactly do we have to show for it? Nobody knows. What’s more, we now face a complex financial logjam that’s every bit as messy as the original fiasco. And the situation is all the more hazardous because Paulson keeps waffling.
As you recall, the original plan was to buy $700 billion in toxic securities—spoilage from defaulted home mortgages that kicked off the financial meltdown. Simply put, taxpayers would buy $700 billion worth of assets nobody else would touch, ostensibly to get frozen credit markets back in motion. But the toxic-loan plan never got off the ground. It couldn’t move far or fast enough to bring the immediate relief Paulson promised.
Instead, Treasury announced it had devised a new plan aimed at thawing out the frozen credit markets. The new plan: Put money directly into big banks by enacting a little-known clause in Sec. 113, (e )(1) of the TARP legislation, which economists are calling the “Stock Injection Alternative.”
Paulson promised that stock injection effectively served to “rescue” the banks, but instead of owning shaky assets, the government—the taxpayers—would become preferred shareholders of the banks themselves. That means the taxpayer would be promised a return (since preferred shares pay interest), and those owning common shares would take the first hits. Thus, taxpayers would be more protected and less likely to lose money.
Amid this back-and-forth maneuvering, people started whispering that perhaps Paulson didn’t really know what to do. First he’d claimed that buying toxic mortgage-based investments from troubled banks, particularly those whose failure might undermine the domestic or global financial systems, was the only conceivable solution to bank failures. And he tenaciously opposed any congressional suggestions that could modify his plan.
Then after the first $350 billion had been released, he unexpectedly switched gears into what some believed was too broad and too vague a direction.
Paulson had already spent $85 billion to bail out insurance giant, AIG. But even after a congressional hearing and scandalous admission about the company’s lavish corporate resort boondoggle, AIG still had the audacity to come back to the money trough and lap up another $40 billion.
If there is anyone in the Treasury keeping track of where all these dollars are going, they aren’t letting on. In fact, the money banks have received has done little to thaw out credit for U.S. businesses or consumers. Banks appear to be more willing to lend to each other, judging by a drop in the LIBOR rate. But the no-strings nature of the bailout has led some to use the money in ways Congress may not have intended. For example, PNC Bank, headquartered in Pittsburgh, PA, used part of its allotted cash to acquire Centurion branches in its market area.
Credit cars and auto loans next in line
In a further drift away from Congressional intent, Paulson announced he wanted to extend the bailout program to non-bank credit markets like those holding credit card receivables, auto loans and student loans. American Express has, with a sprinkle of Treasury pixie dust, been deemed a bank, thus qualified to feed at the trough with the others. Companies like GMAC, the lending arm of General Motors, and other carmakers’ lending units, are standing in line as well.
In the original bailout plan Paulson asked for overarching Czar-like authority to move money around, without being subject to review by any court or administrative agency. His initial “just trust me” proposal didn’t fly. Congress assured the public that any plan they approved would have built-in oversight.
But by early November, not only had the White House failed to nominate a special inspector general to head up oversight efforts, Congress had yet to appoint any members to a five-person congressional oversight panel. In fact, a comprehensive plan seems non-existent.
A lot of money had been blowing out the door, but no one had bothered to consult with Congress about any of the details. Finally lawmakers stepped up to the plate.
On November 18, Paulson faced harsh questioning by members of the House Financial Services Committee where he shared the table with Fed Chairman Ben Bernanke. In addition to sharp criticism of mishandling matters, pointed questions reminded everyone that some TARP money was to have helped homeowners faced with foreclosure, an idea strongly supported by FDIC Chairman Sheila Bair.
Paulson argued that TARP was meant to stabilize financial markets and the flow of credit, not serve as a panacea for all our economic difficulties. And, he brushed aside questions about future plans by saying he had no intentions of doling out the second half of the $700 billion program — let the Obama administration deal with it, he said.
A secret $2 trillion deal
Back in mid-October, the Federal Deposit Insurance Corporation announced a new $2 trillion three-year program—the Temporary Liquidity Guarantee Program. The program was meant to strengthen confidence and encourage liquidity in the banking system. This guarantee is in addition to the $250 billion preferred stock purchase plan we already mentioned.
Perhaps you might be curious about the details surrounding that $2 trillion deal, a little transparency perhaps? Well, never mind. Federal Reserve Chairman Ben S. Bernanke said the central bank would not disclose any details of these loans of taxpayer funds because doing so would “stigmatize banks needing the money.”
The American taxpayers deserve a coherent explanation about what has happened with all the money spent so far, like who’s getting what, how much and why. They were promised oversight and transparency, but Bernanke’s statement it’s yet another example of a whole country being left in the dark with no real answers.
Now more than ever Americans need confidence that their government is making smart decisions as they sort through this financial fiasco. The best way to instill confidence is for Congress to do what it said it would do: ensure strict oversight of the bailout process. They would do well to start at the beginning by keeping a closer eye on Paulson, a man who seems hell-bent on making up the rules as he goes along.
Perhaps the entire bailout fiasco was summed up best during the congressional hearings when Gary Ackerman (R-NY) looked Paulson in the eye and said, “You seem to be flying a $700 billion plane by the seat of your pants. It seems to be the second-largest bait-and-switch scheme that history has ever seen, second only to the reasons given to us to vote for the invasion of Iraq.”
This is far from being the final chapter of the story. You can find updates at our website: www.financialspeculation.com.
The United States is currently in the middle of a mortgage crisis. Foreclosures on mortgaged homes are at an all time high, and predictions say that billions of dollars of wealth will have been lost before its through. The effects of the crisis are being felt on all levels – aside from people facing foreclosures on their homes, many lenders have gone bankrupt. Finally, the government has decided to step in and provide some relief to lenders and borrowers alike. But the question is, just how will this government bailout affect a person’s mortgage?
What this bailout plan does is, unfortunately, pretty limited. It won’t help out everyone. What the bailout does on the level of the individual borrower is to freeze the borrower’s mortgage for five years. This keeps the interest rate of the mortgage down for a period of time so that the borrower can get their finances in order and dig themselves out of their situation. Unfortunately, there are a couple of stipulations on this program.
The first stipulation is that it only applies to people who have less than 3% equity on their homes. People with higher equity are simply out of luck. The second qualification is that the borrower must be no more than 60 days late paying their mortgage. Needless to say, for people who are already in severe trouble and have been missing payments aren’t helped at all by this.
In addition to the above qualifications a buyer would have to prove that he or she couldn’t afford increased interest in their mortgage. The government buyout plan also only applies to subprime mortgages – but there are many people struggling with prime mortgages who face financial difficulties, too. Unfortunately, this leaves a lot of people who were looking for a little relief out of luck.
The ultimate problem with this bailout program is that it only serves to delay inevitable outcome. The bottom line is that if you are living in a home that you can’t afford to live in, even if the government bailout helps you, you may still find yourself in trouble. Unless a significant financial change or a reduction in the interest rate or principle is in the wings, you chances are at the end of the five-year freeze you still won’t be in a good place.
Another perceived problem with the government bailout program is that it works to reinforce the behavior that put the housing market in the crisis it faces today. Subprime lending encouraged people to try and buy houses that they couldn’t really afford, and the bailout program is helping those same people. Meanwhile, people who had made smart choices about buying a home, but faced some other financial problem are left high and dry.
The unfortunate bottom line is that if you can’t pay your mortgage, chances are that the government bailout isn’t going to save you from foreclosure. Unless you have good reason to believe there’ll be a change in your financial fortune, it may be time to start preparing for the worst.
Many people are wandering why the United Kingdom government decided to deposit nearly $90 billion into banks, while lending back $350 billion to the taxpayers. When it came time to make the final decision, the UK government realized they had no choice. Panic in the markets is at a steady increase, while banking shares have been at a steady downfall. British Prime Minister Gordon Brown, along with the help of Chancellor Alistair Darling, knew that something must be done immediately to bring back the confidence within the banking industry. Urgent action was agreed upon, and a bailout plan was put into action.
The UK government created a plan that consisted of funding the banks with over $90 billion, in exchange for shares, in hopes of reassuring the markets that the credit crunch would be survived. The loans received from the banks would total over $350 billion and would be used to stabilize the economy. The banks are currently reluctant to loan to one another, which is much needed for day-to-day business. The UK government has high hopes that this bailout will get cash flowing through the system once again.
A lot of taxpayers have been asking where this bailout idea originated. A similar plan was put into action in Sweden in the early 1990’s, due to a devastating banking crisis. The plan proved to be a huge success for Sweden. Taxpayers eventually received a return on their capital investment after the bank’s share prices began to increase.
The UK government decided against a U.S. style bailout for several reasons. The $700 billion bailout introduced by the U.S. government has been criticized by many. Critics say the U.S. bailout is aimed only to purchase the bad debt held by banks, and capitalize over time by doing so. This plan does not offer the banks an opportunity to recapitalize in exchange for a share holding in which could also bring the taxpayer a return. This creates a perception of greater risk for the taxpayer.
The banks are extremely satisfied with the UK’s bailout plan. They have been trying hard to earn enough cash to even the balance sheets after the runs on their share prices. Abbey, Barclays, HBOS, Lloyds TSB, Nationwide Building Society, RBS and Standard Chartered have all committed to participating in the government plan. In return for the bailout plan, the UK government is asking for preference shares. The government will require the banks to implement new rules that will control executive income and dividend payments. The banks will also be asked to lend more to small businesses and homebuyers.
The UK government has faith that they will see the same success that was achieved in Sweden, however, there is always a potential risk. If the plan were to fail, the money markets would remain frozen, and confidence would continue to decrease. If share prices continue sliding, the taxpayer will lose even more. If the banks use all of the government lending, and are unable to pay it back, the financial crisis could last for years. However, the UK government remains optimistic that bank share prices will rebound, eventually resulting in profit.
For more information on the United Kingdom visit http://www.ukbailout.com.
INTRODUCTION
Whatever the comments trying to lead the public astray be coming, the entrance of world depression 2008 can not be overlooked since it stands well entered in the Indian economy. The decision regarding closure of Tata’s Jamshedpur motors plant for three days, decision of Ashok Leyland to run only for three days a week for coming two months, decreasing interest rates, decrease in CRR, lowered REPO rate, cut in SLR, index of stock market in reverse gear, Rs 275000/= crores released by the Reserve Bank of India (RBI) to help industries and investors etc. are the events which indicate that RBI and the Government accept the entrance of depression 2008 in the Indian economy. Among all these events or the actions the Rs 275000/= crores bailout drew my attention most. The concern and worry of RBI and the Government over the depression are easily understandable to me. But, I could not understand whether RBI and the Government are worried for the economy or for the investors and industries of the economy. To my opinion both are the separate things and the economy should be given priority against industry and investors.
THE DEPRESSION 2008
A depression (economic depression) is caused either by the excess of supply or by the lack of demand. In both the conditions depression should be fought against by increasing demand instead of by decreasing supply in market because decrease in supply will always bring national income and employment down while any cut in national income and employment is never acceptable. The present world wide depression has been resulted by both the excess in supply and the deficiency in demand. The excess in supply has been generated by over production on account of heavy productive investment in developed economies and it came about in developing economies due to the dumping through ‘globalization’. The deficiency in demand came about due to deficiency in purchasing power in the hands of the dominant middle income mass which resulted by high level inequality in national income distribution in both the economies. I have explained in detail in my article ‘Story behind the World Depression 2008’ how the depression was generated in developed countries and how the developing economies have come in its grip. My said article (http://www.articlesbase.com/economics-articles/story-behind-the-world-depression-2008-626225.html) concluded that the problem of depression is the problem of increasing the (effective) demand by increasing the purchasing capacity of the dominant middle income group.
SIGNIFICANCE OF THE BAILOUT
The above said bailout seems to be similar in nature as the Wall Street bailout practiced in America. This type of measures taken in American could not make any dent on the root causes of there’s depression. The depression is still gaining more and more depth in America day by day. Then, how can we expect that the measures as taken in America would be proved fruitful in India? The monetary help to industries and investors preserves their profit whereby the production and employment level is preserved but for the time being only. The root cause of their falling profit remains untouched. Therefore, the bailouts towards helping the investors and industries only postpone for some time the cut in production and employment without helping the demand increase. I could find no way mentioned in economic literature to treat depression without increasing demand if supply side is kept unaltered. The market is suffering from deficiency in demand not because the investors are suffering from falling profits but the investors are suffering from falling profits because the market is suffering from deficiency in demand. Therefore, deficiency in demand should be treated to save both the economy and the investors. There are four conditions when a depressive trend emerges in an economy.
(1) When either the rigidity of demand prevents prices from rising to compensate the falling profits of producers in case of increasing costs.
(2) When the demand does not keep pace with increasing supply caused by extra production.
(3) When the demand decreases on account of emergence of some factor affecting the total consumption of general mass negatively.
(4) The dumping of goods by some depression stricken foreign country.
In case of any one or all of the first three conditions the demand should be increased to treat depression. If the fourth condition is the cause of depression, check on imports would provide fruitful results. The present depression 2008 in developing countries though emerged mostly on account of the fourth condition but due to their being abided by the terms of globalization they can not adopt the way of checking their imports. Therefore, the developing economies like India have no way but to increase demand of general mass to treat the present depression. Therefore any measure not helping increase in demand like above said bailout can not be proved fruitful to treat the depression. However, a bailout, if made to divert flow of funds towards the hands of ‘demand- dominating-middle-income-group’ will increase the total demand in market by increasing purchasing capacity of this group. Therefore, bailouts should be made but to help the consumers instead of helping the investors and industries. Moreover, the investors and industries also will be helped though indirectly but ultimately if the demand is raised by raising purchasing capacity of the dominating middle income group through bailouts because the so raised demand will enable the producers to sell their product at a price that keeps their profit preserved.
CONCLUSION AND SUGGESTIONS
The above discussion concludes that taking measures to save the investors for time being is not the treatment of the depression but it is only the postponement of the situation. To treat the depression measures should be taken to increase the demand, determined by the purchasing capacity of the general mass, through increased liquidity in their hands as the ‘marginal propensity to consume’ of general mass in a developing country is sufficiently high. Therefore, the bailouts should be made to help the demand increase instead of helping the supply be preserved. In other words, the horse should be made to pull the cart instead of making it to push cart. Hence, the bailouts should be made but utilized to protect income of the general mass against retrenchment, to provide cheap consumer loans and to finance the subsidy schemes launched for the purchase of consumer goods. _______________________________________________________
“How many billion?” That’s what millions of Americans were saying last fall when they first learned about Congress’ proposed $750 billion bailout package. Boy did that cause a big hoopla over! Some Americans agreed with the notion and need for the $750 billion financial industry bailout package while others despised it. In the end, Congress passed the bailout. While the major companies that received a portion of the bailout money to stay afloat saw some immediate benefits of the bailout, it wasn’t until January that the average American—homebuyers, in particular—began to see the trickle-down benefits.
Trickle, Trickle.
While the $750 billion bailout package was designed to help various financial institutions, the help the companies received did come at a cost to the firms: the United States government essentially gained a significant stake in those businesses when they doled out a portion of the bailout to firms. The specifics of the bailout and the deals with each financial firm are complex. Therefore, we won’t go into all of that. Besides, it’s not all that interesting. What is interesting is that, once the deals were done, the U.S. government emerged as the entity to provide financial backing for a majority of the mortgages in the U.S. That means that, if you already have a mortgage, Uncle Sam might actually now back a portion of your financing; it also means that if you’re looking to buy, Uncle Sam will likely provide the funding for the mortgage loan that you need.
What’s In It For Me?
I know what you’re thinking: What’s in it for me? In a word: Lots. Mortgage rates have done just as financial experts predicted: They’ve plummeted! The national average in January was 5.26% with rates in some areas being less than 5%. Now, if you haven’t been keeping up with the mortgage industry, that dip is actually a good thing for American homeowners and homebuyers. How so? Well, that depends on which side of the real estate deal you’re on.
If you are a current homeowner, low mortgage rates mean that you can attempt to refinance your mortgage loan at a mortgage rate that’s significantly less than your current mortgage rate. As a result, your mortgage payment will be smaller, and therefore, it will be easier for you to keep your home in this tumultuous economy. Meanwhile, if you’re a homebuyer, the low mortgage rates mean that owning a home will be less costly; your mortgage payment, as long as you buy at or below your means, will be affordable. Though this is good news for you—whether you’re a homeowner or homebuyer—remember this: Being offered a bargain mortgage rate, or a mortgage loan at all, is not “automatic.” You still have to do your part to make sure your credit score and overall finances are in check to qualify for a new mortgage or to refinance your current mortgage loan.
The Hope
The goal of the $750 billion bailout package was, of course, to stabalize the American financial industry. While it appears that the package has succeed in being an excellent band-aid for the United States’ financial industry’s woes, whether it will be enough to get the American economy back on track for the long-run still remains to be seen; that’s a lofty aspiration that may or may not be realized. The glimmer of hope that the bailout package will energize the housing industry is much brighter. The lower interest rates will make mortgages more affordable; that means that, in theory, more homeowners will be able to afford to keep their homes through refinancing their mortgages and that more homebuyers will be able to secure affordable mortgage rates.
The Reality
While mortgage rates have been positively affected so far, the future remains uncertain. Therefore, if you’re planning to buy or refinance, don’t drag your feet. It took just three months for the bailout trickle down to reach American homeowners and homebuyers, that trickle could dry up just as quickly.
On Wednesday night the President of the United States, George W. Bush, addressed the nation concerning the proposed bailout of United States banks and tottering financial institutions. Reactions to the proposed bailouts were mixed and even some Republicans criticized the administration’s proposals. President Bush urged for the immediate passage of the bailout plan stating that “We’re in the midst of a serious financial crisis, and the federal government is responding with decisive actions.” Bush also stated that failure to pass the bailout plan could lead to a “long and painful recession.”
The current United States financial crisis has affected stock markets, commodities, and Forex markets worldwide. Confidence in the United States dollar is waning with many people worried that the bailout policies proposed could lead to a devaluation of the United States dollar. The financial crisis could not be more ill timed with the United States suffering a massive debt from the combination of the War in Iraq, rising oil prices, and massive infrastructure damage from recent hurricanes. The average American is already struggling financially and this financial crisis is only making things worse.
The Bush plan calls for the government to buy 700 billion dollars worth of troubled assets. These assets consist mostly of mortgage backed securities whose values have declined swiftly when the housing market imploded. Initially the White House had taken a hard line concerning the bailout plan but has indicated a willingness to compromise in order to ensure a speedy passage of the bailout plan.
The Bush administration compromised with Democrats who demanded that the pay of CEOs of troubled firms be limited. Addressing such concerns Bush stated that the financial rescue “should make certain that failed executives do not receive a windfall from your tax dollars.” Bush also invited both presidential candidates and key congressional leaders to the White House to work out a compromise on the bailout. Bush also warned that failure to pass the plan would result in dire economic consequences such as disappearing retirement savings, rising foreclosures, loss of jobs and closing of businesses.
One can only hope that politicians, for once, can put partisan politics aside and work together on a plan that would benefit both business and the average American worker. With the United States dollar regarded as unstable in some Forex Markets, failure to act could result in a disaster and the voters are not likely to forget such a financial disaster come election time.
It seems that everybody has their hand out for some bailout money these days.What started out with the government generously giving away money they didn’t have to Wall Street has morphed into billions being given to the banksters and insurance CEO’s, with the automotive industry and others standing in line seeking their share of the government bailout loot as well. It has become so ridiculous that even Larry Flynt of Hustler fame wants a bailout for the Porn Industry. The whole thing would make for good comedy if it were not for the consequences these actions produce. For while many noted economists declare that bailouts and stimulus money are necessary to ‘kickstart’ the economy, history and logic show otherwise.
Many have been led to believe that it was FDR’s ‘New Deal’ that put America back to work when the real truth is that it wasn’t the New Deal but World War 2 that pulled America from the depths of the Great Depression. As shown by Llewellyn H. Rockwell in his recent column called ‘How This Happened’,
” Economic growth went nowhere between 1933 and 1939, with real gross domestic product per adult still 27 percent below trend at the end. Per capita GDP was lower in 1939 than in 1929. Unemployment was at 17.2 percent in 1939. This was actually higher than it was in 1931. This is despite a 100 percent increases in monetary expansion. Taxes had tripled. Employing people became ever more expensive due to unions and national income guarantees”.
While I’m not advocating another world conflict to get things going, the point is that it wasn’t FDR’s job programs or the creation of money out of thin air through the printing presses that pulled America from the depths of the depression, but the cranking up of the war economy and the rebuilding that came afterwards with America left standing as the major economic power capable of producing the products that the rest of the world needed to rebuild, that created the boom.
Another unfortunate result of the bailout is that it rewards businesses that made unwise or downright stupid financial decisions and allows them to stay in business and compete with companies that didn’t. In a free market capitalistic system, the incompetent would be allowed to fail. The inefficient would be replaced by those who are able to produce products and services that people want and the net result is that consumers and society benefits.
Much of the same can be said for the multitude of homeowners that the government is trying to save from foreclosure. The immoral aspect of the government’s actions is that diligent homeowners will by punished by being asked to subsidize those that made terrible financial decisions such as buying houses they really couldn’t afford. In both cases, the government is stepping in to alter the normal business cycle that would weed out the inefficient and unwise.
The end result of these numerous bailouts is that individuals and businesses that in a free society should be ‘punished’ for their imprudence are instead rewarded. These actions can only produce disastrous results for society at large. Not only does it create market distortions and misallocations, but sends the wrong message as well. If there be no price for failure, than there really is no longer a reward based free market, and things quickly evolve into a free for all, with everyone trying to get their hands on some of the loot, knowing that moral hazard no longer applies, and there is no price to be paid for failure since the government stands waiting to bail them out.
While there is an increased trend in the number of bailouts by the government recently, it is not all that of a new topic. Throughout US history, there have been many government bailouts, beginning in the 1970’s. The only difference is that today, the dollar amount of the bailouts has increased to great proportions. Until the recent hype of the stock market issues and the takeover of Freddie Mac and Fannie Mae, the term bailout was not something Americans used in everyday language. I believe it is due to the high influence of the media these days that bailouts are more widely covered these days along with the decrease in our economic efficiency. These billions and billions of dollars spent on these bailout programs may help the businesses that need it but it must also affect our economy in ways that are not effective.
To explain, a bailout usually comes about to prevent a business from going under because it is believed that the effects of the collapse will be much worse on the economy than to help liquidate the assets until the business can get back onto its feet. The government is most likely the one to fund the bailout, by ways of loans to be repaid once the business is back on its feet. Beginning with the first bailout in our governments’ history, the Penn Central Railroad, at a mere $3.2 billion, it is nothing compared to the recent $700 billion cop out plan to aid in the mortgage crisis. It does not look as if the bailout route will go away anytime soon.
Bailouts come with both advantages and disadvantages but it depends on what kind of market that is being dealt with. Sometimes it is the business owners that make the wrong choices and lead their business into turmoil. Should the mistakes of owners be given these loans in order to get back on track? After leading a business into trouble once, it may very well happen again in the long run. It is important to wonder if the inevitable is being delayed or the business actually has some chance of getting back on track. Even so, the executives of the collapsing businesses are usually the ones at the advantage when it comes around to a bailout. Making wrong choices should have to be dealt with, and not rewarded. Rewarding these bad business decisions does not provide an incentive to make the correct decisions.
Another problem raised is the amount of government involvement in the business world. The United States rests on a laissez-faire system, in order to keep government and business separate entities. Bailouts may raise some disagreement as to whether the government funding these programs is becoming too involved. Also in the same spectrum, the National Reserve has created a very high amount of liquidity and a very easy going policy. Interest rates are at a very low rate, which has not helped with the housing crisis. The most recent collapse of Fannie Mae and Freddie Mac has negatively affected the economy due to people being enticed into purchasing mortgages and homes they were unable to afford, which they eventually lost. People have been engaging in much riskier behavior due to this debacle and the bailouts encourage this to go on.
On the other hand, bailouts in the auto industry can have a good effect on our economy. By helping out an American company, it keeps production inside the country to keep up the skills of the people in the country and keep it secure as a nation.
Overall, government bailouts may seem like a good or a bad idea depending on the issue at hand. The government must make sure that it is not getting too involved and also that it is creating good policies to stimulate our economy. Bailouts should not be used as a form of a way out of bad decisions, as this motivates bad decisions to keep happening and having a belief that they can always fall back on taxpayer’s money in order to be rescued. If bailouts continue to increase as they have been, I don’t believe the economy will get back on track like we need it to.
With the new mortgage bailout plan, many homeowners are questioning whether or not they should continue to pay their mortgages. If you do make your mortgage payments on time, can you still receive help from the proposed mortgage bailout plan?
The answer to this question is a definitive “maybe.” With the economic stimulus bill that passed into law by President Obama, $75 billion will be allocated towards preventing four million homeowners from losing their home. However, neither paying nor stopping your mortgage is an automatic qualifier for help through this program.
How Will the Bailout Plan Work?
In 2008, over 1.3 million homes foreclosed as owners were unable to meet their monthly mortgage obligation. Most of these foreclosures were a result of either job loss or an adjustable rate mortgage (ARM) payment ballooning beyond affordability. Millions of more homes are expected to enter into foreclosure over the next few years.
Mortgage companies are not in the business of repossessing homes and selling them. However, they can be hesitant to restructure a mortgage with a homeowner without the proper financial means to repay the principal and interest each month. With the new bailout, however, the $75 million will be going toward guaranteeing mortgage companies a portion of the mortgage if they agree to restructure with a qualified homeowner.
Who Qualifies for Bailout Assistance?
How do homeowners in jeopardy of losing their homes qualify for a restructured mortgage? The main aspect that your lender and the government program will review is whether you have a financial hardship. They will look at whether you have lost income due to unemployment, layoffs, cutbacks at work, etc. A serious financial setback that puts you at risk of foreclosure will at least get you a review with the program.
However, you must be able to make a new mortgage payment. If you have suffered unemployment and have no future prospects for immediate employment, the mortgage company will assume that you do not have the means to repay the mortgage – and therefore, does not have any motivation to work with you. When you approach your lender to restructure, be sure that you can prove your means of making a monthly payment.
The other main issue that the bailout program will evaluate when determining your eligibility to restructure is if your current mortgage payment is greater than 31% of your gross monthly income. If so, you may qualify for a mortgage restructure to lower your payment to 31% or below.
Who Does Not Qualify for Assistance?
If you are not currently delinquent and can still make your mortgage payment, don’t expect to get help with the bailout program. Continue to make your mortgage payments on time and protect your credit history. Ultimately, you need to keep in contact with your lender and keep them informed of any changes in your financial situation. A borrower who is upfront with their lender is more likely to receive consideration from the lender in working out mortgage issues.
This article is intended for general information. Always seek sound financial and legal advice before making any financial decision.