Dong Fang Daily, China
Bailout Plan Might
Actually Work
By Lu Zhiming
Senior members of the Democratic Party hope that Obama can implement a series of measures to save the U.S. economy even before he moves in the White House next year in order to prevent a long-term recession.
Translated By Alan Kwok
27 November 2008
Edited by JesÂsica Tesoriero
China - Dong Fang Daily - Original Article (Chinese)
The macro-economy keeps deteriorating and the crisis in the financial sector continues to hinder the real economy. Under such circumstances, the Federal Reserve immediately issued an $800-billion bailout plan for the time when Obama is moving in and Bush is moving out of the White House. The plan announced on November 25th is titled “Term Asset-Backed Securities Loan Facility” (TALF), and it aims to rejuvenate consumption and mortgage credit as well as to rehabilitate people’s confidence in the stock market by offering unprecedented financial support.
Quoting from the Federal Reserve’s press release on November 25, 2008, TALF, “will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS).” These ABS are, “collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).” By dong so, the Federal Reserve is killing two birds with one stone. On the one hand, it is pressing financial institutions’ “hesitation to loan” further by using non-recourse mortgage. On the other hand, it prevents the drop of America’s consumption need and consumer confidence by reducing the occurrence of the violation of AAA-rated consumption mortgage.
While the financial crisis is deeply impacting the real economy of the U.S. as well as the world, the real economy’s negative effects on the financial market are gradually being unveiled. As the “negative feedback” between the largest two economic systems intensifies, there is no doubt that the U.S. economy will come to a recession. To stop the situation from worsening and to prevent the negative feedback between financial system and real economy from becoming more intense, it is necessary to link the key sections in the middle of the two systems. For example, to bring back people’s confidence in consumption credit and mortgages. The $800-billion bailout plan is an excellent move that shows its real value in helping to apply such a proposal.
Although the U.S. is still undergoing a big-time change, this new bailout plan is already Obama-approved. It is much different than Bush’s $700-billion bailout plan in the sense that Bush the Republican, representing the elites, was trying to save financial institutions by acquiring their bad assets. As for Obama of the Democratic Party, owning a much broader base of civilians, he is looking at increasing the amount of the tax that will be refunded to people as well as enhancing the protection of consumption credit and mortgage to boost people’s confidence. The shift from “institution-favored” to “people-favored,” is why Americans' confidence to consume has recorded an unexpected rise lately.
Though Bush and Henry M. Paulson, his Secretary of the Treasury, have invested a lot of effort in saving the large financial institutions and increasing the liquidity in the financial market, they failed to stop the crisis from tempering the real economy and then the full-scale economic recession. There are some natural causes of the economy that cannot be handled by human efforts; however, they do not excuse the Bush government’s incapability of protecting consumer rights. Due to the weak savior in the microeconomic area, the sub-prime mortgage problem has passed to the real economy via personal consumption, and in the meantime, via the real economy to the financial system.
Indeed, in the current economic recession, Obama is probably not going to abandon those large financial institutions. The number of banks classified as “problematic” in the third quarter in the U.S. has increased by 6% over the last quarter and has reached the highest level in 13 years. Senior members of the Democratic Party hope that Obama can implement a series of measures to save the U.S. economy even before he moves into the White House next year in order to prevent a long-term recession. Despite Obama’s plan to increase the amount of investment in public facilities, to greatly encourage the development of environmentally friendly energy, as well as to create 2.5 million new careers; it is considered that the deficit will exceed the current $454.8 billion, to reach a record-breaking $1 trillion.
Besides, the TALF plan by the Federal Reserve will increase the amount of asset-liabilities to $3000 billion. Such a large financial burden will probably bring further possibility of a long-term recession. It is not difficult to expect that the financial market will have great doubts when it comes to TALF.
(Lu Zhiming is a Ph.D. in finance)
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