Monday, October 13, 2008

Economic Mess - Bailout Nothing New Really

For a historical and global perspective of what the US Govts bailout/rescue plan Britain's The Economist

[H]istory teaches an important lesson: that big banking crises are ultimately solved by throwing in large dollops of public money, and that early and decisive government action, whether to recapitalise banks or take on troubled debts, can minimise the cost to the taxpayer and the damage to the economy. For example, Sweden quickly took over its failed banks after a property bust in the early 1990s and recovered relatively fast. By contrast, Japan took a decade to recover from a financial bust that ultimately cost its taxpayers a sum equivalent to 24% of GDP.

All in all,[B] America’s government has put some 7% of GDP on the line, a vast amount of money but well below the 16% of GDP that the average systemic banking crisis (if there is such a thing) ultimately cost[/B]s the public purse. Just how America’s proposed Troubled Asset Relief Programme (TARP) will work is still unclear. The Treasury plans to buy huge amounts of distressed debt using a reverse auction process, where banks offer to sell at a price and the government buys from the lowest price upwards. The complexities of thousands of different mortgage-backed assets will make this hard. If direct bank recapitalisation is still needed, the Treasury can do that too. [B]The main point is that America is prepared to act, and act decisively.

Basically, the "bailout" is nothing that hasn't been done elsewhere, and the consequences for doing nothing could have been devastating.

Seen this shit happen in the 3rd World with much, much smaller and less complex economies, but the fundamentals are the same.......

one scenario, similar to what happened in East Asia, Russia in the late 90's, which dominoed into South America...

The trouble is that because of its large current-account deficit America is heavily reliant on foreign funding. It has the advantage that the dollar is the world’s reserve currency, and as the financial turmoil has spread the dollar has strengthened. But today’s crisis is also testing many of the foundations on which foreigners’ faith in the dollar is based, such as limited government and stable capital markets. If foreigners ever flee the dollar, America will face the twin nightmares that haunt emerging countries in a financial collapse: simultaneous banking and currency crises. America’s debts, unlike those in many emerging economies, are denominated in its own currency, but a collapse of the dollar would still be a catastrophe.