Senate’s $700 Billion Bailout Gets Cautious Reception in Asia
October 1st, 2008
By BRIJ KHINDARIA, International Columnist
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The Senate’s $700 billion bailout plan is getting a lukewarm reception in Asian markets, including Japan, where investors have been watching it very closely. Japanese markets opened without much excitement although it is still too early to see any real trends.
The wariness abroad stems mainly from fears that the underlying US bricks and mortar economy, also called the real economy, may not be as strong as everyone hopes. The financial economy, especially the giant investment and mortgage banks and insurance sector, seemed quite robust just a few months ago creating the impression that the sub-prime loan debacle was limited to the immediate lenders. There may be similar weaknesses of unsustainable debt hidden in businesses of the real economy. For instance, Warren Buffet has recently poured billions into General Electric, probably the most admired company around the world.
The current disaster happened because it turned out financial derivatives several layers below the immediate lenders were so worthless that underwriters could no longer obtain cash flow to cover their own debt. Financial institutions stopped lending because there was no way of calculating the worth of collateral any more. In a market economy, worth is determined through pricing. When no one is willing to buy, the asset has no monetary value so credit dries up.
The Senate bailout plan, approved by a convincing 74 to 25 vote margin, opens the possibility of a return of buyer’s confidence allowing assets to gain more than zero values. But investors will not return to the market in sufficient numbers until the bail out’s approval by Congress.
Even if all goes well, it is not clear that businesses, city administrations, home owners and car buyers will be able to obtain enough credit from local lenders to stop a downward spiral in industrial and services output.
If tight credit continues, business and consumer demand will revive very slowly. That puts GDP growth in jeopardy when combined with the vast government debt, resulting partly from the bailout. Getting back to 3 or 3.5% GDP growth may take more than a couple of years.
The risk of further downslide in GDP figures cannot be ruled out. Investors are factoring in those doubts as financial markets open. The initial trend will become apparent within the next 12 hours as markets open in Europe and then in New York.
At first glance, the Senate package is better than the one that failed a few days ago. To the $700 billion, it adds about $100 billion (perhaps up to $300 billion) in various kinds of relief for tax payers. Normally earmarks and suspension of tax burdens are bad things partly because they are bribes paid to buy votes on the floor. But they are acceptable under the current dire circumstances.
At this time, anything is welcome that avoids foreclosures and allows people to keep their existing homes, including such indirect influences as earmarks and other covert relief. Actions that put more spending power in main street’s hands, whatever the tricks used, are acceptable at a time when the real economy could slide into recession because even those who are creditworthy cannot raise loans.
It is not quite true anymore that the world catches a cold when American financial markets sneeze. But it is true that a lot of the world’s savings are invested in various US financial instruments. A sickening American economy could cause so many losses around the world that global trade and business may slow down.
That could cause a global recession although the one in the US may be worse. This is a tragic prospect but the really scary thing is that global economic instability triggered by the US is likely to geometrically multiply security risks from civil violence in poor countries and feed into global terrorism.
So like the Senate, members of Congress should put aside their immediate electoral battles to give the bailout non-partisan and convincing approval. Nothing less is capable of restoring the trust and confidence in US governance required not only to protect the livelihoods of Americans but also prevent potentially dramatic and very costly unrest around the world.
This entry was posted on Wednesday, October 1st, 2008 at 10:55 pm and is filed under House, USA, At TMV, Wall Street, Elections, Corporations, Money/Finance, Politics, Economy, Asia, Business. Responses are currently closed, but you can trackback from your own site.
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