Bail Out

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Information about Bail Out
Business & Mgmt

Published on September 28, 2008

Author: tanksons



A study I could not resist forming some views after scrolling thrugh the Web and news papers.

Market Meltdown in USA Economic Bail Out – a thought model Readings as a visitor in USA Summer 2008

US Economy Bailout The US Budget Estimates Table S–1. Budget Totals (Dollar amounts in billions)   2008 2009 2010 2011 Budget Totals: Source -  Budget of the United States Government, FY 2007.mht    Receipts 2,590 2,714 2,878 3,035    Outlays 2,814 2,922 3,061 3,240 Deficit −223 −208 −183 −205 Gross Domestic Product (GDP) 14,521 15,296 16,102 16,955 Budget Totals as a Percent of GDP:            Receipts 17.80% 17.70% 17.90% 17.90%    Outlays 19.40% 19.10% 19.00% 19.10%  Deficit −1.5% −1.4% −1.1% −1.2% US $ 700b bailout (now estimated ) is about 25% of annual revenue & about 4.5% of US GDP

20 08 CONSUMER PRIC E INDEX: AUGUST 2-84=100) August leve l of 219.086 (198 ugust was 5.4 percen t higher than in A 200 7. If it is coming out of the budget, at what cost? Health & Human Services ? Defense? Education? Homeland security? Agriculture? Energy? Veterans Affairs ? National Science Foundation? NASA? Else from where? More budget deficit ( inflation )? Oh!!!! Yes, some are free to decide fate of those who are unable to decide, but suffer

U.S. Tre asury S request ecretary ed swee Henry P Treasur ping ne aulson h y Depar w powe as in gover tment a rs for th nment f s he see e financia unds to ks $700 l assets purchas billion liquidity from fir e troubl or inves ms facin ed tor conf g a lack idence. of he my t hrough t he U .S. econo es will see t …he ho p s. credit crisi crippling ..he has a plan s and ked that discr th th etion at the Tr ere be n over ea o whic sury Dep judicial o h ass a vers ets s rtment i houl have ght to th d be e purc sole hase d.

si dent’ s men pre ing on react he C a n a ll t hing b y achie v e a ny t m ptom s?” sy ething do som ss to congre ite House ve asked … ” Wh Why? “ We ha hort time hug e in s

around 2% annualized GDP growth Negative saving rate Inflation National debt closing in to GDP High transaction cost Reducing disposable incomes Growing unemployment Economic indicators Unemployment 6.1%August 2008 GDP growth 1.9%2Q 2008 over 13 trillion in 2007 CPI inflation 5.4%August 2007–August 2008 National debt $9.792 trillion September 24, 2008 Poverty 12.5% in 2007

Insensitivity for borrowing originates like this US Government Securities US $ Holding break up Billions % Japan 593.4 22.17% Mainland China 518.7 19.38% UK 290.8 10.87% Oil Exporters 173.9 6.50% Brazil 148.4 5.54% Banks 133.5 4.99% Luxemburg 75.8 2.83% Russia 74.8 2.79% Sub Total 2009.3 75.07% Other countries 667.1 24.93% Total national debt in July 2008 2676.4 100.00% US Trade deficit partly financed this way. Above is external debt Recent internal debt is independent of above

Feel good or populist solutions will just borrow some time… many things need real correction. Make or Imports Employment trade deficit

credit bailout as initiated will just help system to survive to keep markets pulsating & keeping problems in place. With most of current income discounted for living the way most people live.. by discounting the future Wiser will find their savings & investments their values reducing … Thereal purchasing power is scarce to keep markets stable – then from where growth will come?

buy durables, cars & ….how many can houses if credit cards /loans are not available? … how many people will come forward to buy houses? The answer is obvious – very few. Then how the operating manufacturing companies / shoppers will remain profitable?. September 24, 2008 - The nation’s home builders today called on Congress to move promptly to enact the emergency financial rescue plan proposed by Treasury Secretary Henry Paulson that is designed to stabilize worldwide financial markets and restore consumer and investor confidence in the U.S. economy.

… investors are holding units they would like to unload if they could -- just take a look at the condo inventory, which jumped to a record 769,000 units in July (’08) situation ..the commands to deal with the cause of causes, if USA wants to remain strong & retain its strengths. …since lenders do not like to hold property, they won't hesitate to dump houses on the market as fast as they can -- and since they've shown they are willing to write assets down to virtually nothing

..criticizing is simple, but its too late now. Clarity & sense of direction is the need of the time for lasting solution. A good thought model is desperately needed. It MUST evolve from the focus on diagnosis & prognosis – with causes & cause of causes. Lets build up the model – at least we can correct what we can.. to help & contribute….

sincere, honest and Inviting purposeful thoughts from stake holders to built a solution model is a process – a simulation with real life data. Fortunately the American spirit has proven itself time and again by achieving good results out of impossible conditions. The current situation is too precious to be an exception. Does not matter how others defines the urgency - such solutions will take time to get built up. Time of suffering is the real cost for something wrong of this magnitude.

Such problems, unfortunately, can not be dealt with in one go. No one can have real insight of the complexity We may need to assess the larger impact It is always possible to take ‘problem solving’ as opportunity to create something better that was not there to begin with. So let us split the problem- break it down. THINK There is always a better way of doing things.

Lets look at some of the variables involved. This is the demand side The First Variable Household income in the United States in 2007 Households in ‘000 % Households 0 to 25000 31,995 28.26 25000 - 50000 30,211 26.69 50000 to 75000 20,752 18.33 75000 to 100000 12,428 10.98 100000 and more 17,813 15.74 Total 113,199 100.00 Who amongst the above -have borrowed and paying regularly? -have borrowed and likely to default? -will buy houses at disposal? -can buy and borrow with some equity of their own?

WASHINGTON (MarketWatch) -- U.S. home builders sharply reduced the number of new homes starting construction in July and dropped the number of new single-family permits to the lowest level in 26 years, the Commerce Department estimated Tuesday. Housing starts fell 11% to a seasonally adjusted annual rate of 965,000 in July, …a common sense approach ( and deviating from the normal accounting / valuation norms) look at the collateral values on real time basis – replacement cost basis. …knowing real asset values and losses incurred by the lenders can bring us out of box. …it is one way of looking at the problem while …forget what the books say visualizing a thought model. Forget they were built earlier and have problems – just forget.

This is useful as the loss in value of function of collaterals is a demand / supply gap in the first place and secondly its also in finding credit worthy buyers – which are the real causes for the present scenario. These factors need correction for future solutions.

why there is a lower credit worthiness? Unemployment, No savings, already discounted future earnings – all leading to lower equity in houses This needs to be corrected in the real bailout process. A big job by all means -even at cost of US$ 700 billion. Who is looking beyond present ? The U.S. government has taken control of mortgage giants Fannie Mae and Freddie Mac

do need houses, but some are People unable to pay for them effectively. What’s the purpose of committing huge resources ahead of time? How much of house building is funded by borrowings? A wrong judgment in this information age ? All wheels of this One thing is certain - vehicle are not running at same speed – so where it will lead?

Is this a beauty of free enterprise & free economy? Do we have initiatives to correct or market alone will do this job? government and No still there is election coming on. Some action must be taken – urgently – but an effective action – a real correction.

Realizing the best value for existing properties is a major part of the solution – to protect the bank assets and synchronizing speed of new constructions of such properties is essential. The losses the lenders face is because of a mistake - absence of real selling and lending function. Both builders and lenders are responsible for this. This needs to be corrected.

In a market economy each will think of own interests first, but each one must concede something for the normalcy. Can, between themselves, these forces will work it out on their own?

No still there is government & people’s representatives. With election coming on, urgent action is essential – but they also know it has to be effective action – a real correction. Pray god they remain uninfluenced by lobbyists.

Tovisualize the fragments of thought model lets start thinking loudly. Find credit worthy buyers for foreclosed and new properties. Leasing some of them for good rentals. This may also apply to doubtful mortgages to emerge.

Accelerate the process by making these investments attractive by tax incentives. Tax payers put up their money in properties and gain out of it too! Objective set must be like Leveraged tax concessions for shorter budget deficit. Private sector execution with close oversight . Motivated long term economic

Builder buyback of ‘tinted’ properties, with reasonably priced soft credit. Its unpopular decision but most sensible under given situation. Better for monitoring and better follow up action for real solutions. The builders are real big stakeholders for times to come.

new The US government has enforced a housing bill to offer tax benefits to first time house Buyers. This can be modified to cover second home buyers and rentals to introduce mutuality of interest and minimizing federal involvement for direct taxpayer involvement in bail out. Cleaning lender books with added moratorium is a good way.

The cash degeneration of lenders due to bad mortgagees till a cutoff date should be replenished by “Bail Out”. May be as equity or quasi equity so as to retain the ‘private’ ownership till the things turn the corner – whatever time it takes – but with conditionality's about cap on executive remuneration and proper accountability, management changes if necessary.

Ablanket buy out of bad debts will add to continuation of old ways. Even the decision makers are afraid of this – what a confidence in the money managers! This way money will be bit scarce and we will realize its real worth. The ‘money managers’ will think down to earth to find profits with limited resources and will learn not to overplay through ‘derivatives’ route.

“Derivatives” are parasites and have killed big and small with one bad judgment. Its vertical way of thinking – going deep in one direction. It focuses on more liquidity when minds are frenzy with profitability greed. Good in exceptional conditions but not purposeful in the normal course. For “Bonus” oriented money managers it proved to be curse.

Keepingcredit lines open is essential for healthy normalcy in the economy – real purchasing power, real demand and bit of higher savings to fund the economy for growth. But for this further and real growth is difficult.

Whatever we have see so far is post facto way to correct the situation. Real solutions lay in adding fundamental strengths in economy - controlling trade deficits – optimizing imports – everything, clothing, toys, electronics, cars, hardware and what not.. joy of market US has forgotten the friendly productivity for the local market. Spirit of “be American buy American” is twisted.

Americans are known toinnovate, others exploit knowhow to compete with Americans. It may be quality systems, Six Sigma, productivity and competitive advantage and what not. Looking at future these still seem to be valid solutions – globalization or no globalization. If one removes something from the system, it needs to be replaced with something to keep people gainfully occupied. What we see happening here now? If others can do it successfully, why not Americans? Renewed commitment? This also needs a check up.

more jobs and a Creating competitive advantage is THE real long term solution. Energy, offshore / onshore crude oil, refining, steel, public works, infrastructure, energy efficient communities with network of public transport, affordable housing designs. Tax encouragement for savings and empowering more demand is like riding on two horses running in opposite directions – but an evolving equilibrium is needed badly. Remember they did it differently in Great Depression.

A Good thought will always overcome the adversities. Inputs from WWW and news paper coverage. .. A visualization with a salute for American Spirit

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