I have great respect for the Federal Chairman, Professor Bernanke. I understand the fact that he’s proposing the 700 billion dollar bailout to protect a tool of regulating the economy.
The only reason why I think an economist might even think about bailing out a bank should be for personal profit, or because he honestly believes it’s the best course of action. Hopefully, it’s the not former. Banks are an important part of the tools for economy regulation, you increase the interest rate, it’ll take the money out of the economy because it’s better to save than to spend. You lower the interest rates and it’ll inject money into the economy because spending/investing money makes more sense than saving it. It’s proven to be more effective than fiscal policy, although fiscal policy if applied correctly is still effective.
One of the things that probably contributed to this crisis is the accounting standards and possibly the Sarbanes Oxley Act. Due to the new rules in the account standards and what is considered to be GAAP (Generally Accepted Accounting Principles) securities, depending on the type, is priced at fair market value. Now given the fact that the fair market value of houses are dropping like crazy, these highly valued securities are worth less and less every day. This drop in value is creating a loss on their books, and in accordance with accounting principles, they must record it. This drop in financials is definitely noticeable and causes a panic with the shareholders and prompts and rapid sale of said company’s stocks.
What Chairman Bernanke is proposing is to save the banks by having a huge buyer buy all the undervalued securities, that way, the panic is removed, and the price of the house will go back to it’s original pre-burst value; assets purchased pre-burst won’t be selling for a loss.
It makes sense, but still doesn’t justify a 700 billion dollar blank check that can’t be review or subjected to oversight, that, I simply can’t agree with. What I also can’t agree with is the fact that if housing doesn’t tank when will people like me be able to buy a house? Although I definitely do believe Bernanke is in a tough spot, the economy isn’t as simple as, “1+1 = 2”, it’s more like “n + x + y + z = a”. I think there will be issues in letting the banks fail and issues with not letting the banks fail. If the banks fail, there will be fewer banks on the market, which might lead to an oligopoly. If the banks don’t fail then it can possibly encourage reckless investment, keep housing prices inflated, and etc. Either way, it’s going to be a tough call, but apparently Bernanke believes that former is the worst of the two. Given the fact that he pretty much writes the book on this sort of thing he might be right, and given his position, I hope he is, but only time will tell.