Phil for Humanity Phil for Humanity
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4 Reasons Why the 2008 Bank Bailout will probably NOT Work

During the late summer of 2008, several banks started to stop lending money or greatly restrict how much money they lend, because these banks have fast mounting debts and assets that are decreasing in value quickly. This combination, primarily caused by mortgage payments not being made on mortgage assets, has started a vicious cycle know as a "credit freeze" or "credit crisis", where new loans are not approved even for credit worthy borrowers.

Some parts of the United States Government believe that a $700 billion dollar bailout would be sufficient to prevent a complete freeze on credit that would surely put the country and possibly the world into a depression. Unfortunately, this bank bailout might not work for several reasons.

First, even with this huge infusion of money from the government, this bailout may not be enough to convince banks to start lending again, especially if their mortgage assets continue to decrease in value quickly. For instance, Japanese banks went through a similar bailout, but those banks became much more careful with new loans thus putting the brakes on the Japanese economy. As a result, the Japanese recession has lasted for over a decade. Therefore, the fear of banks not knowing how low their assets could drop is a prime reason for banks to not lend money even with the money from the bailout.

The second problem with the 2008 Credit Bailout is that the actual total amount of money needed is unknown. No one knows how many banks would need bailing out and how many mortgages will go default. The $700 billion dollar price tag on the bailout is just a guess that is not even based on any calculated estimates from a banker or actuary. Therefore, more money may be necessary.

Third, this bailout is being funded by the United States National Debt. This means that U.S. taxpayers will be burdened with paying off this loan, thus further suppressing the long-term health of the economy.

Finally, the primary reason why the credit market is at risk is because of the crashing housing market, and the 2008 Bank Bailout does not completely address this root cause. It is true that the bailout will probably allow most new mortgages to be approved, thus preventing the buying and selling of most homes from halting completely. However, the primary reason why the housing market is crashing is that people are not paying their monthly mortgage payments. I am not referring to real estate speculators who purchased second and third homes as a short-term investment who are losing money on their investments; but rather, the average lower and middle class person. This is because the fundamentals of the economy are not good: salaries are decreasing, unemployment is rising, inflation is high, and monthly mortgage payments with adjustable rate mortgages (ARMs) are increasing sharply.

As a result and in my opinion, without directly addressing the housing crisis, I think the bank bailout is doomed to fail. At best, the bailout may only temporary solve the very short-term credit crisis while at the same time harming the economy in the long-term. Therefore, I think American politicians need to find a better solution.

If you have any innovative ideas, I strongly recommend that you contact your U.S. representatives.

by Phil for Humanity
on 09/29/2008

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