Trickle Down Or Trickle Up?
For quite some time now the world's financial system has been fragile. The Federal Reserve Chairperson, Ben S. Bernanke is inundated with a dilemma in the wide ranged credit freeze surrounding today's financial institutions. This problem goes far outside what interest rate cuts can mend in the economy.
The exceptionally low interest rates of the early and mid-2000s and the continual bailing out by Alan Greenspan of any Wall Street player that got into trouble created enormous temptations to speculate with borrowed funds and throw caution to the wind, completely ignoring risk. Why worry about risk when it's not your money and even if you get into trouble you can get bailed out? This problem is called moral hazard.
The derivatives speculated by Wall Street players do not have near the value they led us to believe they had. Now we are left in a frantic pursuit to de-leverage in spite of the cost. Unsurprisingly the buyers have thinned out and institutional investors do not want to add to the already puffed up package in their portfolio; particularly now that the real value is evident. So now we are finding ourselves in a liquidity emergency to the extent of which we have not experienced since pre World War II.
Commercial as well as investment banks are stuck with puffed up assets such as mortgages and private equity loans they cannot sell because they are packaged with derivatives of exceptionally questionable value. This is a kind way of saying that Wall Street fat cats lied about the value and has overpriced them by billions of dollars putting us in peril. Basically this means that banks do not have the cash to make new loans and this is destroying our credit based economy. For banks and brokers to be able to make their balance sheets stronger by de-leveraging, the banks will have to reduce the number of loans they have on their books. This, unfortunately, would devastate the economy and turn a bad recession into a long-term depression.
This is why the Federal Reserve is bailing out banks with long term financing at low prices. What other option is there? Either let the entire financial infrastructure of the world freeze up or they lend money to financial institutions and accept the subprime mortgages and related securities of debatable value as collateral. This is how the Federal Reserve has become the buyer of last resort which is incredibly inflationary. These financial middlemen are projected to take the cash borrowed from the Federal Reserve and lend it out again to higher quality borrowers; unfortunately this is not what is happening. Theoretically, this would be considered the trickle-down effect.
So why don't we give a trickle-up effect a try? The purposed bailout will cost at least $1,000,000,000,000. That is one trillion dollars for those having trouble! Instead of giving one trillion dollars of newly created money to the Wall Street players who are largely a part of our current problems, why not give that money to the people of America? This way it can then trickle-up to the Wall Street players by stimulating the economy. By giving about $3,200 to each person in America we may be able to get the cash flow back in the right track. This means a family of five would get $16,000 in cash to spend how they choose.
Commercial as well as investment banks are stuck with puffed up assets such as mortgages and private equity loans they cannot sell because they are packaged with derivatives of exceptionally questionable value. This is a kind way of saying that Wall Street fat cats lied about the value and has overpriced them by billions of dollars putting
Article Source: http://www.search-raven.com
About the Author
J Stromsteen is an expert in finance. Besides her site, Cheap Auto Insurance, she contributes to Bush's Depression as well as first time home buyer to provide up to date info on the subprime crisis.
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by: J.Stromsteen
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