Government Saves Beloved Banks, Shuns Automakers

Includes: DIA, F, GM, QQQ, SPY
by: Faisal Laljee

It has now been well over a month since the $700 billion package was approved and the government came to the aid of the US banks with the hopes that it would trickle down to the consumer. However, the general feeling out there is that banks are shoring up their reserves with this money and the liquidity that the Fed was looking to inject in the market is not exactly flowing through our economy.

What should the government have done with the $700 billion? Was giving it to the banks the right move? I think it is too soon to tell but here is how it would have served the right purpose.

If the $700 billion was returned back to the tax payer directly (after all, it is the tax payer's money), in the form of $15,000 per household, there are 4 things that would have happened:

1) Foreclosures would have been put off by at least a year since home owners who were going to foreclose would not pay their mortgage with this money. Banks would have the benefit of avoiding foreclosures, and home owners would save their homes.

2) For those who are not home owners or those that are not looking to foreclose but have credit cards that they might be defaulting on, they would use the money to pay off some of their credit cards. Again, banks would benefit as would consumers since this would mean their interest rates would remain low.

3) For those who will lose their jobs (or are currently jobless), they would use this money to stay afloat and get through these tough times.

4) For those who are comfortable and have cut down their spending, they would either save this money or spend it. Either way, the banks or the economy would benefit from this.

What I fail to understand is why give this package to banks for them to sit on it and leave the automakers out in the cold? I mean don't the automakers and their suppliers, dealers, partners etc. make up a few million jobs (2-3 million to be precise)? Wouldn't a loss of 500,000 jobs in this sector affect our economy in the worst possible way? Why is this even a tough decision? Are we the US not proud of our automotive sector? Sure GM and Ford have had missteps, but surely Ford has been doing the right things by trimming their models and making more fuel efficient vehicles? The auto industry is in the middle of a long-term restructuring which requires the help of the government. Why is a $25 billion loan for an industry that employs millions a bitter pill while a $700 billion package for banks that don't face union issues, have been making money hand over fist for years and still laying off people acceptable?

Check out this recent news video with an interview with Ford CEO Alan Mulally and President elect Barrack Obama.

Now I am neither associated with the Financial Services sector, nor the Automotive sector. It does not make a difference to me directly whether they approve the $25 billion for the auto-makers or not, but as a tax payer, if I were asked where I think the money should go, I think the money should be channeled quickly back to the American tax payers for all the reasons listed above. A $25 billion loan to the auto industry would certainly help hundred of thousands of tax payers to keep their jobs, and their homes, which again would benefit the banks. The government should be looking to create jobs and preventing further job losses.

Warren Buffett recently spoke to Fox Business about what he thinks the government should do to help the auto industry. Click below to see the interview.

Now that the $700 billion has been made available to the banks, I think that there needs to be close monitoring of this money to make sure banks don't sit on it. Rather, they should use it to help homeowners avoid foreclosures, help businesses get loans so they can continue to operate in this challenging environment and the government should approve the $25 billion for the auto-industry to prevent job losses and save the industry.

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