Cora1

Bailout Bill Passes; What Happens Now?

Please forgive a foreigner a few typos, but ...

1) On money supply and inflation: assume subprime assets were bought against payment in treasuries: the money supply would not rise!
2) If under the package, banks lose risk assets for treasuries, they not only get rid of illiquid assets, but also get collateral for interbank lending. Leverage (in risk assets) and liquidity improve.
3) Furthermore, capitalisation of banks will improve due to price recovery in risky assets. Everyone is focusing on the USD700bn. However, if these 700bn in hypothetical demand create something like a psychological price floor for what is currently sold at fire sale prices, the package is suitable to trigger the market entry of private equity investors in larger scale. As prices of risk assets recover, so will the capitalisation of banks.
4) This package will hence improve bank balance sheets from the asset and the capital side, and provide liquidity / collateral to banks. Money markets are likely to calm.
5) As far a lending to main street is concerned, a lot is gained by securing the functioning of credit markets going forward. Nothing wrong with your analysis of the American desease and that more saving is required. We hopefully agree that the complete collapse of the banking system is not the preferred way to get there.
6) As concerns market to market and trust: Market to market is fine when prices reflect value. You are not however not honestly arguing that investors have higher trust into US banks for as long as there is need for two bailouts per week when accounting on market to market and fire sale prices? I guess we agree there is need to return to market to market when markets have calmed.
7) How short are some of you? And what is your attitude towards social responsibility?