What is an Economic Bail Out and What Does It Mean?
by Jo Oliver, Sep 25, 2008
Unless you live under a rock, you know that the U.S government is in the throws of a “bail out” related to recent stock market woes and mortgage companies that are in crisis. I would like to give a little context to this for those that just hear the headlines, but don’t know what they mean.
First, what is a bailout? An economic bailoutis when a bankrupt or nearly bankrupt party (like Lehman Brothers) is helped by another party (like the US government) giving them assets, that can be easily converted to cash. This infusion of liquid assets frees up the troubled party to meet it's short term obligations. In return, the helping party will often receive controlling interest.
So, when you hear that AIG has 1 trillion dollars worth of assets, you may wonder why they need a bailout and ask :“Why don't they just sell their own assets?” The key word when you are talking about assets is, liquid. The companies in crisis have illiquid assets. An illiquid asset is not readily saleable due to uncertainty about it's value or it lacks a market in which it can be traded. In other words, no one is going to buy mortgage company assets because the value is uncertain and there are not buyers for the troubled loans.
When a large company is on the verge of a failure that will have vast long term effects, the government views this as “too big to fail.” They will step in for a bailout in order to stop wide spread economic repercussions and panic that result in depressions. What the U.S government is proposing to do in the mortgage bailout will be the largest since the Great Depression. Some may view this government intervention as too far reaching. Others may see it as preservation of the economy. Either way it is happening and the best thing American citizens can do is arm themselves with knowledge.
Right now, President Bush has a 700 billion dollar bailout plan laid out for Congress to approve. Ironically, the plan is on three pieces of paper. The specific details are not being released, but Republicans and Democrats alike are ripping the plan apart. Mainly they are criticizing the plan for it's heavy emphasis on private sector intervention, the tremendous dollar amount, and the lack of check and balance system r/t who is getting this money and where it is going.
Democrats are concerned about the home owners behind these bad loans and are insisting that the plan help more borrowers stay in their homes. They also want a condition to the bailout that will put limits on executive compensation. Where as, Republicans seem more concerned with who, what, when, and where all this money will go. Some Senators are pushing for a committee to oversee where all this money goes, instead of giving the Secretary of Treasury full responsibility of 700 billion dollars. Regardless of the specific disagreements, one thing is agreed upon…..something has to be done now to prevent economic collapse. But, words are only as valuable as the action behind them. Each side is holding out for their specific interests, despite admitting the essentialness of expediency. What both parties seem to be forgetting is that a bailout's purpose is not to help the specific companies and especially not the customers of the companies. It is simply to prevent the specific parties from effecting the entire economy.
Lastly, I will give you my brief opinion on what I think should happen. The bail out is necessary to prevent worldwide economic turmoil. Normally, I say the government should not intervene when a business is in trouble. However, the wide spread results of what will happen if these businesses fail is a matter of national security. It should be regulated by a committee, not just one man. Allowing one man to dole out billions, is asking for disaster. It should be passed now, without any of the added bonuses that each party wants to stick into it. The bill should not include individual home owners. 95% of homeowners are paying their notes on time. Most of the 5% that are in trouble, are in a bind because they bought something that they couldn't pay for. I sympathize with their plight. Still, it is unfair to take tax dollars from the people who didn't buy what they needed or wanted, but rather what they could afford, to bail out people who bought beyond what they could afford. Personal responsibility is part of life. If someone bought a big screen TV, but then couldn't afford to buy food, would you buy them food….. or tell them to sell their big screen? So, if you can not afford a 500,000 dollar house, sell it and buy or rent what you can afford.
Source: http://www.newsflavor.com/Politics/US-Politics/What-is-an-Economic-Bail-Out-and-What-Does-It-Mean.272409
by Jo Oliver, Sep 25, 2008
Unless you live under a rock, you know that the U.S government is in the throws of a “bail out” related to recent stock market woes and mortgage companies that are in crisis. I would like to give a little context to this for those that just hear the headlines, but don’t know what they mean.
First, what is a bailout? An economic bailoutis when a bankrupt or nearly bankrupt party (like Lehman Brothers) is helped by another party (like the US government) giving them assets, that can be easily converted to cash. This infusion of liquid assets frees up the troubled party to meet it's short term obligations. In return, the helping party will often receive controlling interest.
So, when you hear that AIG has 1 trillion dollars worth of assets, you may wonder why they need a bailout and ask :“Why don't they just sell their own assets?” The key word when you are talking about assets is, liquid. The companies in crisis have illiquid assets. An illiquid asset is not readily saleable due to uncertainty about it's value or it lacks a market in which it can be traded. In other words, no one is going to buy mortgage company assets because the value is uncertain and there are not buyers for the troubled loans.
When a large company is on the verge of a failure that will have vast long term effects, the government views this as “too big to fail.” They will step in for a bailout in order to stop wide spread economic repercussions and panic that result in depressions. What the U.S government is proposing to do in the mortgage bailout will be the largest since the Great Depression. Some may view this government intervention as too far reaching. Others may see it as preservation of the economy. Either way it is happening and the best thing American citizens can do is arm themselves with knowledge.
Right now, President Bush has a 700 billion dollar bailout plan laid out for Congress to approve. Ironically, the plan is on three pieces of paper. The specific details are not being released, but Republicans and Democrats alike are ripping the plan apart. Mainly they are criticizing the plan for it's heavy emphasis on private sector intervention, the tremendous dollar amount, and the lack of check and balance system r/t who is getting this money and where it is going.
Democrats are concerned about the home owners behind these bad loans and are insisting that the plan help more borrowers stay in their homes. They also want a condition to the bailout that will put limits on executive compensation. Where as, Republicans seem more concerned with who, what, when, and where all this money will go. Some Senators are pushing for a committee to oversee where all this money goes, instead of giving the Secretary of Treasury full responsibility of 700 billion dollars. Regardless of the specific disagreements, one thing is agreed upon…..something has to be done now to prevent economic collapse. But, words are only as valuable as the action behind them. Each side is holding out for their specific interests, despite admitting the essentialness of expediency. What both parties seem to be forgetting is that a bailout's purpose is not to help the specific companies and especially not the customers of the companies. It is simply to prevent the specific parties from effecting the entire economy.
Lastly, I will give you my brief opinion on what I think should happen. The bail out is necessary to prevent worldwide economic turmoil. Normally, I say the government should not intervene when a business is in trouble. However, the wide spread results of what will happen if these businesses fail is a matter of national security. It should be regulated by a committee, not just one man. Allowing one man to dole out billions, is asking for disaster. It should be passed now, without any of the added bonuses that each party wants to stick into it. The bill should not include individual home owners. 95% of homeowners are paying their notes on time. Most of the 5% that are in trouble, are in a bind because they bought something that they couldn't pay for. I sympathize with their plight. Still, it is unfair to take tax dollars from the people who didn't buy what they needed or wanted, but rather what they could afford, to bail out people who bought beyond what they could afford. Personal responsibility is part of life. If someone bought a big screen TV, but then couldn't afford to buy food, would you buy them food….. or tell them to sell their big screen? So, if you can not afford a 500,000 dollar house, sell it and buy or rent what you can afford.
Source: http://www.newsflavor.com/Politics/US-Politics/What-is-an-Economic-Bail-Out-and-What-Does-It-Mean.272409
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