The Problem With The Rescue Plan

Oct 17th, 2008 @ 5:11 PM by Alden Smith

We see the government reach out to Wall Street banks with a helping hand to the tune of $750 billion dollars. Many of us, unless we follow the news like I do, breathe a sigh of relief. Finally, something is being done, even though it could end up costing the American taxpayers dearly. I think most everyone would agree that some action needed to be taken. Prop up the Wall Street banks; throw a few crumbs to the little banks around the country, and everyone lives happily ever after.

There is just one problem here. When this deal was struck, no provision was made saying what the banks had to DO with this money after they acquired it from the Fed. Today’s new from the New York Times gives us some insight into what they feel will happen.

It is likely that the banks will gain this rescue money from the Fed, but will then sit on it until such time as their liquidity position is much improved. The chief executive of Merrill Lynch, John Thain, said that banks are unlikely to move swiftly. In private, many banking executives agreed, according to the Times.

It is understandable why they would do this. For all the gains in dollar amount that banks have made in the past prosperous years, they have lost $1.06. Thain predicts that, for the next quarter at least, that the banks will use this sudden windfall as a cushion. I don’t think that was what Treasury Secretary Paulson had in mind.

An analyst at Barclays Capital, Roger Freeman, said “I don’t think that the market wants to see that capital being put to work to leverage the business up again. My expectation is it’s quarters off, not months off, before you see that capital being put to work.”

David M. Walker, the former federal comptroller general and now president of the Peter G. Peterson Foundation had this to say: “It is the government’s responsibility to set the terms and conditions on this money. This is the people’s money. They’re giving it out with no rules.”

So it goes with the government. With no rules set down in writing as to how the money is to be used, the banks have full will to use it as they please. It is very likely that they will shore up their positions before doing anything else. Meanwhile, credit will stay tight, and no real gains in the economy will be seen as far as the mortgage market goes for quite some time. I could be wrong – I have been before. This time, I hope that I am.

Posted in Mortgage Refinancing, Mortgages
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