So by now, we all know the economy has taken an interesting tailspin, and banks have pretty much stopped lending. The Treasury, with the assistance of several foreign banks, has agreed to pump $180 billion into the global market to provide a measure of liquidity in the market. The US government will be authorizing $700 billion to be spent to buy up subprime mortgages. The big concern thusfar has been in asking where the $700 billion will come from. Taxpayers will be asked to shoulder a burden that many consider far too large for taxpayers to handle. I would agree with this judgement, but I would also express some over the actual security of these purchases.
The government is assuming the role of Atlas carrying the world's burden. It is buying up these bad mortgages to free up lending space in the market, which needs to happen. But is what now happens is the government assumes all of the risks and benefits of the mortgages that Lehman Brothers or Bear Sterns did. Many anticipate the value of the mortgages to shore up with time, balancing out much of the $700 billion loss. I acknowledge the possibility; but at the same time, I find it ironic that the government will be passing laws against such lending practices while carrying out these same irresponsible actions. There are benefits to partaking in subprime mortgages; if people pay them off with time, you've made an absolute killing, hence their initial popularity. But as people defaulted on them (as they are now), banks run out of money available to lend.
In my mind, a better alternative would be encouraging people to save more money so banks will have more money available to lend out to borrowers. This can be done through providing something such as a tax credit for opening a savings account or for maintaining a solid credit score. These actions would likely produce a far better outcome, removing many of the risks involved in getting the bad mortgages out of the market. With time, something like this would have to be scaled back depending on its success, lest the market end up in a situation akin to that of Japanese markets, where oversaving is an issue.
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"The government is assuming the role of Atlas carrying the world's burden."
Hey...what if Atlas shrugged?
Not funny, I know I know, I couldn't resist being obnoxious.
The saving incentive sounds like a good plan, but would it be enough to correct the whole system? The situations seems to have reached a point where there is no alternative but a bailout.
If a significant amount of the population started saving their money, wouldn't it in turn be detrimental to the economy? With many people in debt and living paycheck to paycheck, would the tax credit mean anything to them?
Pardon my economic ignorance if I said something lame. I'm trying to understand.
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