I seem to have a steady flow of updates on the US bailout coming my way, so hopefully I can break down some of the information for you that helps explain it a bit more.
The key point from all this is that it will add stability to the US financial markets. Right now everyone is scared about the tax payers being stuck with the bill. It may not be quite as bad as it seems. While the US government is bailing many companies out by buying up their assets, it isn’t paying full price for these assets and there is a tremendous potential for them to be resold in the future for a profit.
It will definitely separate the stable well run banks and financial institutions from the companies that took the money and the excess risks and are now paying for it. Watch for the companies that went for the easy money and took on significant sub-prime mortgage debt to get swept up by the larger stable companies and/or the Feds. Think of it as a cleansing that creates more stability.
Homeowners who are stuck with over mortgaged properties or who are on the verge of foreclosure are still in the same boat. While the bailout is helping the large institutes, it does nothing to save the homeowners mortgages. It does however create more confidence in the banking industry. The intent of this is to prevent the struggling US economy from completely stalling and going into a full blown depression.
The other important point of the bailout is the government will control the golden parachutes and huge bonus payouts for the companies they take over. The out of control payouts some of these executives were receiving will hopefully cease to exist and it may bring some sanity back to the markets. One payout that stuck out from last year was the president of Lehmann Brothers receiving a $22 million bonus last year for a company that had to declare bankruptcy this year. What a great way to run a business!
I would love to hear some feedback from you, so tell me your thoughts if you can find the time. I will add more information as all of this plays out and more information comes out of it.
Here are my thoughts about the US financial crisis. The US can do one of two things. They can devalue their dollar, which they are doing by printing more money, or they can go back to the gold standard.
They have chosen to devalue the dollar which will make imports more expensive for the American consumer which will, in turn, cause inflation. One estimate I heard was inflation in the US will be as high as 20% in the next year or two. I don’t see that happening in Canada, but we will be impacted in some way.
This certainly makes owning hard assets like real estate or gold bullion pretty attractive.
Another update, earlier this afternoon they rejected this version of the bailout in it’s current implementation. Watch for them to come up with a new version in the next day or two.