Wednesday, 24 September 2008

8 things you should know about 700 bn bailout

1. Will this improve unemployment
No, US companies have cut more than 550,000 jobs this year, sending the unemployment rate up to a five-year high of 6.1 per cent in August. Those figures are likely to worsen in the coming months, with or without a bailout.

2. Would it prevent another Lehman-like bankruptcy?
Lehman Brothers failed last week because it couldn't find investors. Getting $700 billion in bad debts off banks' books will certainly help, but it remains to be seen whether that will be enough to convince investors that it is safe to put their money in financial firms.

3. Will this improve USA economy?
Even if the government gets Congressional approval this week to buy bad debts off banks' books, satisfying some of their cash needs, the financial sector will still need to raise money -- and investors haven't exactly been lining up to help. Unless banks can find funding somewhere, they won't be eager to resume lending, and that will leave the economy sputtering.

4. Is 700 bn enough to stop the financial crisis?
The good news is, outside of the financial sector, Corporate America is remarkably cash-rich with some $620 billion sitting on the books of large firms, so companies should be primed to spend once confidence is restored.

5. How does this affect me?
"Last week as the credit markets were frozen, the capital markets were frozen, we had a situation where American companies weren't able to borrow money," Paulson said on ABC's "This Week". "This could ultimately affect small banks, loans to businesses, loans to farmers, jobs, people's retirement."

6. What will happen to housing market?
The housing market is at the root of the year-long financial crisis, and some members of Congress -- expressing concern that Paulson was taking a roundabout route to helping homeowners -- are expected to push for more direct mortgage assistance when they hammer out terms of the bailout legislation this week.

7. How healthy are US banks?
"The US banking system needs a lot more capital," said Jan Hatzius, chief US economist at
Goldman Sachs. "Capital infusions are needed to avert a sharp contraction in lending."

8. What is this 700 bn bailout plan all about?
The government's bailout plan in effect addresses the first point by establishing a price for hard-to-value assets, and Congress may tackle the third issue this week. Raising more capital won't be easy.