The US government’s $700 billion bailout package for some of the biggest financial houses like the AIG, Freddie and Fannie virtually amounts to nationalization of these private sector giants, something that is closely associated with socialism. Moreover, it is noteworthy to observe that the bailout packages are not to the immediate benefit of shareholders, but more to save the common man and his mortgage. That smells of socialism again! Or with elections around the corner, is the proletariat more important than the bourgeoisie .
The great bailout devised by Secretary Henry Paulson gives the government the authority to buy out home mortgages, asset-backed securities and commercial mortgage assets in order to infuse stability into the tethering US financial system. This move will make the US government, the buyer of the last resort of mortgage linked assets, virtually giving them a governmental guarantee. What is interesting to note is that few banks or financial institutions across the globe are willing to buy or back any such assets as was clear from the collapse of Lehman Brothers. Hence the US government is being forced to do so in order to prevent a complete collapse of the financial system.
However, the Congress is yet to approve the $700 billion bailout package and a lot of effort seems to be going into it for its smooth passage. Public posturing by Bernake and Bush on the status of the economy not only signify the financial mess the system is in, but also the desperation for getting a Congressional approval for the bailout package. So serious is the condition of the US economy, the Presidential address on the issue is being compared as equally important to the 9/11 Presidential address.
While Bernake has asked for a massive governmental takeover of shaky assets in order to instill confidence in the economy, the US Congress is questioning the move as it involves using the taxpayer’s money to save big banks. However, if confidence needs to be restored into the economy, then mortgage based lending needs to gain momentum. This is unlikely as long as mortgages remain shaky and that is what the government wants to address. Once the government acquires shaky mortgages, they will come under virtual government guarantee and banks will not mind advancing credit against them.
As a true barometer of the health of the economy, similar to the stock of a company, which represents its health, the US dollar has begun to dip. While, the further deteriorating state of the US economy should result in a depreciating dollar, an immediate effect of the bailout approval is likely to be a knee jerk strengthening of the dollar. Beyond that, the value of the dollar will depend upon the performance of other major economies like Europe and Japan and how the US economy is expected to perform post the bailout package.
In the medium term, the liquidity crisis needs to be addressed, which may require a lowering of interest rates. If we view this as a recovery period for the US economy, the dollar should logically dip, which it might with a lowering of interest rates.
Ironically, in the heartland of capitalism, where the free market is supposed to thrive, a massive government intervention is being initiated to prevent the collapse of the economy. Though ultimately, this is likely to lead to the restoration of market confidence, Karl Marx would indeed have had a hearty laugh at the expense of capitalists using socialist methods to shore up their economy.