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US Bailout – Is it good and enough for US, and World economy September 22, 2008

Posted by Bipin Agarwal in Global Economy, Politics and economy, Real Estate Development in Global Economy.
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There have been lot of people calling to ask my opinion about the recent event in US market and in particular about the bailout. After we talk about as to what is happening in the bail-out, real question is that enough or systematic problem is not being discussed.

Let us be clear, when we talk about bailout, we are talking about:

  1. AIG loan is not a bail out and it may turn out to be the best investment by US tax payers and gov.
  2. Fannie bailout- US gov did not have much choice given the balance sheet they have. If they did not bail out the two institution, US will loose lot of credibility in the world and interest rate will have to go through the roof to support the expanding debt.
  3. Now the mother of all bail-out of 700 plus billion. First of all it is not clear that should we even call it a bail-out until the details of the plan are public. It the plan is structured along the lines of AIG, it could be the best solution. In that situation it is not a bail out and just a stop gap financing for toxic assets in the balance sheet of the financial institutions. If the plan is designed to keep the next election in mind or is designed to help only selected financial institutions, it could be the great tragedy. There is already complaint from BOA that the plan will help Goldman and Morgan.

What is interesting is that no presidential candidate has opposed the plan. If the plan can be put in place with reasonable safeguard for US tax payers, that is good news. Long term impact of the plan will be high US interest rate, weak dollar against major currencies, particularly the currency of the countries that have a huge foreign reserve such as Russia, China, Middle east.

Real impact of the policy can not be determined until the US election are over and the policy of the next administration are clear. Also, never underestimate the power of US.

If you are a investor, it is time to re-balance with more international exposure, more bonds (both high yield domestic and highly rated inernational) and with ample cash to invest further in next three to six months.

There is another policy decision that can accelerate the recovery of the US economy, US should allow massive immigration of the educated work force. Immigration of 10 million people will solve the housing bubble and create more jobs. Remember, educated people create jobs.

Now the question is bailout that is being talked about enough? Real problem is not the toxic asset that are sitting on the balance sheet of the financial institutions, Bigger risk is about Credit Default Swap (CDS). No body has started to put their hand around the scope of this problem and its impact. I am sure once, bailout is passed, market will go down again and focus on the CDS.

If you have a question, about Global economy and Politics correlation, feel free to ask.

http://www.redhawkinvestments.com

Bipin Agarwal
https://twentyminutelifestyle.wordpress.com/about/

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