As of the 12th of December, 2008, 187 financial institutions [Source: Propublica] had been approved by the U.S Treasury to receive $242.2 billion from monies made available by the first bailout package. Of this figure, Citigroup received the largest share of $45 billion. While U.S taxpayers would like to believe that monies given out are judiciously used by those institutions benefiting, the absence of monitoring policy by the U.S Treasury leaves some doubt as to if these monies will be used for reasons they were collected.
Neel Kashkari, the U.S Treasury official supervising the TARP testified before congress with these opening remarks. “Each financial institution’s circumstances are different, making comparisons challenging at best, and it is difficult to track where individual dollars flow through an organization.”
Assumptions based on this statement can only wonder what the plan of the U.S government is if these institutions go back doing what they did, lose their share of the spoil to only come back singing the same old tunes of bailout. Unlike in the U.K. where banks who benefited from bailout money are required to use such monies strictly for lending purposes, no one in the Treasury department or entire U.S government seems to want to know how the taxpayers money is been spent.
Even as the first bailout package hasn’t much brought much succor to the very distressed sub-prime mortgage markets, experts believe that with the second bailout package, it’ll only be a matter time for things to return to normal.
As announced by the U.S Treasury and Federal Reserve, the second $800 billion stimulus package is in two parts. First is a $600 billion programme which will be used to buy back mortgage related debt and securities, while the rest $200 billion goes to consumer debt securities.
Lenders often bundle consumer debt (credit issued from loans, mortgages, and credit cards) into larger packages which are then sold to investors, thus making additional funds available for more lending while taking a sizeable portion of these loans and their accompanying risk off the lenders’ books.
It is expected that the second bailout will be used to buy back these loans financial institutions have been unable to offload and are at risk of defaulting. In the long run more money should be available for consumers and businesses in need of credit. Regarding the second bailout, the Federal Reserve had this to say, “This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”
If all bailout measures currently being undertaken yield no positives, here’s a possible worst case scenario:
Cost of Credit
Banks refuse to lend to one another meaning there’s less money to give away. Because there’s less money to give away, U.S consumers could find it more difficult to access loans. With heightened competition to receive loans that are unavailable, the cost of a loan could be worse than currently is
– higher interest rates and less favorable conditions.
With less credit at their disposal, credit card issuers are likely to pull out a larger number of their less profitable cards from the market. Consumers already on these cards could find it difficult finding another credit card deal, and where this is possible, overall costs attached to a credit card could be much higher even for those with perfect credit.
Increased cost of credit leads to higher interest rates charged by financial institutions which make consumers and businesses less qualified for mortgages, loans, and credit cards. Businesses have reduced access to credit, and could raise the prices of goods to compensate. Workers are not likely to get a raise at work so there’s not much money to purchase essential items, most of which have astronomically risen in price over a short period.
Hyperinflation reduces consumer spending which in turn affects the profitability of manufacturing companies. With no one to purchase goods being produced, and lenders on their necks for repayments, worker layoffs could be a likely option to help balance the books. In the very worst case scenario, many more companies will go bankrupt, increasing the number of individuals depending on coupons and government welfare assistance packages.