Word of the Week - Bailout

More Than Just Atlanta Real Estate

What a week! This must be one of most eventful in terms of the financial markets and the US economy.

Whether you live in Atlanta or Alaska, the word of the week was ‘bailout’ but is has also been called ‘financial stimulus package’, or by some ‘wall street giveaway!!’ what ever you want to call it, there is definitely a split in opinions as to whether it is even needed.

Some of the pundits were even suggesting that we should ‘let the chips fall as they may’ in other words, all of these financial institutions that are in trouble should be left alone to fail and then let the markets settle and reset.

At the other end of the spectrum there is President Bush, who on Tuesday is claimed to have said during the talks ‘If money isn’t loosened up, this sucker could go down’, he apparently made those comments as he saw the package he offered fall apart.

In between these two opinions there are some people who although they believe that the markets are king, they see the flaw in the do nothing plan. Although on the outset it would not cost the taxpayer billions of dollars, once these institutions fail, due to the complex nature of the modern financial markets their effect is always wider that just their employees and shareholders, the markets have a tendency to panic and become unstable, and as I said in the last blog, they all effect each other in some way, so this approach although well meaning in its nature has major problems. That said, this plan does highlight one observation, no one knows what the full depth or potential cost of this situation is.

It seems most people believe that the problem is big enough that we need to do something. Amongst this crowd are people who claim that Hank Paulson’s main interest is saving the value of his Goldman Sachs stock, true he is an ex-chairman and CEO of the financial giant, but actually what gave Goldman Sachs a great boost was the announcement on Tuesday by Warren Buffet that he would invest $5 Billion in Goldman Sachs. I should disclose that Warren Buffet owns the company that I work with, but without favoritism I can honestly say that there are many, many people and financial institutions that follow the words and deeds of Warren Buffet, after all he didn’t get to be the richest person in the world (Forbes.com 03/05/08) without understanding the financial markets, value, economics etc.
But coming back to the bailout, I have heard people saying that we should use this $700B in other ways, such as handing thousands out to each household. Now while this is a great thought (I really need a big screen HDTV) what they misunderstand is that we don’t actually have this money. We are going to have to go with our begging bowl to other countries such as China, to lend it to us, and with our credit rating being as low as it is, you know the interest rate will be high, so this will just be added to the approximately 9.7 trillion that the USA owes other countries.

The plan it its original form was only three pages long, this seems short for a high school essay, never mind a financial plan to save the world! Well the senators (and public) have seen through that ploy and have asked for more detail to be added to crucial elements, such as executive pay to those involved in bailed out institutions, are there limits to the size of loans or bad paper that is covered. How long will the government hold them for? And will they sell them on at a profit? By Monday the document was 42 pages long, by Friday the working version was up to 102 pages.

Whatever we do to fix this the bigger picture also involves fixing the mechanism that allowed this to happen in the first place…………….lack of regulation and oversight of the banking and financial institutions. We have already heard from countries like China, and Germany saying ‘I told you so’ as we sailed towards the iceberg. The markets will never have the same confidence in American investments if we don’t fix it. The days of property prices rising annually by double digits are gone, what it proved is what all grandmothers know ‘Things that come to quickly always end in tears’.

But ironically the objective of all these bailout plans is to achieve one very basic aim…….. Help property prices to stabilize, bottom out, and then start to increase. Once that happens we are all back on the good ship ‘happiness’ as this is an indication that the economy is headed in the right direction.

Is this the way to do it…………..what do you think?

Good news….Our company’s market share of sales of Atlanta homes rose by 30% in August 2008 over August 2007.

The next Blog - Is this socialism?