Bailout Plan : What Needs to Be Done More!

Hi,

Well yesterday and today the news is out again that the Federal Reserve is changing the plan of how to bail out the financial institutions. Back in October, the Reserve Chairman wanted to use the money of the bailout to buy the devalued assets on the bank's balance sheet. Now the Reserve is saying that his October plan was not good, and he has a new plan. The new plan is to invest the cash in buying shares in the banks- becomign a shareholder in the bank.

Well to give credit to the Chairman of the Reserve, the new plan is 100 times better and safer for taxpayers and government and banks than the October plan. If you are interested to know why, I will write about assets purchases versus equity investment later on today.

But for now, the plan to invest in the equity of the banks will give the banks the needed cash to "deleverage", or pay the loans THEY OWE to other banks and financial insitutions. Since the banks have large debt to equity ratios (sometimes 30 to 1), they need to pay down the leverage in order to have a capital strucutre that is more sound, structurally stable and allows long term investments.

This plan will help the banks to ''deleverage"- which is good- but will not necassrily mean that the recession will end. Nor will it mean the credit crunch will be over and consumers will have ability to take out loans to buy cars, houses, pay for furniture, etc.. The credit crunch is still going to stay with us for a while.

You might ask, why and how and when will the banks be back to normal in running after us to take loans? When will the lending start again for me as a consumer? When can I go shop for a better car loan among competing banks? When will I be able to make banks give me better rates on my home loan? Well this is long way. Why?

The banks are in the business of taking money from investors and depositors and lending them to others people for a higher interest than they pay thier investors or depositors. So, basically the banks have CASH as their primarily asset. Lending cash out in an enviornment of recession is extremely risky business. But of course, if banks honker down and hide their cash, the whole economy will not get out of the recession. So, it is the chicken and the egg dilemma.

Banks have to lend to the businesses to finance their inventory and working capital, but they are afraid the companies will not do a good job in managment and will go bankrupt, thus losing the ability to pay the bank.

Companies need to make a profit to convince the banks to lend them. But they are not able to make a profit with the consumers afraid of losing their jobs and not buying. As consumers hoard cash and stay at home and limit their purchases to the minimum, companies selling non stable services or prodcuts will face declining sales- GM/Ford/Toyota, Starbucks, Circuit City, Retailers of various products. As companies have declining sales, their fixed cost will have to be lowered to keep the company floating. Lowering fixed costs means firing people and closing shops and buying less inventory. As people are fired, less people are buying, and the downward spiral of recession takes a deeper dip and I am forecasting a depression in the coming year.

This is not going to be an easy ride and I recommend that every company and every person save as much as possible in their businesses. Now is the time to close shops that are not profitable. Now is the save on costs of all type.

I have installed Skype in the company and invited all the people I work with and friends to start using SKype to communicate with me. My telephone bill will be cut by more than 70% at least.

The same will go to all expenses in the company. On a personal account, I will only fly with low fare airlines and at the cheapest rates. I will only stay in the lowest rates in hotels. I already started searching the net for the best deals in the cities I ahve to visit on business.

Living the times is an enjoyable experience because it means we are adaptable and we are wise.

But back to the execution of the bailout. I think that the next probelm will be the credit card market. There is more than $1 trillion in credit card debt in the US alone, and much of it is bad credit.

I will talk about this in my next blog. Now I will go have my lunch.