US Government dives into credit markets

By Pete Southern in LiveWire Economics Blog | October 15, 2008 9:55 |

The US government has made its move into the credit market. It is kind of ironic that the world’s most free enterprise economy, under the direction of a “less” government republican president, has made its first move into government-funded credit.

In line with the new bailout plan, President Bush made remarks Tuesday (October 14), and it was announced that the government would investing $250 billion this year to help fund struggling banks and creditors. The purpose of the funding is to support struggling creditor by enabling them to shore up their credit reserves while also obtaining needed cash to immediately open up the credit market to consumer and business borrowers in need of funds.

Credit is the lifeblood of business and housing expansion and much of the US credit sector has been on hold in recent weeks as many banks and lenders have failed. A lack of available capital makes it extremely difficult for many willing businesses to expand through borrowing. Additionally, it makes it harder for potential home buyers to obtain the loans they need to help spark the housing sector.

The first part of the funding involves an infusion of $125 billion into 9 major banks. Shoring up the remaining large banks that help drive the US economy is a main priority for President Bush, and his administration, in the remaining weeks of his presidency.

Another $125 billion is said to be available for other necessary bank infusions later this year. In exchange for the funding, the banks are turning over a portion of their ownership to the federal government. This is something that Treasury Secretary Henry Paulson adamantly agrees is not something Americans should want. However, Paulson and Congress agreed that this scenario was a necessary evil to preserve the credit system and allow for financing to business and consumer markets.

Another caveat to the government infusion of cash is agreement on the part of each bank to place limitations on executive compensation. Perhaps the greatest hold up to the successful passing of a bailout plan the first time through the House was concern about bailout money becoming part of outlandish executive golden parachutes. Secretary Paulson says that preserving the purpose of the cash infusion was the main emphasis of the bailout. The money is expected to be offered for financing purposes to help spark the economy and create growth, and it’s not to be latched onto by the creditors.

It had been anticipated following the passing of the bailout that the first point of emphasis would be for the government to begin buying out bad mortgages and credit assets. Although that is still part of the plan to help the credit markets, both democrat and republican leaders felt the quicker way to positively impact the economy would be to create more capital. This is a proactive approach to moving forward in growth while buying out bad debt is more of a way of improving credit flow through unclogging of the system.

Most Americans remain very cautiously optimistic about the opportunities with the bailout. Investors seem to be buying in based on the 962 point gain in the Dow Monday. Only modest profit taking Tuesday suggests that the dramatic slide in equities last week might be over or at least paused.

Market Recap

The Dow had its largest single day point gain in history Monday with a 962 point gain. This strong move followed up Friday’s late day surge. Global announcements, including one out of the UK, showed that other countries were in the same mood to fight against the growing global economic and credit crises. Thursday, mild profit taking set in with little other market catalysts. The Dow dropped 76 points while the NASDAQ was off by 65. Intel beat its 3rd quarter profit forecast.

Neil Kokemuller
Tuesday, October 14, 2008
10:06 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.

Pete Southern About Pete Southern
Pete Southern is an active trader, chartist and writer for market blogs. He is currently technical analysis contributor and admin at this here blog.


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