Tuesday, October 14, 2008

What is the problem is it liquidity or debt ?

Under the proposed $250 billion plan, the Washington Post reports, there is a risk that banks will take the new government capital and use it to bolster their balance sheets but still not resume lending. The Treasury is not getting any specific contractual guarantee to prevent that from happening.

The Wall Street Journal reports the move to partially nationalize the banks “intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.”

This begs the question we are told this is a liquidity crisis but banks will not lend to the people overburdened with debt - be it personal or corporate debt even if they get the government money.

The underlying debt problem is not solved by these liquidity measures has the banks will reap the benefit.

Until there is a massive write down of the underlying debts in the economy this problem will get worse has the current course inflates the problem and does not tackle the debt problem.

Political Economy Research

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