You can’t turn on the news without being bombarded by gloom and doom stories about our economy, housing and the banking disaster. Who can blame you for being completely and utterly depressed and frustrated about the whole thing? If you’re like me, you’re mad as hell that some bad apples out there ruined your savings, jobs, security, etc.! I’ve written about my feelings on how we got to this point.
I feel compelled, however, to share with you my thoughts on the subject because we all need to focus on getting out of this mess. Mis-information in the media only confuses the matter and slows recovery. So, I’d like to focus on the “bank bailout” everyone’s talking about. I need you to understand what’s going on and how to recognize the truth from the river of news stories out there.
The first thing you need to accept is that banks are a vital part of our economic system. We need to have them to make things work. There is no question or doubt on this unless you want to go back to growing vegetables and working on the barter system. Therefore, to fix the economy, we need to fix the banks first.
This first step is what the TARP (Troubled Asset Relief Program) money is intended to do. It is money that is injected into the banks to prop them up and prevent them from going out of business. The TARP money was NEVER intended to flow through the banks to spur more lending. That would be phase 2 that TARP was not intended to deal with. So, please, don’t believe the news stories where a Senator is pontificating how he doesn’t understand why the TARP money is being horded by the banks. It isn’t to pay bonuses or to maintain fat cat lifestyles. Banks were supposed to hoard the money. That is how they are meant to stay in business.
You see, each bank needs to maintain certain ratios (established by law) of equity (assets) to liabilities. If a bank goes below those ratios, they cannot be a bank and they are closed down. As the banks used this “bad assets” as part of their equity, when the value of these assets went down (i.e., the housing bubble exploded), they were not able to maintain their ratios. The value of liabilities stayed the same but the value of assets plummeted! The government had to inject assets (i.e., cash) in order to get the ratios right again.
So far, $350 billion has been injected into the banks. The other half will be done soon by the Obama administration. This is a good thing, folks. We need the banks to stay afloat.
Once the banks are stabilized, Obama will have to face the more difficult question of how to fix those “bad assets.” That is the subject of another post.
I hope that clears things up a little for you. It’s not good news, but it’s important for you to know the truth.
All the best