The Bitter Pill Of Bailout Only Medicine For Deadly Foreclosure Crisis

The bitter pill of the bailout package of $700 is the only medicine for the deadly foreclosure malady – no matter how unpalatable it is. The taxpayer needs to be explained so as to be able to swallow it with good grace and allow it to work to heal the system.

The government will be using the funds to buy mortgage related securities that nobody else will touch. These will be purchased by the treasury at a rate that is slightly more than its current depressed worth. This will inject capital into the gasping banks from which the common man will benefit. The banks will go about their normal activities. The government will sell the securities at a later date. This is the plan of action against the background of the raging foreclosure crisis.

What this operation will cost the taxpayer cannot be calculated as it depends on the recovery of the market. The treasury will be getting the $700 billion by borrowing across the globe. It will do so by selling the securities.

The money spent will not be added to a deficit budget, as it will not fall under the category of spending. The country is standing on the brink of a disaster and any move taken even if it does add to the deficit should not be considered as a bad plan. It will contribute to 2% in relation to the economy and that is well below the 6% and 4.5% deficits noted during the early years of Reagan and Clinton respectively. The deficit may increase with the advance of recession but this will not necessarily be because of the rescue activities.

The bailout move is not inflationary in nature; neither is it deflationary. The money that could have been used elsewhere is here being used for rescuing the foreclosure related crisis. Short-term loans are being given to financial institutions that cannot avail of other borrowings. The government can lend without limits. The institutions are offering various collaterals and the expectations are that the loans will be repaid in full. These loans fetch interest for the feds to the tune of 2.25% minimum. Thus the government will be making money. Purchase of short-term commercial paper from corporations will also earn interest. This will cover losses if the papers go sour.

Looking at it from all angles the broad-spectrum antibiotic is the best bitter medicine.