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Trickle Down Or Trickle Up?

May 2, 2008
The world's financial system is as weak now as it has been in many decades. Federal Reserve Chairman Ben S. Bernanke has a huge problem on his hands: a very wide-ranging credit freeze up surrounding financial institutions. This is a problem that mere cuts in interest rates cannot cure.

The very low interest rates we experienced in the early to mid 2000's as well as the trend of throwing caution to the wind has left the financial world at risk. This care free attitude was spread by Alan Greenspan; a major Wall Street player who was bailed out of trouble with borrowed funds, has led us down a dangerous path.

The derivatives speculated by Wall Street players do not have the value they thought they had. Now we are left in a desperate race to de-leverage regardless of the cost. Naturally the buyers have thinned out and institutional investors do not want to add to the already overvalued package in their portfolio now that the real value can be seen. We are now finding ourselves in a liquidity emergency to the point of which we have not known since before World War II.

Commercial as well as investment banks are sitting on overvalued assets such as mortgages and private equity loans they cannot sell due to being packaged with derivatives of very questionable value. This is a nice way of saying that Wall Street lied about the value and has overpriced them by billions of dollars. Basically this means that they do not have the cash to make new loans and this is killing our credit based economy. For banks and brokers to make their balance sheets stronger by de-leveraging the banks would need to reduce the number of loans on their books. Doing this would overwhelm the economy and turn a bad recession into a long lasting depression.

This is the reason for the bailout by the Federal Reserves by means of long term financing at discount prices. What other choice do they have? They can let the entire financial infrastructure of the world freeze up or lend cash to financial institutions and take the subprime mortgages and related securities of questionable value as collateral. In this way the Federal Reserve has become the buyer of last resort which is very inflationary. These financial middlemen are intended to take the cash borrowed from the Federal Reserve and lend it out again to higher quality borrowers; unfortunately this is not happening. Theoretically, this would work out as a trickle-down effect.

Why not a trickle-up effect? This bailout is going to cost at least $1,000,000,000,000. Yes, that's one trillion. Instead of giving that one trillion in newly created money to the Wall Street fat cats so they can continue to speculate in derivatives causing more of the same problems that we are facing now, why not give that one trillion to the people of America and let it trickle up to the fat cats on Wall Street? Don't you think giving every man, woman, and child in the US a check for about $3,200 would help stimulate the economy and get money flowing again? That would be $16,000 for a family of five. Why not help the entire population instead of just a few well-connected, fat cat, white collar criminal insiders? Why should they be given a trillion dollars of new money?

Why can't we do this to help all of America in this way instead of a few Wall Street fat cats? Why is it they should be given a trillion dollars of new money to throw around like they have in the past?
About the Author
J Stromsteen is an expert in field of finance. Besides her website, Cheap Auto Insurance, she contributes to Bush's Depression as well as first time home buyer to provide up to date info on the mortgage crisis.
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