Paulson Plan II
Federal Socialist Banking Positions?
What is going on now?
Although the rescue plan is likely to be effective in opening up the crucial credit markets it will take time to implement and deliver results. It is taking the government weeks to award contracts to companies that will perform each of the plan’s functions and to ensure that the plan is most efficiently and effectively executed.
Although taking a bit of time to get it correct is understandable, delay does nothing to address the overall credit market freeze, to get banks trading with each other, or to help the lack of general confidence in the financial system. The truth is, even if the plan was in effect today it would still have taken time to see its positive impacts.
Unfortunately, US banks were out of time. The frozen credit markets, sinking equity markets and lack of cash liquidity around the world were going to sink dozens of banks. Going into the market close, last Friday (10-11-08), many professionals weren’t even sure if world renown investment banks Morgan Stanley and Goldman Sachs were going to be able to open for business the following Monday. Still struggling from the fallout of the Lehman Brothers failure and fund redemptions by the billions, the system could not absorb additional financial strain and failure.
In unprecedented fashion, the Federal Reserve of the United States begrudgingly took on an equity ownership position in many of the largest US financial banking institutions. Basically, the US government has nationalized many of the largest most influential US domestic banks. This move has received much scrutiny and appeal because it is socialist in nature, in the center of what is supposed to be a country based on democracy and capitalism. Unfortunately, the Federal Reserve had no choice and needed to adopt the “Marshall Plan” that was already being implemented around Europe. As said by Secretary of Treasury Hank Paulson, “This is something that we would have preferred not to do, but it needs to be done to add strength to the system and the global credit markets.”
Infusing capital into the balance sheets of the US banks has an immediate impact on the ability of companies to operate their businesses. Available cash and credit will keep them afloat and functioning because the US Federal Reserve becomes both the lender and creditor of choice on both sides of the transaction. This enables the Federal Reserve to back short term trading and lending between banks which will help un-freeze the credit markets and help operations of both Wall and Main street firms. At this point, the Federal Reserve has basically reinforced every gap in the suffering banking system and has made substantial progress in creating liquid in the credit markets and overall operations of the US financial system. Positive results have already been seen, credit liquidity has improved, and further efficiencies and operations will continue over time. This undesired, socialist series of actions is proving effective and has all but eliminated the possibility of a 1930’s style repeat depression.
