What is the problem with these US banks and AIG?ok maybe with the subprimemortage crisis they do have to write off debts but surely there is financial mismangement within these banks. Should anyone pay |
What is the problem with these US banks and AIG?ok maybe with the subprimemortage crisis they do have to write off debts but surely there is financial mismangement within these banks. Should anyone pay |
It's an adjustment to trickle down economics. Since the base has not been able to perform and satisfy it's debt load, the debts held by the financial institutions (assets) no longer hold their worth. The "bad paper" in most cases has no value because no one is buying it. The loans held by banks are not being bought or traded. The cash has stopped flowing upward into the larger corporations.
Just like any mighty oak tree, without good roots, the top dies.
This is what has happened to our economy. It took a few years, but the policies initiated by the Regean era have finally caught up with us.
Job numbers are used as an indicator instead of personal income. It is obvious that 3 minimum wage jobs do not offset the loss of 1 high paying construction or manufacturing job. Service jobs are just not that high enough income. Over the time since 1955, families have needed to work more hours to survive. That is why most families require 2 wage earners.
Today, income loss coupled with rising energy cost leading to higher real inflation rates a situation has arisen where enough loans are defaulted (mortgage, credit card, medical, etc) that the lenders simply are not collecting enough to keep afloat. Add that no one wants to buy these bad loans and we have the bank failures.
When the revenues were not provided by taxation to cover the expense of a couple of wars, we have the government borrowing money to fund them. The money that might have gone to banks went to the federal government instead. Banks pay 1-2% on savings account funds. The government pays 5-7 % on T-bills and bonds. Investors go for the higher rate of return of course.
Unfortunately, I can only see a devaluation of our currency as the way out. The interest on the $ 9,500,000,000,000 debt payments are $ 500,000,000,000 a year. Since that money goes to many foreign investors, it does little to bolster the economy by being spent here.
We have no choice but to pay, but if AIG were allowed to fail, the cost of the failure may have been spread over a wider base and not borne entirely by the families that are struggling even now.
Financial companies have been "living beyond their means" for so long. The drive to be successful, #1, profitable (to satiate shareholders) causes companies to 'fudge' information, to 'defer' losses with the hope that eventually the economy will turn around allowing them to write off losses against more substantial gains. Also for loans and installment credit when consumers feel the pinch of economic troubles they also try to 'defer' their payments and often run into financial problems. The housing problems have compounded it now companies are having to pay the taxman.
The worst is not over. But the good thing is the government has lots of taxpayer money to use to bail out companies. But that's ok other countries do it too. Hell, South Korea bails out criminals just to keep their economy afloat.
It is not so much bad debts that are actually being written off, but the paper behind debts that are probably not bad is being written down because the value is so uncertain. If you have an asset for which there are no bids, what is it owrth? you don;t really know. Conservative accounting woudl say you have to value it very low.