Thursday, 25 September 2008

The effects of the US bail-out plan

The US government is planning to spend US$700 billion on purchasing bad debts from its banks, so that the banks will have more money to lend to each other and consumers. The idea is to stop many banks becoming bankrupt and prevent a severe recession. There is much debate in the US as to whether the plan is a good idea, and it might not be approved by other parts of government which control the finance.

I suggested in Monday's post that the credit problems were likely to have been caused by factors linked to rising debt in the United States, and by factors linked to reductions in the availability of international lending to the United States. The former factors are common in economic recessions, and are often dealt with by financial packages which, if they do not prevent recessions, at least make them less severe.

The latter factors arise from features of the world economy such as the cost of oil and the size of financial surpluses retained by the US's trading partners. A financial stimulus package is unlikely to rectify them except in the short term, and will lead to increased transfer of money out of the US. The package itself is reported to be funded exclusively by debt. The problems are likely to return at a future date.

It is difficult to judge how much the problem is domestic and how much international, and it is understandable that the part of the US government responsible for financial matters wants to look carefully at the colossal sums of money to be paid to banks.

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