Will the bailout prevent a recession?
No.
Many bad loans were given and that money is lost forever.
Most banks in US are highly leveraged and not capitalized enough to absorb such losses.
Without a government intervention, these banks would go bankrupt.
A government-supported bailout will do two things:
- By absorbing the bad debt, it will prevent the rot from spreading to the good banks
- It will allow banks to sell the assets at a slower pace and thus get better prices.
Someone will have to pay the price for bad loans.
Either it will be the government or the banks.
In both cases, US economy will lose.
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From now on, banks will use less leverage and also be careful about whom they lend to.
This mean the credit availability in the economy will shrink.
This single reason will be enough to send US into a recession.
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Without a bailout, the entire banking sector will collapse. Even good banks won't be spared.
Hence the bailout is essential.
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How effective will be the bailout package?
At present, I have no idea.
It is still unclear what the government plans to do.
I am sure even the US government doesn't know what it plans to do...
.
It is essential to do something and so the government is trying to do something.
Bailout is Enough to Stem the Crisis?
.
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