Governments bail out money fuel the financial crisis fire than dousing it

Posted On 31/10/2008

Filed under economy, Food for thoughts
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Today, we see more and more government around the world are using all sort of “money printing” method to bail out the merchant banks and the market.

Indeed, it seems government want to help the bankers to recover the losing ground by giving them more money, ignoring the bad debts (e.g. credit cards) that piling up behind due to company failed to meet their payment.

In short, the corporate world that need the cash has been starving by governments policies to rescue the bankers, instead of giving the needed cash to the production field, government around the world just <strong>bust more company <strong> by helping the banks.

It is common sense, due to banks natures of “take the umbrella during rainy day”, banks will reluctant to borrow, thus cut down the lending pools.  And some banks even taking step to reserved funds injected by governments in order to cushion their own credit card crunch, continue the high credit card interest rate Russian rollete to sustain their profit.

Unlike the experience learned from Asian financial crisis, I think the bail out are unlikely to work.  Like massive forest fire, when the water dousing practice failed, the fire fighter will take another practice  : cut off the fuel supplies, prevent the fire from spreading.

In short

Forest Fire = debts defaults that bringing down the banks
Burning Forest = Bankers, insurer that burn the cash that needed by typical corporate to survive.
Healthy forest = Corporate and banks that are not burn by the subprime crisis. Nevertheless, some are lending money to banker that affected by corporate. And some corporate are having account in the “burning forest” banker.

Fire barrier = A zone that SEPARATE corperate from failing banks, thus allow the healthy forest continue to growth.
IMHO, the financial crisis are so wide spread that, the piling up debts from different financial product will be ignited by humongous debts defaults.

To prevent the “fire” spread further, government should create a barrier, froze the failure merchant banks debt interest, transfer healthy corporate that tied with those “burning” banks  to healthy banks, and inject money to healthy banks to cool down the cash shortage.

This will save much lots of corporate, instead of letting corporate become part of the “fuel” that spread the financial crisis fire.  As long as corporate (large industrial to SMI/SME)  job-cut can be reduce, it will prevent corporeate loan and personal loan debts become the new round of burning fuel to the financial crisis.

One Response to “Governments bail out money fuel the financial crisis fire than dousing it”

  1. Jefus

    1 Msian banking is not at all transparent. The traditional stone walling was always there. You will always hear rumors of somebody /sombodies holding a humungous debt and have been long overdue and he/they remain in power. But when a serious rumor starts flying, the banks will be in a fix to quell such a rumor. Lack of confidence.

    2. where credit card is concerned, it takes two to tango. if someone gives you 10 pieces of plastic and tell u each one has a 20k credit limit, do u max out all of them and hope to cancel them off when you can’t get anymore ‘free money’? who is at fault, the lender or the borrower? Isn’t it a question of discipline? And poor understanding of how debt works?

    3 If you remember, the co-op run on confidence, and recently, the 1997 Asian crisis, people queue up all night long to withdraw their money from banks in the vain hope to save their money from faltering banks. ( Of course it would not help as long as u see the RM on your money, you cannot stop its devaluing. ) And Singapore banks offering RM deposit rates of 10% for every million banked in.

    4. Now amplify point #3. What happens when the central bank cannot / will not lend out day to day and interbank lending collapses? Where will the individual banks get their liquidity? And when the local depositors get wind of rumors of this nature begin their withdrawal? Mayhem. The collapase will feed upon itself, that why the British Finance Minister A Darling came out to defend their ailing / failing banks some months.

    Moot-T freezing a merchant bank is not the solution, liquidity and confidence is, that’s why it will not be easy for Msia.

    There is a moral angle to job cuts, which is not given priority. Remember when a young person joins your company, he is also investing his time in the success in your company. So, to unload him during times of hardship will become a two- fold problem for him. He is unemployed in a moment of economic weakness, ( hard to find another job) and the corporate decisions making process of which he has no part, failed and he bears the brunt. Many are now taking the view of punishing the CEO rather than unloading workers at this time. ( Yup, I know, not in Msia)

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