Obama administration is head over heels and acting fast to implement second phase of bail out stimulus. Having spent almost $300 billion, TARP is looking forward to second half of the show. In the first half, BoA got $45 billion*, AIG got $150 billion so far, Citi got $50 billion and $10.5 billion was given to GM. These industry giants got their share of the pie, since they are termed as 'too big to fall'. Now the gone is gone and the World is really looking forward to, how the current administration spends the second half.
After an elixir of $300 billion, time has come for administration to revisit its premises and look at the outcomes. It should really analyse what it has achieved by spending such a huge amount. Economics is nothing but a business in which you are supposed to make a profit. Results of the first half of the game speak the different story. For those who love statistics, let us look at the numbers. For each $100 spent on Citi and AIG, the Treasury received securities worth $41. That translates into a loss of almost 60%. Here, we are talking about the vested capital of $195 billion. rest of the maths is simple, isn't it? Main objective of the bail-out stimulus was to bring the liquidity back in the system and stabilise the system. Has the liquidity been brought back? Has these giant scale companies created new jobs? Has the investor confidence been brought back? Has the housing system been stabilised? If the answer to all the questions is NO, Obama administration should really revisit its premises. We have recent example of AIG which after receiving $150 billion, has failed to recover from the mess. Fed has invested(yes, invested) such a huge amount for an interest rate of 11.5% with a view of 2 years. Aftermath of that doesn't look promising. AIG might declare the losses of $60+ billion for fourth quarter. I don't think it will recover from the mounting losses and the shareholders' lost credibility. All these things bring the question back to the surface - what has government achieved so far? Who to blame - Fed for investing our hard-earned money in 'destined to die' companies or the companies themselves for their poor business strategies?
I will not blame the companies which have received the package for spending money on self-preservation instead of bringing the fresh funds into the market. This very tendancy of self-preservation is natural. If you throw a float towards a drowning man; expecting him to rescue an another person going down next to him, you are committing a foolish mistake. Either you throw two floats or you decide who do you want to save. Similar thing is happening in the market. The so called 'Too big to fall' companies have half gone down. I am not going to mention who is responsible for their turmoil - poor business strategies or governement intervention. Of your entire fleet, your big carriers have already gone or are on the verge of going down. Time has come to make a strategy shift.
In current crisis, I believe in those companies which are fit for survival no matter how small or large they are. Obama administration should pick such small or medium scale companies that have the potential of providing returns over the period of time. I am using the word 'returns' in a very broad aspect - be it the profits made by these companies, number of jobs created or whatever falls in this category. If we have not forgotten the very principle of American Economy, we should clearly remember that it is based on consumer spending(a very crude word but speaks the truth). To make consumers spend, they should have money and to have money, they should have jobs. It is a cycle. We know very well the gloomy job data released recently. Large / Giant companies have already lost their ability to create new jobs in the market. Having said that, I am not backing the bail-out strategy. What I mean by helping those 'fit for survival' companies is to provide them with a necessary platform to do their businesses. For instance- liquidity, re-defining the lending strategy and for god's sake let the market decide what is best for it.
Let's discuss the solutions.
Liquidity can be restored by not wasting money on giants but by holding the reduced interest rates for a while. I know at this hour, inflation would be a bed bug. However, we can mitigate the inflation by moderate tax-cuts(as currently planned by Govt). Since, the credibility of credit rating agencies itself has tumbled aftermath of global economic crisis, we are in in dire need to re-define our credit rating techniques and credit policies. In addition to this, administration should revisit lending strategies like reducing short term interest rates and modifying fiscal policy accordingly. However, government should not lend recklessly and at the same time, through government expenditure on public sector, should create more jobs, though temporarily.
The third approach is the last resort but the very important one. We should let the industry consolidate. That is the only way to achieve stability in the market. Simply by keeping dying companies on ventilator won't do any good. We have lots of avenues, where government can park their bail-out money. The reason being market knows very well what is best suited for it. There is a saying in the market that government should never invest in those companies where market has turned its back off.
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