Friday, October 10, 2008

Who will benefit from the US$ 700 billion bailout package?

Who will benefit from the US$ 700 billion bailout package?

This question has been turning inside my head since the bailout package was first proposed. I have been trying to understand the rationale behind it and have come to conclude that certainly the package is certainly not for the benefit of the public at large. The only person who - as I can see - will get some respite from this bailout is US President George Bush. The only gainful purpose that the bailout package will serve is to buy time so that President George Bush can make a graceful exit from office.

I strongly feel that there is no way the crisis can get over until there is a major shakedown in the industrial sector. Manufacturing houses around the globe that stand on weak economic foundations will collapse and many people will lose their jobs.

Below are arguments to support this conclusion.

US has been the largest consumer of most industrial production both domestic and imported. Capital goods, durables, homes etc. Does it really have the appetite for a continuously increasing supply of so much of everything?

I don't think so - at least not any more for some time to come. There is a point when every bowl must fill and the bowl called US has just overflowed. Availability is much much above demand.
More cars are being produced than the consumers need. More houses are being built that the consumer require.... this list can go on.

In the begining of the industrial era - goods were comfortably sold to all those who had money to buy them. Soon, all the able had bought out. This was when the era of forced marketing came on the scene. Producers sought ways to sell their products - advertising, merchandising et al - every gimmick in the book was used.

There came a time when all marketing measures were exhausted, then stepped in the financiers. Consumers were provided with funding (through financial institutions) so that they could go out and buy more. Availability of credit made it easier for people who did not have lump sum cash on hand to buy and then pay gradually in installments. This lead to the second industrial boom. People went out and bought second and third cars in the family, bigger houses and all the luxuries credit could buy.

Everyone was happy! Folks were getting the goods they thought they needed. Financiers were earning good interest rates. Manufacturers were selling briskly at good margins.

It is natural, when one has to pays up front for a purchase, he will negotiate to the maximum and ensure he gets value for money. When goods are sold on credit it allows to the vendorto make some extra money in the deal.

As is the nature of free markets, competition stepped in. Many financiers mushroomed. They went out of the way extending credit - believe me way out. Soon credit limits increased as more and more credit was handed out to the consumer. In the bid to reach the customer first some financial establishments did not do proper credit worthiness evaluations.

The financiers were happy! They too went out and got loans - in the form of deposits or equity - to finance their customers. The consumers are loaded and loaded with tons of credit - overburdened. There came a period when the overburdened consumer just could not pay back. They started taking loans to payback old loans, and things kept getting worse. He was addicted to facilities credit brought to him and kept availing them too.

The whole thing bloated and bloated and finally the bubble has burst. Financiers are in deep trouble because the consumers are in no position to payback leading to foreclosures.
The foreclosed assets won't sell because there are very few creditworthy consumers willing to buy these overpriced assets. Financiers are stuck with assets that won't sell and have dried up the capital unable to pay their lenders - shareholders, depositers. Giants like Lehman, AIG etc have already tumbled and many more in line.

The US$ 700 billion bailout package will merely slowdown the impact of recession and not stop it.

It is now time that the manufacturers feel the heat. Manufacturers have not yet felt the impact, but they had better brace up. With financing out of the system, very few customers are left who will go out and buy their produce. The crash in the financial system is just a tip of the iceberg.