Is bailout really neccessary, no I don't think so.

Few days back, I wrote a post stressing the need for bailout. I came across an article which which pointed out that how the bail out is going to make life worse for the common man me explain how it is going to be worse.

Say Mr.X has taken a loan of $200,000 from a mortgage firm for buying a house. The mortgage company in order securitize the loan, converts the it a bond and sells the bond in the open market. The bond is bought by an investment bank or a mutual fund or a pension fund since it offers good returns. In order to securitize their investment, the entity which bought the bond insures it with an Insurer. when Mr.X defaults, then it sets off a chain reaction which affects all those involved in the chain of events, i.e. the mortgage company, investment bank & insurance company.

The guys with with fat pay checks in Wall street never cared about the fact that this vicious chain may crash. All that mattered to them were profits, never the means to achieve it. Wall street being the brainchild of capitalism came up with a master plan to save their skin from this economic breakdown. The US government $700 billion bailout save only the financial companies from bankruptcy and leaves Mr.X in total disarray.

The bailout has put a double burden on the common man, first $700 billion has been made raised from the tax payers money which includes Mr.X's contribution also. We need to remember Mr.X has been shown door from his house has he has defaulted his payments. His house would be auctioned off now and say it is sold for $50,000. Mr.X still has a liability of $150,000 to his mortgage company. In other words he needs to pay for the house he doesn't have and also he has to pay for preventing the financial institutions from crashing, the very same institutions which has left him in lurch. These guys do have a lot of brains.

Had this bailout not happened the entire world economy would have collapsed and a new world system might have been formed. Of course we would have faced many problems, but I sincerely believe it might have cut off the wings of Capitalistic Imperialism. The bankers have made sure that this didn't happen and Capitalism continues to thrive so that they can reap it's benefits.

Friedman points to Gandhian ways for recovery

Today in New York Times, Friedman has written a nice article, Why How Matters, in which he points out that it is not the goal alone which matters, but also how we achieve the it.

Gandhi had always argued same, it is called the Means and the Ends concept. i.e. it is not enough that we must have a very high goal, but the means we employ to achieve the goal is equally important. Though I am not a great fan of Gandhi, I greatly admire him for this particular trait. I believe at this hour when one of the biggest ever economy crisis of post World war II era is slowly catapulting, this concept of integrity is very important to improve not just the economy but the living standard of the entire world.

Bailout is neccessary

I came upon this article by Scott A.Kjar . Though his argument theoretically seem correct, I believe the bail out is necessary without which lot of banks would collapse and the one to be most affected would be the common man. The bailout might be helping the banks whose policies were managed by the greedy and dumb guys, who failed to foresee the catastrophe, but I don't find this reason to be strong enough for people who had invested in these institutions also to suffer.

The increasing liberation policies and complex instruments make the functioning of banks and economics incomprehensible to an ordinary man and is really tough to expect him to analyze this situations beforehand, when seasoned economists themselves have been left confused. The bailout in turn must be followed by stricter regulations of the market and trail of those responsible.