Bail Out Bill

It appears to me that many people who claim that the bail out bill only benefits the rich at the expense of the poor don’t seem to understand that the proposed bill calls for the U.S. Government to purchase distressed loans from lending institutions in order to provide them with the capital necessary to make new loans. The purchase price of these distressed loans would reflect a highly discounted price reflcting the troubled nature of these loans. These purchases would not erase the losses that the lenders have from making these loans, but would simply buy them at their current discounted fair value.

In fact, if the markets eventually improve, the Government may actually end up making a profit on these loan purchases. The $700 billion price tag for this plan is only the gross cost of purchasing the loans, and does not reflect the net cost which will be absorbed by purchasing the loans. Because these loans will be purchased at current highly discounted prices, overall during the period of holding these loans, there may in fact not be a large cost to taxpayers from this program.

The following is an excerpt of an interview with Warren Buffett of Berkshire Hathaway, one of the leading investors of our time(see http://biz.yahoo.com/ap/081002/buffett_economy.html ):

“Buffett compared the U.S. economy to a top athlete who has suffered a sudden and severe heart attack. He said the proper response to such a heart attack is to use a defibrillator as soon as possible, not argue about the precise placement of the paddles or argue about whether the athlete should have taken blood pressure medication beforehand.

And Buffett said taxpayers will eventually turn a profit on the $700 billion plan if the bailout passes and the U.S. government buys mortgage debt at market prices.

“We are not spending the money. If we buy these assets intelligently, the United States Treasury will make money,” Buffett said.”

In my opinion, some sort of government program to provide capital to the financial markets to make new loans is absolutely necessary. Without a capital infusion, lenders will simply stop making new loans. This credit crisis does not just impact “Wall Street”, but significantly impacts the people on “Main Street”. If loans to purchase homes or to invest in small businesses is not available, this will have a huge impact on most everyday people.

Therefore, I encourage everyone toemail or calltheir congressman in support of some type of government program to address this capital shortage in our financial system. The House of Representatives defeat of the “bail-out” proposal is completely political. Most of the votes against the bill were by politicians facing a close re-election race. Since most Americans simply do not understand the urgent need of this bill and what the effects will be to our economy if some sort of program is not passed, many ill-informed Americans have been deluging their congressman with emails proclaiming that the bill is a bail out of the rich at the cost of the taxpayers. This is simply not true. What it does is simply provide new capital to make new loans by removing these troubled loans from the books of the lenders at a high discount from their face values reflecting the losses which have been incurred. This does not remove the losses from these institutions but just makes it possible to make new loans.