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What is in the bailout plan? :
The essential idea is to spend $700 billion of government fund to buy bad mortgage from the banks and other financial institutions to keep them afloat. Right now nobody wants to buy these bad debts. Therefore, they don’t have any value. This is why the federal government needs to step into help big financial players like Fannie Mae, Freddie Mac, and AIG to stay afloat. The hope is that investors will gain confidence back from the government rescue, and everyone will start to put the price tag on these assets once again.
Economist’s View:
Many economists and investors around the world are still doubtful of this $700 billion bailout plan. Some financial analysts view that the plan can backfire. The government may end up overpaying for the mortgage securities, if the home prices keep falling.
In addition, banks and other financial institutions must mark down the value of their debts according to market prices. But since there is no market price for these debts, they have to make a guess for their prices. Some bank will mark down more than the others. In the worst case scenario, the market price by the government may be lower than the market price by the bank. That would mean another episode of housing credit crisis.
Nobody knows how much this will cost the taxpayer. The idea is that the government should hold on to the mortgage securities until the market is better. There is a possibility for a profit. However, if the housing slump is at its worst and number of mortgage defaults are on the rise, the government may end up loosing a lot of money.
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