Is it a $700B Bailout or a $700B Rescue?


I am not about to claim that I understand the eventual fallout of the $700 billion Bailout/Rescue Plan that just passed in the House and, earlier in the week, in the Senate (take your choice on whether you think bailout or rescue is more accurate). As others have said, I have mixed feeling about the bailout/rescue plan. My gut reaction is let the banks take the loss. But I know that the world, including the economic world, is more interconnected than that, and a bad outcome for some financial institutions will not necessarily be confined to those institutions.

Unfortunately, without the bailout/rescue plan, a loss of jobs is a possibility. For example, small as well as large businesses are having trouble borrowing the short-term loans that businesses have commonly used, at least up to now, to pay immediate expenses such as payrolls. (Business income can be meager at certain times and boom the next week. Companies use these short-term loans to pay immediate expenses.)

Even the state of California is having trouble borrowing the money needed to stay afloat. As Bill Lockyer, State Treasurer, stated earlier this week, the state is in jeopardy of running out of money by the end of the month. California usually borrows money at this time of year to cover the state budget then pays this short-term loan back in the spring when taxes are collected. But guess what? This time the banks are not willing to lend.

How all this works out we will have to see. But even with the $700 billion cash infusion into the financial institutions there is no guarantee that the banks will use this money to make new loans. They might decide that they need to keep it in reserves instead of use it to make loans in the current risky market.

Next week: An example of why so many are outraged by the bailout/rescue plan.