What a hell happening in Wall Street? - Part 3

As mentioned in the earlier posting, we are going to talk about $800 billion bailout and U.S economy now.

This bailout plan is the first step from FED to recover the Wall Street, ultimately the economy as well. As a part of this plan, they are going to buy the bad mortgage assets from U.S banks. This will inject the liquidity(funds) into wall street and unfreeze the market by improving the current lending situation.

When this bailout bill was put forth in U.S congress on previous monday, it failed with votes of 228(against) to 205(support). Most of the Republicans were against this bill since it's going to be tax payers money to fix the wall street fault but there were no benefits for tax payers included. This resulted in market crash by around 800 pts, highest single day crash after 1983 for Dow Jones Industrial Average(DJIA) and other indices also fallen down. Investors lost around 1 trillion dollars on that day. Moreover investors lost around 4 trillion dollars on september alone and lost around 9 trillion dollars since jan 08.

On adding, sweetners such as raising the ceiling on insurance for bank deposits from $US100,000 to $US250,000, and adding up $US150 billion in tax breaks for middle class families and business in the bill, it was put forth again in U.S congress on previous thrusday and it went through with votes of 263(support) to 171(against) and later approved by White House to enact the bill.

Until now, federal government spent around $1.8 trillion in bailout and their debt increased to $11.3 trillion dollar. Except, $700 billion bailout, others provided will be profitable since they were provided with high interest rates with collateral. But, those mortgage assets which government going to get inturn on providing this $700 billion bailout will be profitable or not? What will be the value of those mortgage asset values in future? Noone knows the answer to this question.

In september, around 159,000 lost their jobs, the deepest in 5-1/2 years, which is more than 59,000 predicted by reuters in their survey. Morover, Labor Department report showed 760,000 jobs lost so far in 2008. This resulted in weak personal income and spending hence further job cuts may happen in manufacturing and factory order and shipments sectors as well.

Where this situation leading to? Everyone says the answer as recession. What is recession? In simple terms, decline in the the growth of economy (i.e) negative GDP growth for two quarter or so.

Does bailout provided will improve this situation? not really. Then what will
make this to improve? Fed Rate cut. What is Fed Rate cut? This is rate at which one lending institution lends money from another(mostly from Federal Reserve). How does layman going to benefit from this? Prime rate is the rate at which consumer and business gets the money from lending institution which may be around to 2-3% more than fed rate. If fed rate decreases, prime rate also decreases. If loans are available cheaper than before for person and business, then the following cycle will get triggered,

money flows -> consumer consumption of manufactured product -> manufacturing sector improves -> other dependent sector grows -> more jobs -> economy grows -> money flows

I hope this might helped you to understand the wall street. Your feedbacks about this series are welcome.