The opponents argue that root cause of the financial meltdown was irresponsible behavior of some politicians who thought that credit can be given to everyone and pushed hard for it. These kinds of politicians should not be removed or punished using economic mechanism. The same opponents argued that the approach of the government to bail out the financial banks and the economy is a socialist approach and should be abandoned.
It is not only enough to bail out troubled financial institution without changing the management because keeping them in place means that their policies will continues and the impairment they brought about will even be bigger. Finally, it does not make an economic sense when the companies that receive huge government funds for their bail out continue to pay a lot of money to its executive. This has caused ripples in the domains of the tax payers. Loan guarantees The government provides guarantees to help business and consumers to access credit.
This is in order to encourage financial institutions to lend out their loans without the fear of driving itself into deeper financial crisis. Although this is a move of good intent by the government it should be noted that this good intention may not yield any positive results as most businesses and consumers may fear that borrowing more money especially in this financial crisis period will push them even deeper into financial crisis. It will not be enough only to guarantee loan there has to be a positive public education to ensure that the business and other good borrowers are encouraged to take loans.
Failure in which may result to no response to this move. Another problem is that the government money which is the tax payers money maybe misused in the sense that some business and other borrowers may fail to repay back the loan borrowed by them either intentionally or unintentionally. Intentionally, in the sense that they may devise loop holes to avoid paying them and unintentionally if the economy continue to move from bad to worse. Private public investment fund
In a bid to improve the liquidity of the mortgage institution the governments have decided to buy bad mortgage based security under the private investment fund. The government provides capital and financing to leverage private capital to mop up toxic assets that are dragging money lending institutions down. This gives the financial institutions a chance to clean up their balance sheets while allowing the private buyers to determine the price of the illiquid mortgage based assets. The toxic assets to be addressed include had –to –value mortgages and mortgage backed securities.
This move have already triggered panic in the stock market in the US because shares of the financial institution rose the most in twenty years as major indexes gained about 4%. In addition, companies selling their troubled assets may attract negative rumors that may affect their demand in the market thus putting them in a very uncomfortable position. The trouble is that government intervention is a short term move and if the enraged financial institutions failed to stabilize and return to profitability then it will have to go down the lane of bankruptcy causing the countries tax payers billions and this will have been a futile exercise.
The government may not also have sufficient cash to lend out to settle this objective. Consumer based rescue The government creates a new consumer lending initiatives to kick start the secondary lending markets in a bid to bring down lending costs to responsible borrowers. This was meant to help home owners to pay their mortgages during the tough housing crisis by committing billions of money to reduce monthly payments and guidelines to identify loan.
It will be more appropriate if the government retain the private banking mechanism for home owners and insure bank mortgages instead while leaving banks and lending institutions with the incentive to refinance and issue mortgages. This may be done by creating and institution to handle these concerns. Through this, financial distressed home owners will be in a position to refinance their mortgages and stay in their homes by developing an acceptable and negotiable terms of repayment.
Governments should revert to traditionally mortgages underwriting standards or modify those traditional mortgages that suits the current market demands to avert future sub-prime mortgage crisis?
Bernanke, Ben S. (2008-05-05) Mortgage Delinquencies and Foreclosures Columbia Business School's 32nd Annual Dinner, New York, New York. DiMartino, D. , and Duca, J. V. (2007). The Rise and Fall of Subprime Mortgages, Federal Reserve Bank of Dallas Economic Letter 2(11)