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US Financial Bailout

By smithdm3 - Posted on 28 September 2008

The reporting on the potential $700 billion US bailout is driving me crazy. I suppose I can understand why people are upset when they think that there will be a direct federal transfer of money from the Treasury to banks, but really, that's not what should happen.

As I see it, the Feds will be buying securities here, and albeit they are somewhat distressed, toxic assets, but they still do have value. And, they should be getting them at a pretty decent price so they should be able to sell them on the market for a decent return in the future when the system can withstand a little more risk.

See, what is the issue right now isn't that all these securities are bad and have no value, but that the banks are too far leveraged, holding too much risk and don't have enough cash on hand in that case (the securities have progressively gotten more risky and hence the banks need to have more cash assets on hand to offset that). These securities still have value and can be sold on the free market, it's just that no one can add risk to their portfolio's right now, no one but the Fed.

I know that there was a paper released where 150+ some economists say that the bailout is the wrong move, but Warren Buffet says the Fed can make money on the deal. And when it comes to finance and investing, I'll take Warren's word over any number of book learned economists.

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