Market Meltdown in USA
Economic Bail Out
– a thought model
Readings as a visitor in USA Summer 2008
US Economy Bailout
The US Budget Estimates
Table S–1. Budget Totals (Dollar amounts in billions)
2008 2009 2010 2011
Budget Totals: Source - Budget of the United States Government, FY 2007.mht
Receipts 2,590 2,714 2,878 3,035
Outlays 2,814 2,922 3,061 3,240
Deficit −223 −208 −183 −205
Gross Domestic Product (GDP) 14,521 15,296 16,102 16,955
Budget Totals as a Percent of GDP:
Receipts 17.80% 17.70% 17.90% 17.90%
Outlays 19.40% 19.10% 19.00% 19.10%
Deficit −1.5% −1.4% −1.1% −1.2%
US $ 700b bailout (now estimated ) is about 25% of
annual revenue & about 4.5% of US GDP
CONSUMER PRIC E INDEX: AUGUST
August leve l of 219.086 (198
was 5.4 percen t higher than in A
If it is coming out of the budget, at what cost?
Health & Human Services ? Defense? Education?
Homeland security? Agriculture? Energy? Veterans
Affairs ? National Science Foundation? NASA?
Else from where?
More budget deficit ( inflation )?
Yes, some are
free to decide fate
of those who are
unable to decide,
ed swee Henry P
Treasur ping ne aulson h
y Depar w powe as
in gover tment a rs for th
nment f s he see e
financia unds to ks $700
l assets purchas billion
liquidity from fir e troubl
or inves ms facin ed
tor conf g a lack
my t hrough t
he U .S. econo
es will see t
…he ho p s.
and ked that
discr th th
etion at the Tr ere be n
over ea o
whic sury Dep judicial o
h ass a vers
ets s rtment i
houl have ght to th
d be e
si dent’ s men
pre ing on
C a n a ll t
hing b y
achie v e a ny t
m ptom s?”
congre ite House
ve asked … ” Wh Why?
“ We ha hort time
hug e in s
around 2% annualized GDP growth
Negative saving rate
Inflation National debt closing in to GDP
High transaction cost
Reducing disposable incomes
Unemployment 6.1%August 2008
GDP growth 1.9%2Q 2008 over 13 trillion in 2007
CPI inflation 5.4%August 2007–August 2008
National debt $9.792 trillion September 24, 2008
Poverty 12.5% in 2007
Insensitivity for borrowing originates like this
US Government Securities US $
Holding break up Billions %
Japan 593.4 22.17%
Mainland China 518.7 19.38%
UK 290.8 10.87%
Oil Exporters 173.9 6.50%
Brazil 148.4 5.54%
Banks 133.5 4.99%
Luxemburg 75.8 2.83%
Russia 74.8 2.79%
Sub Total 2009.3 75.07%
Other countries 667.1 24.93%
Total national debt in July 2008 2676.4 100.00%
US Trade deficit partly financed this way.
Above is external debt
Recent internal debt is independent of above
Feel good or populist
solutions will just
borrow some time…
many things need
Make or Imports
bailout as initiated will just help
system to survive to keep
markets pulsating & keeping
problems in place. With most of current
income discounted for living the way
most people live.. by discounting the future
Wiser will find their savings & investments
their values reducing …
Thereal purchasing power is scarce
to keep markets stable – then from
where growth will come?
buy durables, cars &
….how many can
houses if credit cards /loans are not
… how many people will come forward to buy
The answer is obvious – very few.
Then how the operating manufacturing
companies / shoppers will remain
September 24, 2008 - The nation’s home builders today called on Congress to move
promptly to enact the emergency financial rescue plan proposed by Treasury Secretary
Henry Paulson that is designed to stabilize worldwide financial markets and restore
consumer and investor confidence in the U.S. economy.
… investors are holding units they would like to unload if they could -- just take a look
at the condo inventory, which jumped to a record 769,000 units in July (’08)
commands to deal with the
cause of causes, if
USA wants to remain strong & retain
…since lenders do not like to hold property, they won't hesitate to dump houses on the
market as fast as they can -- and since they've shown they are willing to write assets
down to virtually nothing
..criticizing is simple, but its too late now.
Clarity & sense of direction is the
need of the time for lasting solution.
A good thought model is desperately
needed. It MUST evolve from the
diagnosis & prognosis – with
causes & cause of causes.
Lets build up the model – at least we
can correct what we can.. to help
sincere, honest and
purposeful thoughts from stake holders
to built a solution model is a process – a simulation
with real life data.
Fortunately the American spirit has proven
itself time and again by achieving good results out
of impossible conditions. The current
situation is too precious to be an
Does not matter how others defines the urgency -
such solutions will take time to get built up.
Time of suffering is the real cost for
something wrong of this magnitude.
Such problems, unfortunately, can not be
dealt with in one go.
No one can have real insight of the
We may need to assess the larger impact
It is always possible to take ‘problem
solving’ as opportunity to create something
better that was not there to begin with.
So let us split the problem- break it down.
THINK There is always a better way of
Lets look at some of the variables involved.
This is the demand side
The First Variable
Household income in the United States in 2007
Households in ‘000 % Households
0 to 25000 31,995 28.26
25000 - 50000 30,211 26.69
50000 to 75000 20,752 18.33
75000 to 100000 12,428 10.98
100000 and more 17,813 15.74
Total 113,199 100.00
Who amongst the above
-have borrowed and paying regularly?
-have borrowed and likely to default?
-will buy houses at disposal?
-can buy and borrow with some equity of their own?
WASHINGTON (MarketWatch) -- U.S. home builders sharply reduced the number of new
homes starting construction in July and dropped the number of new single-family permits
to the lowest level in 26 years, the Commerce Department estimated Tuesday. Housing starts
fell 11% to a seasonally adjusted annual rate of 965,000 in July,
…a common sense approach ( and deviating from
the normal accounting / valuation norms)
look at the collateral values on real time basis –
replacement cost basis.
…knowing real asset values and losses incurred by
the lenders can bring us out of box.
…it is one way of looking at the problem
…forget what the books say
visualizing a thought model.
Forget they were built earlier and have problems – just forget.
This is useful as the loss in value of
collaterals is a
demand / supply
gap in the first place and secondly its
also in finding credit
worthy buyers – which are
the real causes for the present scenario.
These factors need correction for future solutions.
why there is a lower credit worthiness?
Unemployment, No savings, already
discounted future earnings – all leading to
lower equity in houses
This needs to be corrected in the real bailout
process. A big job by all
means -even at cost of US$
Who is looking beyond present ?
The U.S. government has taken control of mortgage giants Fannie Mae and Freddie Mac
do need houses, but some are
unable to pay for them effectively.
What’s the purpose of committing huge resources
ahead of time?
How much of house building is funded by
A wrong judgment in this information age ?
All wheels of this
One thing is certain -
vehicle are not running at same
speed – so where it will lead?
Is this a beauty of free enterprise
& free economy?
Do we have initiatives to correct or
market alone will do this job?
No still there is
election coming on. Some action
must be taken – urgently – but an
effective action – a real
Realizing the best value for existing
properties is a major part of the solution – to
protect the bank assets and synchronizing
speed of new constructions of
such properties is essential.
The losses the lenders face is because of a mistake -
absence of real selling and
lending function. Both builders and
lenders are responsible for this. This needs to be
In a market economy each will
think of own interests first, but
each one must concede
something for the normalcy.
Can, between themselves,
these forces will work it out on
No still there is government
election coming on, urgent action is
essential – but they also know it has to
be effective action – a real
correction. Pray god they remain
uninfluenced by lobbyists.
Tovisualize the fragments of
thought model lets start thinking
Find credit worthy buyers for
foreclosed and new properties.
Leasing some of them for good
This may also
apply to doubtful mortgages to
Accelerate the process by
making these investments
attractive by tax incentives.
Tax payers put up their money in
properties and gain out of it too!
must be like
Leveraged tax concessions for shorter
Private sector execution with close
Motivated long term economic
Builder buyback of
‘tinted’ properties, with
reasonably priced soft
Its unpopular decision but most sensible under
given situation. Better for monitoring and better
follow up action for real solutions.
The builders are real big stakeholders for times to
The US government has enforced a
housing bill to offer tax benefits to
first time house Buyers. This can
be modified to cover second home
buyers and rentals to introduce
mutuality of interest and minimizing
federal involvement for direct
taxpayer involvement in bail
Cleaning lender books with added moratorium is a good way.
The cash degeneration of
lenders due to bad mortgagees till a
cutoff date should be replenished
by “Bail Out”.
May be as equity or quasi
equity so as to retain the ‘private’
ownership till the things turn the
corner – whatever time it takes – but
with conditionality's about cap on
executive remuneration and proper
accountability, management changes if
Ablanket buy out of bad debts will
add to continuation of old ways.
Even the decision makers are afraid of this –
what a confidence in the money managers!
This way money will be bit scarce
and we will realize its real worth.
The ‘money managers’ will think down to
earth to find profits with limited resources
and will learn not to overplay through
“Derivatives” are parasites and have
killed big and small with one bad
judgment. Its vertical way of
thinking – going deep in one direction.
It focuses on more liquidity when
minds are frenzy with profitability
greed. Good in exceptional conditions but
not purposeful in the normal course.
For “Bonus” oriented money managers it
proved to be curse.
Keepingcredit lines open is essential
for healthy normalcy in the economy
– real purchasing power, real demand and
bit of higher savings to fund the
economy for growth.
But for this further and real
growth is difficult.
Whatever we have see so far is post
facto way to correct the situation.
Real solutions lay in adding
fundamental strengths in economy
- controlling trade deficits –
optimizing imports – everything,
clothing, toys, electronics, cars, hardware
and what not..
joy of market
US has forgotten the
friendly productivity for the local
market. Spirit of “be American buy
American” is twisted.
Americans are known toinnovate,
others exploit knowhow to compete
It may be quality systems, Six Sigma, productivity
and competitive advantage and what not.
Looking at future these still seem to be valid
solutions – globalization or no globalization. If one
removes something from the system, it needs to be
replaced with something to keep people gainfully
What we see happening here now?
If others can do it successfully, why not Americans?
This also needs a check up.
more jobs and a
competitive advantage is THE real
long term solution.
Energy, offshore / onshore crude oil, refining, steel,
public works, infrastructure, energy efficient
communities with network of public transport,
affordable housing designs.
Tax encouragement for savings and empowering
more demand is like riding on two horses running in
opposite directions – but an evolving
equilibrium is needed badly. Remember
they did it differently in Great
A Good thought will
always overcome the
Inputs from WWW and news paper coverage.
.. A visualization with a salute for American Spirit