What does the federal bailout do?

1 ANSWERS

1. saurav
   

   A number of things, not that I agree with it, but here goes.
   
   First, it allows insolvent, and nearly insolvent banks to remain in business. Ideally government would like them to lend, but they are on such shakey ground, thats unlikely to happen, at least for a while.
   
   And by remaining in business, it keeps the CDS market from crashing,
   
   and by keeping the CDS market from crashing, it prevents a domino effect of counterparty bankruptcies and the collateral damage that would result.
   
   In a nut shell, there are gambles of $20-$100 trillion which would come due if a large bank or insurance company were to go under. No one has that amount of money to pay those they gambled with, if that were to happen, when they were told to pay up, they would end up declaring bankruptcy. The end result, one major bank failure ends up taking out a number of others, and some of those may be in China. China needs to be kept happy, as they are loaning money to the fed... it they stop loaning money, the fed can only print money with less and less value, and thus triggering inflation on a huge scale.

   Report (0) (0)  |   12 years, 8 month(s) ago