Bailout Actions - Getting nowhere!

President Obama is now trying to deliver the bailout package that is expected to cost USD 825 billion (well, that's a trifle short of a trillion) and save (and aksi create) a total of 4 million jobs over a 2 year time span.

Almost a fourth of this amount comprises tax measures yet the plan is not fully backed by the Republicans because the Government is also "wasting money" on spending public money. However, the package is quite broad and covers energy (including renewable energy program spend), education, healthcare etc. Infrastructure seems to be getting a reasonable share of the spend. The plan is likely to be cleared by Feb 16, 2009, but before that we would also see what the FOMC has decided to do on Monetary Policy front on the 29th January. Well, no rate decisions are left to be taken I suppose, but markets will look for new signals from FOMC. From the reception that the Obama plan has received in equity markets, we are destined to see a small bounce in indices before markets realise that a) the plan is undersized to handle the problem, b) major problems relating to capital and health of banking sector are not handled in the package and c) that demand is unlikely to be sustained as tax payers may use the estimated $ 1,000 per capita to retire debt (in view of the deflationary environment). Of course, the wild estimates of cost of jobs ($ 275,000 per job created) has also raised hackles of Republicans though Democrats say that the cost is likely to be only a fourth. Already doubts have been raised whether this size of the bailout is sufficient.

Quite clearly, the senses of markets have been blunted due to the hits that they have been getting in terms of data, bank crises, corporate losses etc. The success of bailout packages aimed at handling economic crises as well as TARP kind of packages that are aimed at rescuing banks are not raising spirits thanks to the dulling senses.

Meanwhile, an interesting piece of data reveals that banks that have received bailouts have actually stopped lending!!. Thus these are the obvious questions - were banks saved to save jobs or were they saved in order to lend?. While the objective of savings banks initially was to protect the economies, failure of banks to lend is now becoming an embarassment for governments - why were the banks saved if they were not to help save jobs or create employment? why was public money being used to save jobs of fat cat bankers?

Let us address the question - why are banks not lending? Because, obviously they face uncertainty (future losses, capital position)and bad credit climate among others. Banks also find that corporates are overleveraged thanks to the lax credit standards of the past and are making losses due to disappearance of demand and high cost of funding. As a result good borrowers are getting scarce. High credit spreads add to the bad climate and finally convert the situation into a scare climate. The move of the Fed and other Central Banks to provide broad credit comfort is supposed to improve the climate.

Clearly we are getting nowhere. Policy makers are applying learnings from the Depression era and are pushing for spending as opposed to other steps and they seem to be getting nowhere!