The $700 bn financial rescue plan announced by the US government and Federal Reserve last weekend is probably the most extensive intervention in the financial markets seen since the Great Depression of the 1930s.
The plan calls for the government to buy billions of dollars worth of illiquid mortgage assets held by banks, investment banks and other financial institutions. While this plan will help banks shore up their balance sheets and make them more willing to lend, the problem is that it will not make them automatically profitable.
The plan's announcement seems to have gone down well with equity markets as seen from their performance last Friday and today (Asian markets are trading strong currently). However there are many who believe that the government bailout is a wrong way to deal with the wrong doers.
"We're playing a game of casino capitalism, interfering the way the market is working," says John Bogle, the man who propounded index funds way back in the mid-1970s. "The government seems punch drunk. It doesn't seem systematic. Believe me, the value of American business doesn't change that much in a day," he goes on to say.
Bogle sums up the entire situation very well -- "We're in the most speculative market I've seen. We seem to be in the depths of despair one moment and the heights of optimism the next."
While experts seem cautiously optimistic that this large government bailout of the US financial sector will solve the credit crisis, questions remain whether it will prevent more failures of banks and Wall Street firms.
Also the fact that the plan does not in any way mend the real root cause of this crisis -- the battered housing market -- leaves many a doubts.
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