This bailout negotiation on Capitol Hill reminds me of a short sale negotiation. You can come up with any price you want between the buyer and seller but it's all meaningless if the bank doesn't approve it. In the end, the bank has to decide which is best for the bank. A loss now or a loss later. Either way there will be a loss and the bank needs to decide what is best for it's shareholders.
Unfortunately, a big bank for the U.S. is China. They hold $593 billion in treasury bills, a big part of the $2.67 trillion in treasury bills held by Asian countries. If China gets nervous and starts to sell our treasury bills, all hell will break out.
One of several articles on this subject caught my attention. Here's what a former advisor to the Chinese Central Bank said:
``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''
China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.
Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating ``IOUs from the U.S.,'' said Yu. ``This is paper and it may default and it will not increase China's national welfare.''
Many say that China can't let the U.S. tumble into a Depression because then who will buy and consume all of the stuff that they are producing in all of their factories? From what I saw of the Olympics, there seems to be a lot of hard working Chinese over there who probably are able to consume stuff as well as any U.S. citizen.
Like many short sales, sometimes it takes a few weeks for the bankers to get together to make a decision. Whatever final bailout package gets passed, don't get too excited. It might be weeks before China decides what's best for them. With advisors like Yu, I'm getting very nervous.
Here's a long detailed article that was in the Atlantic magazine earlier this year that explains the situation very well.
I agree and there are too many consequences of this bailout. This isn't as simple as the simpletons in the media describe it.
I think the scenario that was painted (Great Depression II) IF we don't bailout wall street, is more likely if we DO bailout wall street.