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Monkeys Are Poo Poo

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What is being done to put out the fire?
• The U.S. government has spent (or committed) more than a trillion dollars in trying to
prevent the collapse of U.S. financial markets. Following the bailout of Bear Sterns,
AIG, Freddie Mac, and Fannie Mae, the U.S. Congress approved the Emergency
Economic Stabilization Act to give authority to the U.S. Treasury to buy troubled
mortgages and mortgage-related securities. However, the original package (US$ 700
billion) has been revised to include a recapitalization of banks, federal guarantees on
new bank debt for three years and FDIC insurance for non-interest bearing accounts. If
the troubled assets (MBS) bought by the Treasury are later sold at a fair market value,
this could ultimately be a profitable transaction for the U.S. government. And, if the
Treasury finds the right buyers for the banks that it partially owns, then it could also end
up making money.
• In Europe, the Bank of England pledged US$ 87 billion in direct support to the
country’s major financial institutions. British Prime Minister Gordon Brown’s rescue
package which involves direct capitalization and guarantee of inter-bank lending has
been adopted by other major European countries and the U.S. government (as mirrored
by the new revisions adopted by the U.S. Treasury). Furthermore, central banks around
the world (Fed, ECB, Canada, Sweden, Switzerland, and China) introduced coordinated
interest rate cuts to lower the cost of borrowing, with the aim of restoring confidence in
the global economy.
Different views over how to fix the meltdown
• A crucial issue with respect to the purchase of troubled assets is determining a relevant
price. If the government pays too much, taxpayers stand to lose, but if the government
offers too little, the financial institutions that are holding these assets will not sell them.
In addition, a...