Equity finance: Questions raised by Obama’s Economic Recovery Plan

Barack Obama is the charismatic new President of United States of America.  He promises to bring in economic reforms to raise the world from the financial crisis it is witnessing today and save millions of people in America and over the world from bankruptcy. I would like to give a brief outline of his proposed economic reform plans.

$825 billion stimulus package used fro creating a minimum of 3 million new jobs. Government backed bank that would buy all the mortgage backed securities and problematic assets which at present have no market value. The aggregator bank would clean the balance sheets of the banks so that lending of funds can resume. Financial rescue for bailing out debt ridden banks and financial institutions. Fixing of credit mechanism to arrest slip into deeper recession.
The situation faced by the world is not any ordinary recession where in the discrepancy of demand and supply would work out properly with time. The situation is such that banks are clogged and the securitization model proposed by the Wall Street has collapsed; global markets are unstable and experiencing free fall accompanied by a rise in unemployment. The problems are not small or simple and strict revolutionizing and rational methods need to be adopted to bail the world out of the present economic abyss.  Mr. President has to address all these issues and provide results in the first 100 days to fulfill the dreams of the Americans who have voted for him. Definitely an endearing task but with the team of experts that Mr. Obama banks on this might still be plausible.

The questions that are going to be raised or those that come to any layman’s mind is whether the addressing of credit ease is enough to stabilize the present economy? Wasn’t credit availability the main cause for this economic showdown?  The best way to maintain a healthy economy is by making the middle class stronger and this can be done by increasing their income. The increase in income would maintain a sustained consumer demand which is a necessity for healthy finances.

Supply of money alone would not suffice or save banks that are sinking at an alarming rate. There is an equity loss of $2 trillion for financial institutions alone. This is lost capital and cannot be salvaged. The injured economy is believed to show signs of recovery by the third quarter under influence of Obama’s economic package. The questions though remain:

1. Will the wealth gap be bridged?
2. Is there going to be higher wages for economic growth?
3. Will face value of mortgages and credit card debts be written down?
4. Is sub prime lending to be encouraged yet again?

Are there going to be tax incentive reforms to discourage financial risk takings leading to privatized gains and socialized prices.
The good news being that there are solutions. The bad news being that it would be a Herculean task to turn on the lights. Certainly, the best way to begin is a stimulus package. We can wish for a miraculous rescue.