Buffett's Financial Bet

The $700 billion government bailout had been finally passed and then the President Bush was too impatient to wait to let it went into effect. When Bush signed this most grand bailout act ever in American history, he said, we should take this adventurous act, in order the crisis happened in the Wall street would spread into the whole society and country.

After the discussion of whether or not to save the Wall Street, the focus of us turning to whether this largest and greatest bailout could retrieval the Financial Crisis, resume the confident of the investor and the ultimate result of this bailout should prevent the financial crisis turn into the economy crisis of whole country. However, no matter the market, investor and the analyst could not take much hope about the bailout. After the transitory went up of the stock market that day, three indexes has rounded to a new turn of went down.

Though the passage of the bailout is most significant as a statement of purpose that Washington is not going to let the financial system melts down, as far as I am concerned, this bailout could hardly change the expectation of the market and therefore, hardly serve the function as it should be. In essence, the bailout plan is nothing but peels off the Non-performing Financial Assets of the Financial Institution, stops the loss of the bank, resumes the liquidity of the credit market and when the liquidity is enough, the confident of market would be restored. However, the key problems of this issue is no one knows that how severity the crisis is, which direction the market would lead to and when the crisis would over. These three questions are far beyond the cognizance of common people, and no one could make an exact forecast of the market in the future. Therefore, obviously, the market is lack of confidence to the issue that whether the $700 billion bailout could plug up the “black hole” of the crisis. Based on the argument above, I think that the bailout could just alleviate the destruction of crisis, but has no use in stopping the financial crisis fundamentally. Moreover, this financial crisis has already impacted on the real economy which is the most important target of the American government to prevent. Now, lacking of the liquidity has already influence the outside of the financial system, first at first is the small- and medium-sized enterprises of American.

The economy output of the small- and medium-sized enterprises contains more than half of the GDP of the United State. However, due to the difficulty of borrowing the money from the financial institution, they faced difficult of financing. According to the data of the American government, the opportunity of employment excluding agriculture has been decreasing in the last eight month and the unemployment rate has been increased to 6.1%. Therefore, the responsibility of the so-called bailout is to build a firewall between the real economy and the virtual economy in order to prevent the crisis of virtual economy the spread onto the real economy. However, in my view, the stableness of the firewall could hardly protect the real economy from being disturbed.

Anyway, the bailout has been passed by the congress and then we’re wondering the how Hank Paulson would carry the bailout into execution. From the angle of the economy of globalizing, I hope the economy here could get out from under. But I think this bailout could only address symptoms but not root causes.

Posted by Feng Guo, the article comes from http://online.wsj.com/article/SB122307417911703781.html