Friday, October 3, 2008

Who is dumber? the Sri Lanka or US voter

Politicians pander to the voter. In Sri Lanka they promise what the voter wants, irrespective of whether it can be kept and the voter delivers by electing those that sound most convincing! In the United States today, all members of the lower house of congress, namely the House of Representatives are seeking re-election in less than 5 weeks, and the voters are bombarding their congressmen asking them not to vote to bail out the troubled institutions, and they responded by opposing it on Monday.

Due to the meltdown effect, the voter does not realize that passing the bailout is a confidence building exercise, necessary no matter what public opinion says. How does one reconcile this dichotomy? Members have to put country first irrespective of whether they will have a job in a few weeks, and for power hungry individuals, doing this is hard.

As usual the media is concentrating on stock market performance, which bears little relation to the debt problem at hand. The real issue is that businesses are and increasingly will find it difficult to borrow, and such costs would rise. The resulting effect is lower margins, and accordingly, more unemployment. The voter with a job should fear that, not saving the backsides of a few wealthy wall streeters.

The bailout will make it easier to borrow, reducing the severity and sharpness of the Sword of Damocles. It will add confidence to the banking sector reducing the likelihood of people withdrawing money from the banks. The banks will therefore reduce the extent of foreclosures on defaulters, giving them an extension on payments, or permitting some form of refinancing to turn non-performing assets into performing ones.

One must realize that a fundamental concept of capitalism is confidence, and when that is lost extreme action is necessary to restore confidence, and that is all that the government is doing as it is their responsibility for the long term security of its citizens. It is the long-term savings, retirement funds and home equity of the average Joe we are talking about as the wealthy are immune whatever happens, bailout or not! This is the responsibility of any government and its duty. I found it interesting that the Irish government backed the deposits of every bank in Ireland irrespective of balance. No Irishman then need pull out their savings fearing a run on a bank. That’s confidence for you!

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