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After
the global financial crisis emerged last year, virtually every country
in the world immediately rushed to rescue. US President Obama has
unveiled a series of massive financial bailout and economic recovery
plans since taking the office, involving astronomic amount of funding.
According to Bloomberg News, the total amount US government has promised
to allocate could be as much as 8.5 trillion dollars. How big a role
these trillions and trillions dollars can really play in rescuing this
severely ailing US economy? Let's not rush to an answer. Nevertheless,
we must ask a few more questions. What does this astonishing amount
indicate in terms of current condition? Where will the funds come from
and where are they heading to? Is the second wave of financial tsunami underway?
 In January 2009, president of Hong Kong Monetary Authority made a
public speech, advising the citizens of Hong Kong that the second wave
of financial tsunami with much high magnitude had begun to attack the
global financial system. Certainly, no one would wish this could happen;
world leaders are working unremittingly to find effective solutions to
end this. At this critical moment, however, we must also bravely face
realities and practical problems. We must understand how severe the
second financial tsunami is.
Immediately after the crisis began, Bush administration proposed
and Congress legislated a 700 billion dollar rescue plan. After Obama
took the office, an 819 billion economy stimulus package also passed the
congress. So far, the first half of the 700 billion dollars has been
spent, with 95% being directly injected into the financial system. So
far, over 200 large banks and financial institutes has benefited from
this TARP legislation, among which AIG alone received 37.8 billion
dollars and Citibank took 25 billion. When the big three automobile
companies were mired into predicaments, 114.4 billion TARP money was
diverted to rescue them. According to a new plan unveiled by the
administration, the remaining 350 billion TARP funds will soon be used
exclusively in further bank bailouts.
On the other hand, in Obama's 819 billion dollar economic stimulus
package, one third of the total amount is allocated for tax cuts,
leaving less than 600 billion dollars for rescuing the real economy.
Dividing this number by three, the US government can only invest less
than 200 billion dollars in the real economy within next three year.
Considering the magnitude of this economic recession, it is clear that
200 billion dollars a year are far from enough to stabilize the US
economy.
According to the statistic data I have learnt from news media, the total amount
that the US government has promised to allocate in the entire recovery
process could be as high as 8.5 trillion dollars. This staggering figure
includes 2.3 trillion dollars for various loans with nearly zero
collateral; 3 trillion dollars to buy equities of bankrupting
institutions and 3.2 trillion dollars for guaranteeing the financial derivatives
that are on the verge of collapse. These three items targeting exclusive
at the financial system add up to 8.5 trillion dollars. According
the plan, these 8.5 trillion dollars will come from 3 three government
divisions: 5.255 trillion from the Central Bank (Fed), 1.788 trillion
from FDIC, 1.147 trillion from the Treasury and 300 billion from the
Housing Authority.
8.5 trillion is just a number. I believe most people would like to know
how big it really is. Let me put in this way, the total government
spending on the 15 biggest events in the US history is only 8.1 trillion
2009 dollars. These events include: 1. World War II, 2. the US
Space Program, 3. Vietnam War, 4. Iraq War, 5. Roosevelt's "New Idea",
6. Korean War, 7. World War I, 8. Bank Crisis in the 80's, 9.
Afghanistan War, 10. European Recovery Program, also known as the Marshall Plan, 11. Golf
War, 12. American Civil War, 13. American Revolutionary War, also known
as the American War of Independence, 14. Spanish American War in 1812,
and 15. Louisiana Purchase.
It is shocking, isn't it? The fifteen major events in the US history all
together did not cost as much as what the current government sees as
necessary to save the economy. Considering the US GDP is only around 14
trillion dollars? Where will 8.5 trillion dollars come from?
Apparently, economic situation in the United States can't be optimistic.
Perhaps, nobody knows exactly how severe the problems we are facing.
According to news reports, the government has been spending 3.1 trillion
out of the 8.5 trillion dollars. A large portion of that can be spent
through money printing and doesn't require legislations. This is the
current the financial situation. This is the second wave of the
financial tsunami.
In conclusion, if the administration continues to pour the limited money
into the financial system, we will eventually run out of it. Second,
third....waves of the financial crisis are likely underway one after
another; the ultimate outcome may well be a depression. The recent polls
indicate that the public is strongly against any bank bailout plans.
There is an old Chinese saying, "money ought to be spent on cutting
edge". When crafting the comprehensive plan to rescue our economy, our
government must considerately balance the spending between the real
economy and the financial sector. It is time for the administration to
shift their focus onto our real economy, the "cutting edge" in current
economic crisis. A recovery in the real economy will naturally lead to a
recovery in the financial sector. But on the other hand, a recovery in
the financial system doesn't necessarily drive a recovery in the real
economy. This is a rather simple principle.
Related Series Articles on Global Economy and Recession
by Jonathan Wang
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Consumer Sentiment Lags, Stock Markets Soar - Sign of Depression?
Trillions Dollars Won't Save US Economy, Historical Data Say Everything
Why China is more resistant to the global recession than any western
countries?
Bail Out Banks...Again? Caution, Don't Jail in Economy
What has really caused collapse of the financial market in the United
States?
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