I have been too busy at work to notice recent international news - particularly about the US economy, given that I've just moved to a new office and am still trying to learn the ropes of the business so to speak. I thought that now that I no longer work for a foreign company, I could get away with not knowing what was going on there.
But the Lehman Brothers bit me in the a*s. A global perspective was required in order to complete a Board of Directors' presentation. I went along with it because it was the right thing to do. Of course there will be local and global impact to what will happen to the US economy.
So now I'm forced to pay attention. Here's what happened for the hapless such as myself.
The subprime crisis already began years ago. The US decided to buy bad assets from developing nations and provide a lending service to not exactly "credit worthy" applicants. This was not a suicidal effort, but in fact at that time a seemingly brilliant initiative.
The idea was even if these financial institutions lent money to people who can only repay a small portion up front; considering that the working conditions will improve in the next 3 years and their assets will appreciate, these firms "ballooned" the repayment over a delayed period (about 3 years or so). That way the lenders will pay a little up front but then have enough money later on to pay for an increase repayment after several years. I bet at the time it seemed like a win-win situation.
This was of course until mid-2007 when the interest rates on housing started to rise and investors were getting shaky. As a result people were forced to sell their investments, impacting the stock market and further damaging the financial institutions that lent money because people were now unable to pay them back when their repayment figures were significantly higher.
So the complex web of financial transactions occur until here we are in a state where "everyone owes everyone." Companies like Bearns Stearns, Meryll Lynch & Lehman Brothers who capitalize on these investments felt the blunt first.
And so Bearns Stearns and to be rescued by the US government while Lehman Brothers ended up filing for bankruptcy last Sept-15. Right now the US government needs to implement their $700 billion bailout plan (if that's what it's going to be or something better up their sleeves really quick) or it will hurt not only for America but for the rest of the world as well as the domino effect will just spread throughout the world.
Now to answer the question: Will the US bailout work? According to Forbes it's too big to fail as it brings together Republicans & Democrats to the table as Congress tries to digest Bush's initiative. They say it's no good but there's not better choice right now. It is a rather dire situation - do or die.
If the rescue plan fails, the economy fails. The rest of the world can only watch and wait.