Bailout Mania

It has been quite sometime, since I last wrote and a lot has happened since then in the financial markets. Oil fallen by 70%, Dow has hit 5 year low, Indian market has reached 8000 levels, Obama is now the President elect.

There are a couple of things, which I thought is getting the maximum attention, at least in the media recently. One is the daily talk on interest rates and the other is the bailout packages. I think the latter has become more of a rhetoric and is becoming increasingly fashionable now a days. US was the first to start the 'package mania' and as usual the whole world followed it. Our FM will soon become an outcaste in the global scenerio, if we also do not have a 'package' soon.
The problem lies not on the package but its clarity in direction and implementation. After the US package was announced, the Dow still hit it's low and markets are getting from bad to worse.

The problem I see with all these bailout packages across the globe, is that it primarily focuses on financial institutions and banks, and not on the real economy. Example is that US bailout was meant to help the housing sector, by buying the problem mortgages, so that banking capital gets freed up, and they are able to extend credit to the common man. But in reality what happened was that the Fed ended up buying equity of these banks!! So instead of doing what was intended, it landed up having more ownership of banks, in this falling market conditions. What a waste of money to help certain banks once again.

The other thing we see in the media is the hype that if interest rates comes down, demand for housing and cars will shoot up. What a wrong conclusion !! Demand is driven out of economic fundermentals, capacity shortages, increasing income. Neither of these are prevelant now. Interest rates are only a catalyst to growth and cannot be the only factor.
The need of the hour is incresed government spending and infrastructure project spending. This will increase demand for steel, cement, labour. Rest will follow.

The problem is that State govt in india is bankrupt and all depends on Govt of India for this funding.

Given the forthcoming elections, the Govt. will hopefully focus on increased spending to improve the growth...Let's wait and watch!