Light at the end of the tunnel?

To provide liquidity to the markets, the FED, the European authorities, along with their Asian counterparts have decided to swamp the banks with money. However, this is likely to come with strings (ropes?) attached.

No money comes free – immaterial of whether it is called Debt or Equity. The authorities have put a lot of conditions – no cash dividend, limits on executive pay, no throwing out people out of homes, et al. All these are “visibly” good for the authorities who want to feel good (“God” perhaps?) about what they are doing.

All this brings us to a big question – like all subsidy will it actually bring good or bad to the system?

If you believe in a free market should you throw a life boat for the people who are sinking? Surely when Lehman went down, in India, Nomura Securities took over the business, all the people were gainfully employed – at comparable salaries. So what is the downside of a bankruptcy? Really difficult to say.

When you believe in free markets you do not interfere in any of the “market” discoverd figures – be it salary, interest, price-earning ratio, rent, or IPO pricing. Similarly when GM says it is facing bankruptcy what it means is the sum total of its assets is LESS than the sum total of its liabilities. However there is value in each of the assets. So if out of say the plants of GM if Honda, Toyota, Mercedes, Tata Motors, …each one decides to take some part of the assets AND use it more efficiently, the market benefits. However if a life boat is thrown at GM, they will keep coming back. Next time it will be in 2015, if not earlier!

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