Case for a bigger bailout - Views on News from Equitymaster

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Case for a bigger bailout

Jan 28, 2009

Can we have larger packages please?
Voices, for substantially raising the size of both the monetary as well as fiscal stimulus programs are getting louder by the day. Latest to reiterate the facts are two of the most prominent economists in the US, Robert Shiller and Paul Krugman. Robert Shiller through an article in a leading business daily argued that the blame of the current crisis, to a large extent, should be put on the so called 'animal spirits' of the participants. The term, according to Shiller, refers to a sense of trust that one participant bestows upon another. While this trust was at its peak just before the bubble burst, it is now at its bottom and is badly shaken. Although some steps have been taken to restore the trust, the results are proving to be ineffective and hence, argues Shiller, substantially more needs to be done.

Nobel laureate Paul Krugman, while endorsing a large fiscal stimulus package has also lambasted critics of the package. He has come down heavily on people who are arguing that the cost of the package to the taxpayer is huge by pointing out that the analysis is indeed flawed and the actual cost is indeed likely to be a lot less. Furthermore, he has also opined that in less severe times, interest rate cuts is the best option but with rates now ruling at zero, more income needs to be put in the pockets of people by undertaking fiscal programs such as the one outlined by the Obama administration. Taking into account the view of the experts, it looks likely that the size of the package could well be increased down the road.

The perfect hedge continues to rise
Gold, billed by many as the perfect hedge against inflation saw its prices rise to a five month high recently in the New York market. The yellow metal, perhaps the only commodity to have risen in 2008 and to have entered 2009 on the back of a seven year winning streak, witnessed a huge surge in demand on the back of speculation that President Obama will act quickly and hence, flood the market with dollars. Infact, the US is not the only one to embark upon massive currency printing, economies across the world are likely to take a similar step in order to save job losses and get the credit markets to function again. This will lead to scenario where the ratio of available gold to available currency will shrink further, thus leading to a rise in the price of the yellow metal. Furthermore, with dollar, the current reserve currency of the world, very likely to lose its purchasing power, investors are likely to take shelter in the relative safety of gold. Hence, considering these scenarios, betting against rise in gold prices for the eighth year in succession looks like a risky thing to do.

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