As an MBA student planning on a career in finance, I am deeply disturbed by the ongoing credit crisis taking place not only in the United States but also across the world. The government-financed bailout of $250 billion for various major banks, as described by Lohr (2008), may provide a temporary cushion to allow larger banks and some smaller banks to remain solvent. The question remains as to whether or not the bailout represents a plan that will succeed in restoring confidence in failing or troubled institutions. In addition, while this is a crisis measure in a time of crisis, I cannot help but be concerned that it foreshadows a movement in which major financial institutions will be owned and therefore controlled by the government. It is indeed, as Lohr (2008, p. 1) reported, "profound, and something of a shift back to the state."
What the banks do with the bailout money is also significant. Story and Dash (2008) ask a critical question, will banks use the new capital quickly to unlock the flow of credit through the economy or will they hoard the money to protect themselves against a possible run? This is troubling because any casual observer of the banking crisis recognizes that the banks are in extremely difficult situations and still need to raise $275 billion to offset losses that have occurred due to the mortgage crisis and a looming recession (Story & Dash, 2008).
I am also concerned because bailouts such as this are not always successful in meeting their goals. Norris (2008) commented that the banks not only are lacking in public trust, but they also do not trust each other. By deciding to give money to the major banks that are most vulnerable to collapse, the bailout clearly favors one set of actors over another. It will also take weeks, if not months, for the full impact of the credit crisis to be felt. For example, credit card losses are likely to occur if unemployment rises (Norris, 2008). Credit ca...