US $700 Billion Bailout VS UK 87.5 Billion Bailout

Bailout is the injection of liquidity to failing companies for them to survive. Most of the time, bailouts are done if the company is too large, and having it bankrupt may affect other firms and the country as a whole. In short, it is a preventive measure done by the government to avoid a “ripple effect” that may cause chain reaction to other firms and establishments as well. Nowadays, economic crisis starts to be serious; US and UK are having to have bailouts. What are the differences of these two?

Guo (2008) in his article said that, US bailout plan is to take bad debts off the books of the banks, thus freeing up from credit markets. On the other hand, Boyle (2008), in her article, said that UK differs from US bailout plan because UK’s bailout only lends money to the banks in order to increase their confidence level because the “giant banks” such as the Royal Bank of Scotland (RBS) and HBOS are being reluctant to lend money to each other due to the credit crunch happening today. With UK’s bailout, this banks will gain confidence and will result to cash flowing systems again. The big difference between the two is that US' plan is too risky because its only aim is to purchase all bad debts by the banks and make money overtime. Because of this, UK’s bailout will be most likely to be implemented compare to US’ bailout plan.

After all the news about the US and the Uk bailout, there have been some analysis about its effects on the future. Will it really help? Will the bailout benefit the people? Or will it be a cause of a larger economic crisis?

One of the short term effects of bailout is that banks and business establishments that gained from the bailout will have confidence boost and its employees and staff will remain; thus preventing them to be bankrupt for the next few years. It can solve the economic crisis or not. Another possible effect, especially if the bailout failed, would be money markets remain frozen and more problems will arise from it (ripple effect).

An example of a long term effect, on the other hand, is when banks share prices rebound; the result would be the government could sell the profit. Because of that the government will receive dividends on shares and income from the extra lending it is providing.

In conclusion, the US bailout plan will have less support because of the risks it have, in contrast, Uk bailout will have more support in it because taxpayers are more ensured and it only aims to boost confidence level among banks and not purchase its bad debts. Our country, the Philippines are most likely to be affected, likewise, companies cutting out its staff and employees and a decline to our economy is to be expected.

Sources:

http://edition.cnn.com/2008/BUSINESS/10/08/uk.bailout.questions/index.htm
Q&A: the UK bank bailout explained by:Catherine Boyle
Q&A: US $700bn bail-out plan Editor: Eve Guo
http://www.wisegeek.com/in-economics-what-is-a-bailout.htm
http://edition.cnn.com/2008/WORLD/asiapcf/10/09/world.markets/index.html