Monday, September 29, 2008

Don't Bail Me Out, Bro! (part 5)

Holy shenanigans, Batman. As Jack Buck once said, "I don't believe, what I just saw." The events today in the House of Representatives and on Wall Street are combining to be a much less visceral but no less dramatic series of events.

We here at the Loop and the Lou are not running a political blog. And in polite company, it is proper to avoid conversations regarding politics and religion. But the politics of the day are truly interesting and possibly historically pivotal. We will continue to cover them until it gets petty, at which point, we will return full coverage of all of life's events.

But for now, the House voted down the $700 billion bailout bill. It's not even clear how this happened. Depending on who you are, this is either Nancy Pelosi's fault or 12 GOP Congressmen's fault. Was this about details or about principle?

Probably both. Afterall, about 40% of Democrats voted against this bill too. I watched a clip of Nancy Pelosi's speech, and she really did pick the wrong time to blame this crisis on a Republican. She basically said it was Clinton who lifted us up, and the wreckless policies of this administration that got us here. Dumb. First off, no one in politics is clean from the causes of this. But if you are looking to go back in time, the Democrats would probably shoulder a slight majority of blame. But I'm not going to get into the petty stuff, remember?

The compromise sought in this bill was to protect taxpayers. It is unclear what that means exactly, since passing this bill would have guaranteed an increase in taxpayer liability and an increase in future inflation. However, the many Democrats who voted against this bill were citing CEO bonus control and individual mortgage relief as reasons. Two very good liberal reasons.

There were however many Republicans who voted against this bill and against the President. (The President and the Secretary of the Treasury were both "very disappointed" in separate statements.) There appears to be more principle flowing from the GOP's side. Here is at least one guy's take on it from MI:

"In the Bolshevik Revolution, the slogan was 'Peace, land, and bread.' Today, you are being to asked to choose between bread and freedom. I suggest the people on Main Street have said they prefer their freedom, and I am with them."
--Thaddeus McCotter (R-MI)

That may be a little dramatic, but is it off the mark? Wall Street responded with the largest ever fall off in history, dropping 777 points. We can see that the closer one is to Wall Street, the worse this is going to hurt. However, do not fear, today's drop off was not even in the top 10 in percentage drops in history.

And that brings us to some of the Bull Street we've been hearing about this. I have been hearing talking heads trying to explain how credit will no longer exist in our country. Really? Apparently, most of these people assume that the average business is run like an investment firm, where we over-leverage everything in sight and borrow huge short-term sums to balance the sheets out at the end of the day, only to return those funds the next morning. Here is what Wall Street has been up to, according to an email I received:

"These "investment pros" are constantly borrowing money to fund their business as I have just come to understand in my new job. They take the investments and borrow against these existing securities to be able to further their great ideas. Each night, they run up huge negative balances based on their investment ideas. However, they must balance out so they borrow billion of dollars from other investors (repo trades) overnight to cover their great ideas of the day. To get this cash, they have to put up their existing securities as collateral. However, as their existing collateral became more and more toxic, they began to have a harder time borrowing the money on a nightly basis because no one wanted to lend them money with their collateral."

So now, we are being made to believe that every business out there is borrowing money just to keep their lights on (I heard this on TV from a CNN financial expert). Is this really the case? I know credit is essential, but are normal businesses going to immediately go down because of all of this? I highly doubt it. This will probably affect mainly the obviously bad credit instruments for quite some time, but as we've said before, that's a good thing. A Representative from Delaware on Fox named Dutch Ruppersberger, who in spite of having a really cool name, was telling the audience how bad the situation was. His example: McDonald's was unable to get a loan to expand its coffee business.

Well I'm glad it's time to panic, when McDonald's doesn't have access to cheap capital, we should bail them out. If I have to get out of my car for coffee on my way to work, then the terrorists have already won. This was after he had claimed that this really isn't even a "bailout". This should show you how if you keep chanting the same mantra long enough, a lot of people will believe it. Not a bailout? McDonald's expanding for coffee = my kids going to college?

I do doubt this will be a permanent defeat though. In other words, although many of the Congressmen are against this thing in principle, many are against it in detail only. I have not seen or heard anything that has lead me to believe that passing this bill would do anything but obscure true economics. As many have been saying, this bill is another huge example that our government is working with Wall Street to "privatize the gains and socialize the losses." Many Democrats and some Republicans could be convinced to vote for this bill, sacrificing principle or showing all lack of it, if we, our federal government, had the ability to make some money off of this deal. I suspect that case will be made.

Do not give in though and do not be panicked by this mess. Everyone trying to sell property, heavily invested in Wall Street, dependent upon give-away credit, or even employed by a financial firm is going to have a rough ride coming up. The question is, do we want to guarantee our losses as taxpayers by bailing out this industry, or do we want to keep our money and take our chances on a natural recovery? This bailout is no guarantee for lower gas, lower food and a return to 20% returns in the market, you can believe that.

But for me, today, I got some hope that at least some people in D.C. have a heartbeat. I got some hope that some citizens care enough, one way or the other, to email their Senators and Representatives. I found some belief that although Congress has been fooled several times by this President into "hurry up and vote" scare tactics, that there has been debate on this bill. I found some hope that some people in Congress still believe it is their sworn duty to represent their constituents. It is not the President's job to craft legistlation -- and certainly not the Treasury Secretary's -- and I was happy today to see some members of Congress take their jobs personally and seriously. That's bipartisanship I can live with.


Roller said...

It's been 10 days since the plan was proposed, and the economy has not collapsed. In that time, Washington Mutual failed. I'm sorry for the employees and families of WAMU, but at least that's one more institution we don't have to bail out.

Gene said...

Regardless of blame, I'm just not as confident that without some form of "bail out," there wouldn't be more significant repercussions to the general public then you suggest, Rye. I hope you're right.