The bailout rejection sets the stage for a tough week
It will be a few more days before either the House or Senate take another stab at saving the American economy. Meanwhile, markets will be in turmoil and two vice presidential candidates face a challenging national debate.
The timing could not have been worse for the failure yesterday of the financial bailout package in the U.S. House of Representatives.
The House presently is in brief recess. It will take at least a couple days until the administration and congressional leaders of both parties can patch together a replacement package and round up votes to pass it. Watch global stock and credit markets during the day today. It would be a surprise if they did anything but extend yesterday's performance.
I had half expected President Bush to declare a market holiday, for today and tomorrow, along the lines of President Franklin Roosevelt's declaration of a bank holiday in a similar situation during the Depression. Perhaps such a declaration will still be forthcoming.
You can understand the thinking of the House members who voted down the package. They were reflecting the frustration, anger, and "get even" mentality of constituents who were expressing outrage at the idea of the bailout. But there are times when elected officials need to take necessary if uncomfortable votes, and this was one of them. Among those in our nearby neighborhood who did not step up were Reps. Dave Reichert, R-Auburn, and Jay Inslee, D-Bainbridge Island. (Reichert's Democratic challenger, Darcy Burner, also said she would have voted "no.")
It is possible that the same package, or one almost identical, will be resubmitted Thursday for a fresh vote, or that the Senate, rather than the House, will vote first. There is a strong likelihood that legislation will be passed before the weekend. But before then, huge new financial damage could be done.
Among the most uncomfortable Americans at present are Sen. Joe Biden and Gov. Sarah Palin, as they contemplate what they will say about the issue in their Thursday night vice-presidential debate. Their top-of-ticket running mates have not distinguished themselves during the crisis.
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Comments:
Posted Tue, Sep 30, 9:58 a.m. inappropriate
Stock Market Up/Oil Prices Down: .
With all the hand-wringing about the grave crisis we will face if the bailout of Wall Street is not approved, the sky did not fall yesterday. And today, the stock market is up. The price of a barel of oil is down and going down more. Market indicators show consumer confidence is up. Perhaps consumer confidence is up because us average folks feel our voices were finally heard by Congress? Let's hope so. Jim McDermott, Brian Baird, Norm Dicks, Rick Larsen, and Adam Smith - get a clue. We don't want a "revised" bailout package. We don't our tax dollars paying for bad debts. Period.
Posted Tue, Sep 30, 10:02 a.m. inappropriate
Political reality: I believe - at least I hope - that under the hood, House Republicans and not a few House Democrats faced a political reality on Monday: With constituents - who largely did not understand the enormity of the crisis - up in arms, outraged at bailing out Wall Street, they had to vote "no." I think most oft hem understood that eventually they would have to say yes to some form of rescue. Their hope was that something on the order of what did happen, would happen. The Wall Street markets would tank and folks at home would see that some form of intervention is necessary, no matter how unpalatable. The package would go back to committee for some cosmetic, face-saving tinkering. The "nays" could then be changed to "yeas" and they could still face constituents at home with some hope of coming back to Congress next year.
Arizonan
Posted Tue, Sep 30, 11:28 a.m. inappropriate
I think Arizonan has it right, although he/she probably gives too much credit to initial "no" voters who will shift to "yes" later this week.
A couple good things have happened as a result of all this. First, there have been financial consolidations and failures at the front end which could have been even more expensive down the road. Second, a cold shower has been delivered to all those, ranging from consumers to Wall Street speculators, who took risk too lightly. As I wrote in an earlier piece, this could signal the end of an era of excess.
Posted Tue, Sep 30, 12:26 p.m. inappropriate
RE: Stock Market Up/Oil Prices Down: First, the 200 points on the Dow this morning is a reflexive structural action resulting from positions market makers at the NYSE were required to take at the close yesterday due to the massive influx of "sell on close" orders. This was not natural buying. +/- 200 points can be attributed to "natural" market actions, but the volume is so low today it is tough to take away any sentiment.
In a depression, prices and wages fall at the same time. Prices fall because of reduced demand. That results in layoffs. A higher supply of workers reduces wages. That again reduces demand, starting the cycle over again.
I've argued vociferously that the price of oil was artificially boosted by speculation, so the first $40 or so of the drop from the highs is simply profit taking from the speculators. While we all like paying less at the pump, be careful to call out sinking prices as a completely good thing.
I am amazed at the number of people who don't think this affects them or who still cling to the idea the $700B will be used to restore windfall profits for Wall Street bankers. Neither is true.
At a Utilities Committee meeting last week, Chuck Clark (head of SPU) told a rather amazing story. As with any large organization, SPU needs to access credit to smooth out differences between outlays and income. They floated about $10M in short-term bonds in September, offering them originally at around the 4-5% that other offferings went off. There were no takers, despite the fact they are tax free and Seattle has a good credit rating. At the same time they were floating these bonds, the 30-day T-bill was trading under 1%. The deal eventually got done, but at 7% interest. This was an additional cost to Seattle taxpayers of at least $200,000 as a direct result of the lockup in the credit markets.
Let's say the Bailey Building and Loan is the only bank in town. The cash it moves around between depositors and borrowers is the "grease" that keeps the economy of Bedford Falls working. Why is this "velocity" (moving around) of money important? Because in a modern economy, the timing for outlays for goods and the timing of payment for those goods rarely matches up. This is true even if people are ‘living within their means'. For the economy to work, money greater than the sum total of all transactions has to be available for both buyers and sellers in order to facilitate transactions.
Let's say something spooks the depositors in the Bailey Building and Loan. They start withdrawing their money. Because the BB&L;'s cash reserves are dropping, they have to curtail the loans they make. Businesses cannot purchase product ahead of demand by buyers because they don't have enough cash on hand. Buyers can't purchase products, also because they don't have cash on hand. So the economy of Bedford Falls grinds to a halt.
It is crucially important to understand that the BB&L;, the businesses, and the people of Bedford Falls do NOT have to be in financial trouble for the above scenario to play itself out. This is a simple function of cash flow.
Now you probably know from your own financial history that cash flow binds like this work themselves out with time. In Bedford Falls, for example, their credit-based economy could start working again as a cash-based economy given enough time. In the current problem we face with our economy, the (painful) conversion would take a generation to work itself out. It would be Great Depression II and it would be much uglier than the last one.
Posted Tue, Sep 30, 2:01 p.m. inappropriate
For me, it's simple: everyone who has defaulted on a mortgage, a mortgage that had features like "no down, no income verification" must carry this default with him/her the rest of their lives. The real estate agents, mortgage brokers and mortgage companies deserve to have their bubbles burst, to the extent they participated in this fraud.
if there is to be a "bailout" then the above group should get nothing, no help whatsoever !
if you insist upon printing more money and circulating it, then the above group should not be involved in the relief !
the only thing we have left behind our dollar is the "full faith and credit" statement and now, you want to destroy that ?
Posted Tue, Sep 30, 8 p.m. inappropriate
bailout: Editor
I have listened to all the stuff on the bail out and I think one needed point is a malpractice insurance or liability insurance for all Wall Street outfits. I have one as a veterinarian, doctors have it, pilots have it and many business's and individuals have it. Then we would not have to bail out those idiots again. I mean like 1929, 1985 or so with the savings and loan, Chrysler, adnausium. Come on brokerage houses take some responsibility. When my little business goes belly up its my fault. All that has gone belly up so far is my retirement program. Hum. Maby I needed insurance but I think I have to die to collect life insurance.
Sincerely David Smith DVM