Tuesday, September 30, 2008

Bailout Defeated, What Now?

The shocking news from yesterday was the defeat of the $700 billion bailout bill that was supposedly going to save the known world from financial ruin. On news of the failed bill, the markets responded with panic and dropped by almost 800 points, marking the largest one-day point drop in the market's history. Now it seems everyone is panicking and not sure what to expect. Bush and Paulson are threatening a long-lasting and painful financial meltdown if nothing is done, but can we believe them?

First off, I want to say that there was no guarantee that this bailout was going to save the financial system in the first place--no one knows for sure--although one can predict that it would at least provide a short-term boon to the financial industry. If nothing else, the bailout would have met expectations of the market and helped calmed some fears. In my view, this bailout would have just been a short-term fix and would not meet the expectations that were being set by Bush and Paulson. $700 billion is a big price tag for a short-term fix in my book.

The bottom line is that the market needs to correct itself. Right now, asset values are retreating to where they should have been in the first place. For a long time the government has been using tactics aimed at boosting the market, and as a result, asset values rose to heights they should never have seen. The government, of course, is trying to continue to support these higher prices, but is now finding some resistance. In the short term, they can probably keep the gravy train rolling, but at some point someone is going to have to pay for these policies. It seems that Americans have finally decided to speak up and be heard, as evidenced by the numerous politicians who said they didn’t vote for the bill because they feared for their jobs. Unfortunately, one way or another, the bailout is probably going to happen.

Even though this $700 billion bailout bill was shot down, that doesn’t mean that another version can’t and won’t pass. More likely, though, is that the Fed will end up having to bail out the industry one company at a time. The purpose of the $700 billion bill was to address the problem at the source (the valuation of toxic mortgage assets), thus helping all companies in the industry; that way, they wouldn’t have to worry about bailing out individual companies.

Naturally, I’m not really for bailing out anyone, but I think I would rather see a major overhaul/bailout package than to see us try to fix this thing piecemeal. Unfortunately, the Fed has a lot of power when it comes to bailing out institutions and they don’t really have to ask taxpayers for permission. There will come a point where the Fed would conceivably need to get more money from Congress, and then taxpayers could have a say in a roundabout way, but if that time comes, who is going to argue against saving the Fed? It is much easier to let these companies go under than it would be to let a staple of the U.S. government do the same.

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