Monday, September 29, 2008

Bailout at 20,000 Feet

Its hard to no longer be surprised by what happens in the Caricatured States of America (thanks Vin!) This morning I watched the reality show that is the US Congress. After the 700 billion dollar bailout bill was defeated by a majority of Republicans and a minority of Democrats, the Republicans held a news conference blaming the bill's failure on... wait for it... a partisan speech by Nancy Pelosi! Only in Republican hypocrisy and right wing gorilla math could vast Republican nay votes be the fault of Democrats! They crowded the microphone at the news conference each one wetting their pants trying to pin Republican nay votes on Democrats! What really amazed me is that the crowd of reporters didn't fall down laughing as I did at home spilling a teaspoon of coffee in the bargain. So let me get this straight, these Republicans who received thousands of calls and email from their constituents urging them to vote no and who are up for re-election in a few weeks were going to vote yes at great political peril, until Nancy gave a partisan speech and then they voted no out of spite? A kindergarten child would laugh at this retort yet this is how republicans imagine they get to have every issue their way. "We're anti regulation until things are screwed and then when we vote against fixing them, blame the interventionist democrats." They bet on every horse and hope Americans forget when they're wrong and boast when they're right.

The Bailout
I've been trying hard this week to understand the fulcrum that the US economy sits on. On the one hand, the crisis seems to be created by cheap credit given to bad risks and therefore creating more credit (by making it more fluid) doesn't solve the problem. On the other hand say some, the credit market is so tight that companies that rely on short loans to make payrolls and purchase necessities can not get money and meet these demands or capitalize new projects. In most economic downturns, credit becomes cheap causing borrowing and spending on capital projects creating jobs and turning the economy upwards. If there is no credit this cannot happen and stagnation occurs. Cheap credit is bad, no credit is bad- so what should the Fed do to push the market to the middle?
Settling this argument would require a calculation that could quantify the losses to the economy related to credit illiquidity and pit them against the inefficiencies of evaporating wealth from letting these mortgage-backed securities fail. No one can calculate this because it's probably impossible (another word for impossible calculation is the Future.) Instead, people can only guess. So a trillion dollar decision comes down to guesswork which reinforces the vagueness of the rhetoric surrounding arguments from both sides. I would argue that when the bond market shows negative interest rates as it did this week, the markets are demonstrating that they are willing to lose part of their investment to be sure they don't lose all of it. When this is the state of your banking industry, a guess to create liquidity is starting to look pretty good!
Whatever happens, the US economy is in an adjustment period, doing nothing is certainly one way to get where its going to adjust to. A bailout will not "save the economy" as the rhetoric suggests, it will merely soften the journey to its ultimate destination of post credit crash America which will look pretty different than it does now.

post script
As I watched simulcasts of the floor of the house and the floor of the NYSE, I could actually watch the "markets react" as the votes hit the big board in Congress. It did make me appreciate Canada's election system of no fixed dates. Its true I find the spate of elections in the last 8 years bothersome and expensive, but when I watch an economic crisis overlap an election down south, I mourn for reason.

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