In a surprise move, the House of Representatives yesterday voted against Paulson’s $700 billion bailout bill. I was shocked, personally, because the bill was widely expected to pass and seemed to have a lot of support from both parties in congress. In any event, this basically brings us back to square one since what happens in the Senate later this week probably won’t help the impasse in the House.
Stocks Plunge
The market clearly expected Congress to quickly pass the bailout package as evidenced by last week’s moderate rally and yesterday’s almost 9% plunge after the announcement was made. Even as volatile as the market has been lately, that is quite a drop. Historically in periods of sudden extreme volatility (9/11, the asian financial crisis, the LTCM collapse, etc) the market has rebounded sharply within the next few months. Of course, that doesn’t mean the market will rebound again this time, but we can hope.
Mixed Feelings
I have mixed feelings about the bailout package. It’s difficult for me to take a position on because I can see both sides of the argument. On the one hand, bailing out irresponsible banks and lenders is a huge moral hazard. If they aren’t allowed to fail in spite of the disaster they’ve created, what lesson would that teach everybody else? That it’s okay to be irresponsible so long as you’re big enough to bring everybody else down with you? A bailout only encourages more of the same.
On the other hand, what good is teaching everybody a lesson if it destroys the economy in the process? Without the stop-gap measure of a bailout, things are almost certain to get worse before they get better because investors are likely to lose confidence in the US finacial system without some sign of government commitment.
Overall, I suppose I have to agree with Curt’s assessment that it’s better to go ahead and get it over with. A quick, severe recession seems preferable to me than a decade of stagflation. One thing is for sure: there’s no easy way out of this.
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7 responses so far ↓
1 Mr. ToughMoneyLove // Sep 30, 2008 at 10:24 am
Your assumption that a severe recession will be “quick” may be unfounded. Unemployment will increase sharply, followed by massive government spending to create jobs and provide even more jobless benefits. Many of us will be severely taxed to pay for it. For me, that’s a recession because my standard of living will be substantially impaired.
2 Kyle // Sep 30, 2008 at 10:30 am
It might not be quick, but it will at least be quicker than the long drawn-out pain we’d see if we employed bailout after bailout to prop up a rotten financial system. IMO we need a complete cleansing of the system.
3 Curt // Sep 30, 2008 at 10:54 am
I completely agree.
But, now what is congress going to do? They all want to leave town to work on their campains with 36 days before the election. But, the administration and the congressional leadership is trying to push another bailout bill before the stock market continue to tank.
I think the time to pass the bill is over, and it’s not likely that they will get anything passed before the election. The people have spoken. Even if they modify the bill, they still will not get enough votes. Nobody wants the bailout. The failure of this bailout bill will surely sink the market and many politicials careers will go down the drain with it.
4 Curt // Sep 30, 2008 at 10:57 am
I guess what I am saying is that not only is this an economic disaster, but it is also going to be a political disaster.
5 Kyle // Sep 30, 2008 at 10:59 am
Oh undoubtedly. I think a major part of why the bill failed is that it’s so unpopular and few politicians want to give their opponents ammo on election day.
6 Mr. ToughMoneyLove // Sep 30, 2008 at 11:23 am
Too much of the blame is being placed on credit providers. A complete cleansing of the system will have to include changing the mindset of consumers who have grown accustomed to a lifestyle propped up by credit. Who is going to perform that cleansing? I didn’t hear any of that in the debate yesterday. No politician has the guts to tell his/her constituents to stop spending and start saving. It’s too easy to blame the credit providers, not the credit users.
7 Andy // Oct 1, 2008 at 11:02 am
What this bill is trying to do is restore confidence in the markets. If that happens we can begin moving forward. The bill is only the first step in the rescue and better governance will be required in the future. A recession is inevitable now, the severity is what is in question. If the markets stabalize, we could have a relatively quick recession (till about mid 2009).
The other big problem is our national debt - $10 Trillion this week!
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