Bailout: The Real Cart/Horse Issue
Imagine you had $100,000. Yippee! Before you head out to “Party like it’s 1999”, let’s say you’d loaned out some of that money to me, and oh, let’s say you also loaned out some of that money to DemonDoug, Tastylunch, Gtrinvestor, binv, dwot, and other investors (just to randomly pick some popular bloggers & investors that I personally admire). But for reasons we are not fully explaining to you and for which you’ve maybe already guessed, we have failed to pay you back. Furthermore, we refuse to let you see inside our house finances, obfuscating those financial numbers because they’re embarrassing as to how poorly our vision, wisdom, diversification, risk assessment and general business practices were, financially speaking, over these past 8 years. That $100,000 of yours is gone; you may only see a fraction of it in the future.
Now, suddenly, a wealthy relative, say your long lost Uncle Samuel, gives you another $100,000 at extremely favorable terms. How likely are you to loan out any of that new money to me or Tastylunch or the others?
This is how I see the bailout as it currently stands. I’ve been busy with work, so maybe I’ve missed some key elements (pardon my nose to the grindstone then, please), but no one has yet been able to explain to me how a huge influx of our money into a system that’s as constipated as Jabba the Hut in a cheese factory is going to make one iota of a difference if the core issue has not been addressed?
And what is that core issue? It’s trust.
Can someone please explain to me how the trust is going to be restored by this Congressional Act, the trust that has been repeatedly violated over these past 8 years at all levels of this government, from the Office of the Idiot King, through the Justice Department, through a rubber-stamping Congress, down through a Finance Industry with its CEOs & their banking lobbyists all drinking madly the liquor of quick-buck shady deals, ignorant or brazenly complicit to the hazards with which they’d saddled the rest of us? (Nero, dear fellow, stop fiddling and put down those matches!)
I understand Congress will take up the issue of regulation in another session (hopefully, very soon!) and not forget about it. And I understand they are trying to get the funds out there to help thaw the credit freeze. But when Bernanke and/or Paulson went forward anyway with a plan to release $620B to the global markets just ahead of Monday’s House vote (that failed), it should make you ask yourself three questions:
(1) Don’t Hank & Ben have to wait for Congress’ approval (or was this a forgone conclusion)?
(2) If not, then what the hell is Congress voting on if the Inflation Twins don’t have to wait for the purse to be ordered open? (This should concern you gravely, but that's another whole blog entry...)
(3) Most importantly, why hasn’t that influx of $620B (nearly the full amount Congress had originally been arguing over) made a single iota of a difference to the markets here in the USA and around the world?
Academically, it would be nice to know the answer to the first two questions (if you know, please educate me). But, as others have pointed out in their CAPS blogs, the bailout package will probably not have any effect on the market, as was just proved on Monday with the early release of that $620B (the market's reaction to be sinking 300+ points even before the House vote was started and closingd out the day 777 points down, all told).
What I’m pointing out here is that no matter how many $100k bills your “rich uncle” gives you, you personally are not going to be willing to lend any of that money until some lending practices are corrected. To that end, has anyone given the ideas of Karl Denninger a good mental workout? I don’t understand enough of the derivatives market to know if what he says is true or even if it will work. But it’s certainly a heck of a lot cheaper alternative!
As I suspected last week when Congress & the President (in a rare moment) agreed to push/rush this thing through, it’s more because of international pressures, as Denninger points out in his Sept.30th blog entry here, not for your & my benefit (well, not directly anyway). There is some wisdom in providing those Europeans, Japanese and Chinese who’ve bought our crap mortgage paper an escape by buying them out of those positions, in that it restores some faith in the USA as a whole (thanks Finance Industry for tarnishing that, BTW) and helps stave off a rush to cash-in a lot of the Treasury notes they hold. That would be pandemically bad for us all. But at what point do we draw the line, choosing between a very very bad choice and an absolutely horrible one? Do you choose to load yourself with massive debt, bloating the federal budget by a quantam-leap of 25%, and paying taxes on that debt for the rest of your life, or do you choose to risk extinguishing the faith in the already-weak US dollar and the promises that capitalism is still an excellent export because we don’t allow unfettered deregulation to swallow our markets and financial integrity? Rather bluntly, do you choose to shoot your mother or your father?
For now, it doesn’t matter because (to me) it seems as if the government is putting the cart before the horse. In short, we may live up to our motto: “In God We Trust”. But between us mortals, we need Trust spelled out on paper, and certainly before we hand out any money.
Finally, I understand we’ve got to be careful here, for we only get one shot (really) at fixing this. While trying to cure the cancer into which we’ve been led, we’ve got to be careful to not kill the patient. It’d be like winning the battle but losing the war. I don’t fully understand the credit crunch, and I certainly don’t want to see our financial system (and the rest of the world’s finance) constipated like a cheese-engorged Jabba the Hut. That wouldn’t be good for any of us. But handing out money without the “trust” part figured out is a sure recipe for more failure.
Call or write your Congressmen today, now, here: http://www.house.gov/
And here: http://www.senate.gov/
And express your concerns.