Losing $1.2 Trillion To Save $700 Billion

The House Republicans are a bunch of financial morons. They played politics today with the life savings of the American people – apparently on the altar of ideology. Just like John McCain, who turned this very serious situation into a farce, they put politics over country.

When the closing bell rang this afternoon at the New York Stock Exchange, $1.2 trillion of wealth was wiped out. That is not money from the pockets of Wall Street fatcats – that is money from all of our retirement plans and college savings plans. The Dow plunged 777 points – the largest point drop in history and the biggest percentage drop since the first day of trading after 9/11. The S&P plunged 9% and the Nasdaq plunged 10%.

After the House and Senate leadership worked throughout the weekend to add homeowner protection, oversight, and executive pay caps to the initially flawed bailout plan, it appeared the bailout bill was going to pass this afternoon with bipartisan support. But, then the House Republicans took up with a case of free market tunnel vision and political posturing.

To add insult to injury, the House of Representatives has decided to take tomorrow off because of the Jewish holidays. So, on Tuesday, the American people and their retirement savings are on their own. The Dow plummeted hundreds of points at the closing bell this afternoon. Foreign markets are plunging as I write this. It is a near certainty that tomorrow will see another bloodletting on Wall Street when the opening bell rings. With no plan to fix the credit crisis as Congress left town without doing their job, the markets tomorrow will do well not to end up in a free fall.

Hold on to your ATM cards, we are in for a wild ride. As credit freezes up worldwide and as the financial markets go south, it is only a matter of time until there is a run on banks, and jobs on "Main Street" start to disappear.

It is the economy, stupid! The House Republicans today slapped the American people with the back of Adam Smith’s invisible hand. It is time for the American people to slap them back at the polls.

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12 Responses to Losing $1.2 Trillion To Save $700 Billion

  1. Randy Tayler says:

    Huh. I agree with almost everything you said about what happened and what’s going to happen, but I think they did the right thing, hands down.

    (And I was saying this to my friends yesterday, even as stocks dropped. Today we’re already back up by a third of what we lost, all in one hour.)

    That altar of ideology isn’t a pagan altar of a false god — it’s a true altar of true principles, and SHOULD be sacrificed to. You say that they played with the life savings of the American people, but there’s an enormous segment of folks who have been saving for rainy days such as these, and who don’t deserve to be burdened by the bailout for everybody else.

    In our free market, institutions will rise to fill the voids left by failing banks and credit freezes. Interest rates will rise as they see less competition and know they can charge more, and they’ll make a tidy sum. But they deserve it! They didn’t invest foolishly.

    Free market ideology doesn’t mean no-problems, no-pain, no-tears. It means that we’d rather take the ups and downs of our devising.

  2. Bryan says:

    I’m calling shenanigans! My wife and I are ‘American People’ with several retirement portfolios. Did they go down in value yesterday? Yep. But I’m in the market for the long run and make smart financial decisions based on research and facts. I also manage my risk well, or at least I hope I do. But it’s called risk for a reason.

    Please give me the names of the people that lost 1.2 trillion yesterday. I’d love to know.

  3. Mash says:

    Bryan, its great that you manage your risk well. Good for you.

    Shenanigans? I am sure its only the stupid people who do not manage risk well that lost money. I am sure those stupid old people who parked their money in blue chip stocks got exactly what was coming to them. And if the market goes down another 20% it will serve them right. After all, us real “American people” are too smart to worry about little things like the financial markets or the credit markets.

    Besides, what could possibly go wrong when the credit markets freeze up? I am sure its all crazy talk. I dont know what I was thinking when I wrote this post. You are right, we have nothing to worry about! 🙂

  4. jasper says:

    Mash, Bryan means to say he keeps his money in Swiss Banks.

  5. Kaiser Kabir says:

    But Mash, you were against the bailout? You called it a “scam.” Yet, now that the Plan is dead and buried, you seem to be in mourning.

    Please explain your position further.

  6. jasper says:

    Kaiser, I should allow Mash to respond, but I thought I’d share my 2 cents. I believe Mash called the original 2 and 1/2 page proposal that Paulson presented to Senate banking committee a scam (and it was, and nobody was going to approve it).

    During early Senate hearing, Paulson/Bernanke team could not even tell where this magic number $700 B come from, because there was no clear layout of what the money is going to fix specifically. It appeared to be a scam to help out the fat cats; it had no room for any transparency for the treasury (Paulson asked for complete authority without having the proposal reviewed or questioned) or any accountability on the parts of the mega corporations (the CEOs of the failing banking industries were still going to get their millions of dollars compensation, and not take any hit from the failing mortgage industry).

    It was preposterous! It outraged general public and even the political leaders in Capitol Hill. The Bailout plan needed a thorough revision. In the revised plan, the jackass CEOs do not get their fat bonus from taxpayers (remember HP’s Carley Fiorina got $42 M severance package when she was fired – that’s the kind of CEO-culture that needs to be stopped).

    Why should the CEOs of the mega banks and investment firms be bailed out when it is known that the factors that caused the economic downfall were personal greed (by the risk-taking executives) and minimum oversight (the bigwig Republicans like Romney, McCain, Gramm had been yelling for less regulations for years – coerced by the bank lobbyists).

    Under Paulson’s plan the bankrupt home owners were not going to be able to avoid foreclosure. They already saw the equity of the home evaporate (their houses value much less than the price they paid for), but at least they should be able to stay at their homes. When asked about it the scoundrel Paulson had the audacity to say “(some) homeowners will be collateral damage”. It made my blood boil.

    To sum it up and respond to why the bailout sounded like a scam over a week ago – because the original Paulson/Bernanke proposal did not have enough reflections on the real crisis and mitigation, it was just quick scheme to help the fat cats. Note that they no longer calls it a bailout, but rather a RESCUE plan.

  7. Mash says:

    Jasper, like you said, its the changed bill that I think should have been passed. Certainly should have been passed once it was brought to the floor. To have such a bill fail on the floor in a farce of a vote further inflamed the crisis of confidence in the markets. They pulled a joke on the American people.

    Kaiser, I was vehemently against the original 3 page proposal Secretary Paulson brought to Congress. It lacked oversight, did nothing to help the housing market bottom, and was a $700 billion blank check to the administration. It amounted to giving the lenders top dollar for their toxic assets and leaving the federal government and the taxpayers holding the bag. With nothing to help the actual home owners with the mortgages this amounted to the government taking the hit for every foreclosure. And with each foreclosure the government’s portfolio would get worse and worse.

    The Senate and House took the initial proposal and added at least two important provisions: 1) the ability of the government to go back and renegotiate the mortgages that it now will hold, 2) strict oversight over the Treasury. It also includes provisions to restrict CEO pay if the Treasury buys the mortgage backed assets directly from the companies, and tax penalties on golden parachutes if bought at an auction – not perfect, but not bad either.

    The first provision – the ability to renegotiate – will stem foreclosures. There are people who cannot afford their current mortgages and there are people who see that the debt they hold is much greater than the value of their homes. Both classes of borrowers are walking away from their homes because that is the best option for them. This is causing major supply imbalance and housing prices are plummeting – and will not bottom nicely either. For a soft landing, the loan renegotiations are a must and will allow the housing market to bounce back and will make it much easier for the braniacs on Wall Street to price their assets. Otherwise they are dealing with a falling knife.

    The new bill, then, is a much better bill and actually addresses the core issue causing the credit markets to freeze up. It is still not a perfect bill, and is one that anyone will have to hold their noses to support.

    There is a crisis. If no action is taken things will get very bad. The crisis is not in the stock market, but in the credit market. The stock market is reacting to Congress’s bonehead behavior, but in the long run will go very south as the credit crunch causes one after another bank to fail.

    The Administration had diagnosed the problem correctly, but served up a scam of a bill initially. They wanted Congress to act on the bill without modification. But, fortunately, that bill has been replaced by a 97 page bill that is a much better remedy. Congress deliberated, as it should have. The only issue I had at that point is that after bringing it to the floor Monday, the fools in the Republican caucus derailed it. The market turmoil was unnecessary and completely avoidable. A lot of people lost a lot of money as Wall Street panicked because a bunch of fools in Congress couldnt get their act together.

    So, I reluctantly support this bill.

    Now, free marketers (as in comments above) believe the market under all circumstances can correct itself. That may be true. The only problem is, as a society, we have to decide how much pain we want to go through until the free market in practice can prove the faith of the ideologues. Most normal people would argue that a theory is not worth the jobs and livelihood of millions of people. It is free market idiocy, without regulations, that got us into this mess. Only an idiot would recommend that we let the free market get us out. What was it Keynes said about the long term? 🙂

    I should add also, that as I write this the Senate is about to pass the bill with even more modifications. I havent read that bigger bill yet, but, from news reports, it looks like they loaded with some pork and some good provisions to try to garner more votes in the house.

  8. Kaiser Kabir says:

    Thanks for the explanations Jasper and Mash.

    I suppose the fun will begin once they try to price the debt.

    There appears to be two further issues that need addressing:

    (1) Undercapitalisation of financial institutions. Perhaps a Warren Buffet type of solution is needed here.

    (2) Introducing regulations that limit moral hazard by these institutions. Wall Street has very effectively milked the “run on banks” argument to their advantage. Private gain and socialised loss is a scam, and runs contrary to the principles of free markets.

  9. Mash says:

    Kaiser, moral hazard by these corporations worries me. This is a bit like that old National Lampoon cover. “If you don’t buy this magazine, we’ll kill this dog.” I am of the opinion that the dog ought to take a bullet or two. This was a train wreck begging for regulation for many years now. No one seemed to care – they were too busy making money. So much for George Bush’s “ownership society”.

    This thing had, and still does have I think, the chance of becoming corporate welfare. We’ll see. Its funny how deregulation always leads to massive government bailouts – seems socialism is fine to clean up free market excesses.

  10. Now that the Senate has passed the 700 billon bailout has Wall Streets destiny been sealed?

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