The Credit Hostage Crisis 24 comments
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Either credit is holding us hostage, or we are holding credit hostage. Either way, the surprise failure to pass the mega-bailout in the House of Representatives has increased panic levels in the financial markets to a fevered pitch.
Clearly, I was too early in expressing high confidence in the ability of our democracy to pass a mega-bailout bill in a timely fashion. It seems that we still need to apply maximum pain before all the gears get unstuck. I am frustrated by the early political commentary I have seen and read. I see politicians being as partisan as can be while claiming to be non-partisan. I understand that this President is "the most unpopular president in modern American history," but this sure seems like an inopportune time for Congress to take full advantage of it (of course, Congress as a whole also has very low approval ratings!).
However, allowing the democratic process to run its course is still a much better alternative than handing over blank checks and absolute power to any one branch of the government. This was the scenario that was in play when the mega-bailout drama began with Treasury secretary Paulson making his initial demands. I am encouraged to see the citizenry getting active and pressuring our representatives to do the right thing. I am encouraged to see the checks and balances in the Constitution working. But for anyone who believes that gridlock in Washington is a good thing, you are witnessing one of the huge disadvantages of partisan paralysis.
There are other things holding us hostage. Our distrust holds us hostage. A lot of us are so tired of Washington that we do not trust giving the government any more power or any more license to dispose of our tax dollars on our behalf. The people who need to fix this mess are many of the same ones who either got us here or allowed us to get here. Our fears hold us hostage. The $700 billion potential pricetag is so big that we demand certainty of outcomes when few can be delivered. This uncertainty feeds our fear. Our rage holds us hostage. We sense that Wall Street has fleeced the public yet again, and our righteous rage demands justice. Our distrust, fear, and rage all insist on achieving satisfaction. Unfortunately, we have allowed the financial rot in America to run so deep that we do not have time to feed these monsters at this moment. We must take a breath, think clearly, and do the best we can. We can still make sure that the current legislation does not preclude us from addressing the longer-term issues once we are back on the path of financial stabilization.
So here we are. The cold feet of 12 members of the House today cost us $1.2 trillion in stock market value while we haggle over potentially losing another $700 billion. Monday morning, the Federal Reserve jammed hundreds of billions of dollars more of liquidity into the system and still the credit markets continue to grind down. Folks, we are literally burning money. It is no wonder our banks continue to fail one by one.
After it is all said and done, this is still not a time to let panic hold us hostage. I realize it is hard not to do so. During the crash of 1987 (click here for a rebroadcast of Nightly Business Report on that day), the credit markets also seized up. Alan Greenspan was new on the job, and he rushed to pump liquidity into the system. Unfortunately, this time, we are at the dark end of almost a year's worth of efforts to pump liquidity into this system.
After the 1929 stock market crash, the government was slow to come to the aid of the financial system, and the economy plunged into the Great Depression. This time, we have a government that has already been very active in trying to prop up the financial system. It feels like we have just about run out of options; we have postponed our day of reckoning one too many times.
We are reminded of the old adage "an ounce of prevention sure beats a pound of cure." But I am compelled to note that the technicals say we are once again deeply oversold at historic proportions. The volatility (or fear) index is scratching 50, taking us to the pinnacles of fear in past crises. The percentage of stocks trading under their 40-day moving average, the good ol' T2108 indicator, is at 9% and right back to the historic levels we had at the July lows. This is a time to remain vigilant for opportunity. Sure, few of us will qualify for the kind of sweetheart, low-risk deal that Buffet received investing in Goldman Sachs (GS), but we must still look for our spots. (My cautions about the next likely phases of our economic stagnation still apply!)
Stay alert, give your loved ones an extra hug or two, and be careful out there!
Full disclosure: No related positions.
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This article has 24 comments:
If you want to know why this happened, please view this.
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America is not a democracy but a plutocracy. Plutocracy is governance by the wealthy.
beyondplutocracy.com/
Changing gears, my representative voted against the bill (one of three in MA who did so), and I called his office to thank him for doing so. Taking the time to get the government's action right is too important--this bullet will only be fired once. We should be applauding those who did not give in to the fear-mongering of the administration and many in Congress. So, if your Rep was one of those who refused to go along with a panic-stricken response to give immense power and resources to an unelected official, call their office and thank them. Let them know any short-term market turbulence can be withstood while a better plan is developed and a better bill is enacted.
When will the “Economic Engineers” of the world start to realize that economic behavior can not be engineered? A healthy economy evolves organically and system builders who try to “plan” or “fix” an economy inevitably fail.
While I am anti almost everything the Republicans have done since Bush was elected, I strongly approve killing this bailout.
If the root cause of the problem, is the housing market collaspe and mortage defaut, well then who did that?...it wasn't Wall Street.....it was us!
Yes, the FED kept rates too low too long and money was easy, yes Wall Street invented CDS's and CDO's, yes accounting regulations require mark to market, not mark to model, yes the FED kept rates to high to long and were igorant of the impact on derivitives, but we (the taxpayer) borrowed the money...nobody made us take it....nobody made us bid up homes prices beyond reasonable value, noboby forced us to get in over our head...we fell for it...we created the housing bubble, we are the ones defaulting, we the people are the problem.
At the end of the day, we were no better than the banks or Wall Street.
1) We've been held hostage by strangulatory taxation for far too long.
2) We've been held hostage by the financial system, whose best interest is to keep Americans in a credit-based lifestyle...their goal is to make sure we need loans, rather than be able to buy outright.
3) We've been held hostage by a government unable to control its spending, and which is in the pockets of the financial system -- its a gang-up on the taxpayer.
Did you really not see yesterday coming? How out of touch.
For me as a European it is often weird to see all that US partisan bickering; the youtube vid you post is only a pro conservative advertisement.
Don't get me wrong; I am not a Democrat!
But facts are facts and your conservative president once gave a speech before the Colombian university where he proposed that at the end of his presidency there would be 5.5 million new home owners from the low income classes.
Even if they had a bad credit rate it was not needed not to live in a beautiful house. The guy got a big applause.
And what about that republican Alan Greenspan; astronomical money growth was always the river where the weird mortgages came from.
You see Grandpa: American partisan bickering might be your local folklore but it does not help much...
And now, Bush, in all his wisdom (just like he has exhibited throughout his two failed terms) wants us to rush in and save the asses (and bonuses!) of these financial "wizards". Uh uh, not this time. Not until those folks who had to default have their loans re-written to something they can afford and the Wall St. fat cats have their bonuses stripped from them (amounting to many, many Billions of $s) to pay for it.
How in the world are you allowed to post here?
Our founders built the system with gridlock in mind. They viewed government a necessary evil and chained that evil with gridlock.
They wanted the government to function (outside of it's day to day duties) only when the people gave it clear direction. The people gave it clear direction: DO NOT BAILOUT THE PEOPLE THAT CREATED THIS MESS!
Yes, the economy will be a mess with a severe recession/depression in our future. But when we hit bottom, those that took us there will be gone.
This bailout would have kept them alive and in a position to start over and continue their corrupt methods of attaining as much wealth as possible.
What happened here was an attempt by the financial system to transfer it's insolvency to the US Government. I would much rather have the financial system fail than have the credit worthiness of the US Gov come into question on a global scale.
THANK GOD the bill is dead and let's keep our foot on it's throat just to be sure!
10's of Trillions of Dollars of artificial wealth were created in the last 16 years. Now it's time to give it back and there's no stopping that fact.
If the fed would give me a million bucks, I would provide a long "sensible" list of reasons why this would be good for America.
[O]ver the past five years, banks and securities firms gave an average of $231,877 in campaign contributions to each Representative voting in favor of the bailout, compared with an average of $150,982 to each Representative voting against the bailout – 54 percent more money given to those who voted Yes.
Democrats who voted yes received “an average of $212,700 each, about twice as much as those voting No, $107,993.” Republicans who voted yes “received an average of $273,181 each, 50% more than those voting No, $181,688.”
Last comment, I do quite a bit of consumer survey work. Main Street was taking a beating this last year and prior. The percentages of the irresponsible were in proportion to those on Wall St. The difference? Billions of waste by Main St on defaults by deadbeats vs. Trillions of waste, theft, manipulation and fraud by Wall St. That is truth and reality.
I am an investor and own two companies. I was highly responsible with my money. Guess what, I felt much pain in the last 1 1/2 years already by government and Wall St dual corruption pact. Hence, why the Main St. revolt of late. No Main St love., no Wall St existance. That is how our economy works and defying gravity as Wall St as the ONLY considered economic factor and focus by this government was stupid beyond belief as well as incredibly destructive to this nation. Hell, I am Republican but I'll admit, even Clinton knew enough to throw Main St. a bone.
Obama wins.