Signed Rescue Bill Hasn't Stopped the Market's Downward Trend 13 comments
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The “sweetened” version of the financial rescue plan (remember, don’t call it a “Wall St. bailout”), considered by most to be (as a Washington Post story puts it) “the greatest intervention of the federal government into the private marketplace since the Great Depression,” passed the House and was signed by President Bush yesterday. And yet the Dow fell more than 150 points on Friday, to end its worst week (biggest point drop) in seven years.
Why? Well, Friday morning’s news of more than 150,000 jobs lost in September (and the ninth straight drop) had a lot to do with it. It’s kind of a stark reminder that this is a rather desperate “rescue”–more like being put on life support than going on muscle-boosting steroids. We know that even after this rescue is put in place, our economy will still be badly over-extended and under-invested.
The stories tend to refer to the new legislation as the “$700 billion package,” but that doesn’t count the $107 billion increase in the deficit from extended tax cuts (including AMT relief) whose costs of temporary extension are not offset although the policies are far from emergency, temporary ones. (Here is Concord’s position on it.)
Here’s how the official Congressional Budget Office cost estimate describes the effect of the rescue portion on the debt and deficits (”net budget impact”) (emphasis added):
CBO expects that the Treasury would use most or all of the $700 billion in purchase authority within two years (after which the authority to enter into agreements to purchase various troubled assets would expire). To finance those purchases, the Treasury would have to sell debt to the public. Federal debt held by the public would therefore rise by about $700 billion, although the government would also acquire valuable financial assets in the process.
As noted above, CBO expects that since the acquired assets would have some value, the net budget impact would be substantially less than $700 billion; similarly, net cash disbursements under the program would also be substantially less than $700 billion over time because, ultimately, the government would sell the acquired assets and thus generate income that would offset much of the initial expenditures.
In addition to any net gain or loss on the purchase of $700 billion or more in assets, the government also would incur administrative costs for the proposed program. Those costs would depend on the kinds of assets purchased or insured. On the basis of the costs incurred by private investment firms that acquire, manage, and sell similar assets, CBO expects that the administrative costs of operating the program could amount to a few billion dollars per year, as long as the government held all or most of the purchased assets.
Note that the Blue Dog Democrats did go along with this version (here’s the roll call), despite their opposition to the (Senate-added) deficit-financed sweeteners. I think they knew that the risk to the economy, if this legislation had not passed, vastly outweighed the potential benefits in holding out on AMT relief–which the Blue Dogs knew would ultimately be passed in violation of pay-go anyway (despite all their valiant efforts).
You see, the Blue Dogs know how to be adults in representing the best interests of their constituents through their (thoughtful) votes.
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www.youtube.com/watch?...
Traders need to be very careful in this market.
Can we therefore say that this credit crisis is a 'routine' (albeit severe) response to the credit expansion we've had over the last five years or so? If so, then why did Bernanke and Paulson panic? Could it be that as middle-aged men who have never witnessed a severe credit contraction (such as happened in the early 1970s and early 1980s), they overreacted? Of course, more cynical and sinister theories are possible, but this is the benign theory: they were simply over their heads in responding to a relatively normal credit contraction. And we taxpayers have to pay, as well as setting an extremely damaging precedent for the USA.
She is just being sarcastic - right?
As to whether this is a routine credit contraction or some extreme abnormality I believe it is more routine than abnormal. The US housing market was severely over extended, credit default swaps were traded like candy back and forth without even owning the underlying security.
With so much leverage to be unwound the contraction is painful but to those of us who lived through the early 1980's this is modest. The Ben and Hank panic is a far more severe issue than the credit contraction they're worried about. What will they do with a real crisis?
Martial law???
I saw the Congressman's comments on the floor via the YouTube link... Interesting.
If Bush-Paulson, et. al. think that they could enforce anything close to martial law, consider the L.A. riots in the 90's, New Orleans, Katrina... Simply put, the ability of this government, at the federal, state and local level has the same ability to control things if unrest develops as FDIC does if they try to cover a run on the bank with their one percent assets... It ain't gonna work.
The military has problems taking care of business in two countries right now that are about the size of California. Iraq, the larger of the two, has a population of about 27 million. California is about 37 million...Then there is New York, Texas, etc., etc. That's a lot of country with a lot of pissed-off people if you need to do that.
Police will watch out for their own families and abandon their posts (50 percent or more did this during Katrina and in a situation like this I would bet 70-90 percent would walk out), there are few National Guard troops and military - and you would need to assume that they would shoot on their own people looting stores, etc. -- not just those "bad people" that we always see during riots on TV. They would be average Americans, soccer moms looking for food for their kids.
I guess they could always nuke their own country to control us!?!?
Anyhow, I doubt it would ever come to that. Bush would start another war with some other country first... I think Congressmen also "embellish" their stories a bit... Notice how he doesn't give any specifics.
Anyhow, if they are counting on martial law to control this country if "this sucker goes down," it will work as well as the bailout plan.
> jack
People often rattle words like news being priced in or discounted, however, the simple truth is markets are nothing more than supply vs. demand. For the market to move upwards, there simply has to be more buyers than sellers. Sounds simple right, it is, so let's think about Friday and it should be clear why the market had to fall and fall hard.
Everyone I spoke to was waiting for this bill to pass in order to sell their holdings. The whole world expected a rally, but everyone was waiting for this rally in order to lighten up, to sell...............
Why, this is simple also....... For the first time in my trading life (over 20 years) all the media as well as the two presidential candidates have been hammering into everyones head the severity of this financial crisis. They have likened it to the great depression, the Titanic and so forth, now, add this fact to a year where most people have watched their portfolios, 401k's, and mutual funds losing value on a monthly basis and you have a simple recepie, people want out of stocks period.
Why did Friday have to fall, again people wanted out, they were waiting in mass for this rally in order to sell and once the selling started, who would come in to catch this falling knife? The market had to fall right in to the close, again, who would buy? The market will be there another day, so why buy in now? This is a time to be in cash, money markets, T-bills, whatever, anything but stocks.
The market will no doubt come up again, but first there must be a consolidation at the lows and clearly we haven't reached that point just yet. In fact, we're not even close.
What's interesting is when the market rises, it will rise quickly and for the same reason as this current fall. Supply vs. Demand. When the news changes a bit and the crisis on Wall Street is not the headline story every hour of every day, people will begin to buy stocks again. The rise will be fast and furious because prices will be very depressed and once the buyers arrive and purchase Diamonds or Spyders at expremely discounted prices, who will be in such a rush to sell them? The market will move up hundreds of points and those who bought at or near the bottom will simply hold on for the ride.
Its all about supply vs demand, that really the point of my article.....
Hope this is useful to someone.
Cash (and safe cash) is king.
I would prefer to see a cratering at some point followed by a solid base-building period... but the fundamentals in the world economies are still very far from suggesting that scenario.
I am feeling your pain as I just looked at my 401K. Only 66K down this qtr!! I want to squeeze some necks! I can't be alone!
Just a little old $66,000.00. Just one "little guy". Now with some basic math lets throw those 78M boomers coming into retirement into the mix with their plans.
So much for my buy and hold strategy. I still have eight years to tap into it even though I plan on retiring next Christmas. I am hoping for a bottom and then a recovery for seven or eight years. I may break even.. at best.