flahute

From this morning’s Wall Street Journal:

‘No’ Votes Came From All Directions

The fatal “no” votes to the financial rescue package came from a strange-bedfellows coalition of lawmakers, from the most conservative to the most liberal members of the House, with a large number of representatives from low-income districts angry that Wall Street seems to be getting handouts while people getting tossed out of homes would get minimal aid.

One common strand that tied some of the diverse opponents together: a tough re-election fight. Eighteen of the 21 most vulnerable Republicans up for re-election, and 10 of the 15 Democrats in the closest races voted against the $700 billion financial rescue, illustrating the political hazards of bailing out Wall Street without offering an equally generous hand to taxpayers.

To me, this illustrates that the members of the House aren’t really thinking about doing what’s best for the country, even if it’s unpopular, but just care about protecting their jobs. It does make me wonder how many of those “no” votes would have been “yes” votes if we weren’t only 5 weeks from Election Day?

As Juvenal said in Roman times, “Two things only the people anxiously desire — bread and circuses.”

If everything was left solely to the people, do you think we’d be paying any taxes? But without tax revenue, how would vital government programs, such as say … Defense … be funded? Taxes are not popular, but are vitally important to ensure that our government can continue to function.

Putting together a plan, even an initially flawed plan that can be revised down the road, is vital to getting our economy back on track. The current ad hoc approach causes more uncertainty, more panic, more consolidation, less competition, and certainly doesn’t seem to be working.

What is going to happen if the Citigroup, Bank of America, and JP Morgan Chase acquisitions of WaMu, Wachovia, Bear Stearns and Merrill Lynch lead to their own financial troubles?

Without a Bailout Plan, What Will the Cost Be? – TIME

By voting down the proposed $700 billion financial bailout package — and causing a spectacular stock market rout — a majority of members in the House of Representatives made a clear statement that they didn’t want to put taxpayers on the hook for the failures of financial institutions.

But there’s a catch: taxpayers are already on the hook for the failures of financial institutions, and it’s possible that the bill will actually be larger without bailout legislation than with it. That’s because the regulators who mind the financial industry — the Federal Reserve, Treasury and FDIC — will keep doing what they’ve been doing: stepping in to prevent the chaotic failure of banks and other large financial institutions. This means continuing to put hundreds of billions of taxpayer dollars at risk, but in a way that adheres to no clear plan of action and doesn’t require members of Congress to explicitly approve their actions.

The fact is that as much as many of us would like to think so, there’s truly no such thing as a free-market economy; especially not as global as the economy has become over the past 20 years.

On Monday afternoon, Wall Street basically stopped trading to watch TV — mainly CNBC — to see how the House of Representatives would vote on the $700 billion bailout package. When it first started looking like the bill would fail, the Dow plummeted 389 points, or 3.6%, in just seven minutes. If it had continued at that pace for much longer, this would have been perhaps the most harrowing day in stock market history. It didn’t, but things were still really, really bad. The Dow ended the day down 778 points, or 7%, and the S&P 500 — a better measure of the overall market — was down 107 points, or 8.8%, its worst performance since the 1987 market crash. And markets for bonds and short-term loans were, for the most part, nonexistent.

And without a market for commercial paper, there is no short-term financing available for most businesses to conduct their day-to-day business … like rent and payroll. According to a recent Bloomberg article, “a continuation of this trend would be problematic for the economy, as the commercial paper market is where entities go to raise working capital to produce goods and services.”

So what happens now? On Capitol Hill, House leaders said they’ll try again soon. Treasury Secretary Henry Paulson practically begged for a revised deal in his brief appearance after the market carnage. “Our tool kit is substantial but insufficient,” he said. The market’s traumatized reaction today may change some minds and some votes.

In asking Congress 11 days ago for the authority to spend up to $700 billion to buy troubled assets, Paulson and Fed Chairman Ben Bernanke were hoping to share some of the responsibility and the blame — and get the freedom to boost companies that weren’t already on the brink of failure. Instead, they’re back to being crisis managers for the moment — and maybe for the duration of the crisis.

That’s not all bad, especially now that most of the endangered financial institutions are commercial banks. The Federal Government has clearly defined that authorities take them over, merge them out of existence or shut them down — whereas it had to make things up as it went along with investment banks Bear Stearns and Lehman Brothers and insurer AIG. That’s why the demise of giant banks Washington Mutual and Wachovia, arranged over the past week by the FDIC, occurred in a far more orderly fashion than the non-bank meltdowns.

But orderly isn’t the same as cheap. To get Citigroup to absorb Wachovia, the FDIC agreed to share the risk on a $312 billion portfolio of loans (Citi has to eat the first $42 billion in potential losses; anything above that hits the FDIC fund).

According to a Bloomberg story last week: “It won’t take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year.” And that was BEFORE the FDIC became exposed to another $280 billion … so now the FDIC may be in need of its own $430 billion “bailout”.

Also, the fact that every big FDIC deal so far in this crisis has been different — IndyMac was allowed to fail, with only insured deposits safe; WaMu was seized, but all depositors were protected; and Wachovia was sold in a deal that protected both depositors and owners of the company’s bonds but left shareholders with very little — has left investors guessing about the fate of the rest of the banking world. Hardest hit in today’s market sell-off were regional banks like Sovereign Bancorp and National City, perhaps because they seem too small to get special FDIC treatment.

Federal authorities are going to keep doing whatever they can to keep the financial system from collapsing. Taxpayers will bear the risks and the costs of that, whether Congress votes to put them there or not. And it’s possible — although nobody can know for sure — that this ad hoc approach will end up costing more than an up-front $700 billion bailout.

So … is it better to have a imperfect plan, but a plan nonetheless? Or is it better to simply keep floating along as if the market will take care of itself, and have the government step-in again, and again, and again, with no real rhyme or reason as to which companies they help and which they don’t?