Financial Bailout Failure Roils Markets
Kurt Brouwer September 29th, 2008
Update: The negative news on the financial bailout vote failing in the U.S. House of Representatives certainly did roil the markets and stocks plunged across the globe. Here at home, the S&P 500 fell 8.79% and other indexes, both foreign and domestic fell sharply as well.
Though it may not seem very exciting on a day like this, there is one bit of positive news, which is that the U.S. dollar is having a strong rally versus the Euro and the British Pound. This article from the U.K.’s TimesOnline [emphasis added] makes the point:
In its latest severe sell-off, the already sharply weaker pound plummeted by almost 5 cents against the dollar today compared with its level at the close of New York trading on Friday.
The fall of more than 2.5 per cent in sterling saw it tumble from $1.8445 to levels below $1.80, taking it to a 10-day low of $1.7962. The pound has now shed almost 11 per cent against the greenback from peaks above the watershed of $2 reached at this time last year.
…The euro also fell heavily against the dollar amid concern over the eurozone’s banking strife and the adequacy of arrangements for bank rescues in the 15-nation bloc. The euro lost as much as 1.8 per cent against the dollar, falling to levels of about $1.4340 from a US close of $1.4613 on Friday…
Financial Bailout Vote Fails
Stocks opened lower today as investors seemed to be quite negative about the terms of the proposed financial bailout being voted on in Congress today. However, when it appeared that the bailout proposal was not going to get through the House of Representatives, the stock market tanked as this article from the Associated Press explained:
Fear swept across the financial markets Monday, sending the Dow Jones industrials down as much as 705 points, as the financial bailout package was defeated by the House.
As the vote was shown on TV, stocks plunged and and investors fled to the safety of the credit markets, worrying that the financial system would keep sinking under the weight of failed mortgage debt.
…The markets were highly volatile, with the Dow regaining ground to trade with a loss of about 360, then falling backing again, trading down 481.39, or 4.32 percent, at 10,661.74.
Broader stock indicators also fell. The Standard & Poor’s 500 index declined 63.13, or 5.20 percent, to 1,150.14, and the Nasdaq composite index fell 124.29, or 5.69 percent, to 2,059.05.
With Wall Street nervous that the plan may not pass, the yield on the 3-month Treasury bill fell to 0.68 percent from 0.87 percent on Friday. That showed that investors were prepared to get meager returns on an investment as long as it was secure…
The House did fail to pass the bailout in a bipartisan defeat for the controversial measure. At this point, it would seem that Congress and the U.S. Treasury have to go back to the drawing board. The problem, of course, is that Congress has very little credibility with the American people. In fact, Congressional approval ratings were at an all-time low a few weeks ago. This mess has not helped Congress’s approval ratings I’m sure.
Many of the problems we are facing have been caused by Congress and its weak oversight of Fannie Mae and Freddie Mac and other mandates to push subprime loans through the banking system. Other government agencies — Federal Reserve, U.S. Treasury, SEC — also get poor marks. And, Wall Street and its penchant for high leverage and speculation deserves plenty of blame as well. Finally, many Americans helped exacerbate this problem by purchasing homes they could not afford and then walking away from the loans when they became inconvenient. All in all, there is plenty of blame to go around. But, now is not the time to focus on blame, but rather on solutions.
Asking government entities — the very ones that helped get us into this mess — to devise a creative solution to this crisis is a bit like doing the same thing over and over again, but expecting different results. However, I am comforted by something Winston Churchill said during World War II, ‘America always does the right thing, after trying every other option.’ Unfortunately, we seem to be proving Mr. Churchill correct again in that we are trying lots of options without finding a solution.
I just hope we don’t take too long to run through all the options. Even though most of us don’t like this bailout, some form of government assistance to the credit markets may be necessary at this time. Once the crisis has passed, we can revisit it and make long-term, structural changes as needed.
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I think the biggest problem has been that, especially in the House, many Congressmen have understood this bailout to be very unpopular. And with the election so near at hand, they didn’t want to do anything that would foil their re-election (a problem in my mind, but nonetheless). Note that, if I remember correctly, 95 Democrats voted against the bailout in addition to the two thirds of House Republicans.
On the other hand, I think we are seeing those feelings change due in no small part to the MSM’s hysterical coverage of financial news culminating with today’s massive drop. Truly, blogs and AM radio have their place, but when the MSM speaks - nay, roars - in one voice, it is impressive. It takes a strong will to deny TEOTWAWKI (the end of the world as we know it).
I suspect an alternate bailout will be in hand in a few days. Perhaps not as bi-partisan as it might’ve been today tho’.
Good points jdm. The bailout is very unpopular and our representatives generally know which way the wind is blowing. Now that the stock market loss is over $1.1 trillion today maybe they will be more sanguine about the potential costs of the bailout.
Since it’s been characterized as a bailout for “Wall Street”, most of the population hasn’t been in favor of the bill. I don’t agree with the oversimplistic label that the media has slapped on it, but I do think it was a poor deal for taxpayers and rightly should’ve been rejected.
If the government is creating liquidity and pumping capital into these institutions, it should get something in return. Paulson claims that the banks won’t go for that. No problem, they can sink or swim on their own then. There are still plenty left to fail, bailout or not.
Penelope: Good points. Given how savvy Secretary Paulson is supposed to be, he did not handle the financial workout program well. But then, neither did the Republicans or the Democrats.
I think the only Federal institution to get high marks during this mess has been the FDIC, which has quietly and competently dealt with several large bank failures — WAMU, Wachovia, IndyMac etc. There is an emergency provision for FDIC to be much more aggressive, but that has not yet been activated and I don’t understand why. I do have one problem with the WAMU deal which is that they did not protect the bondholders. In other deals, the stockholders got closed out, but bondholders were protected. That’s a better model to use going forward.
I think the PR on this deal has been handled very poorly both because of the extreme language that’s been used to pressure the public into supporting the bailout, but also because it should be clear by now that these workouts really don’t bail anyone out because the common shareholders lose everything.
I am pro-bailout but also pro-eventual-evolution of world financial system into a single global currency. This bailout is a measure to increase the worlds money supply to illuminate and reflect increasing wealth and domestic production and investment world-wide. The massive negative tradeoff - the short term weight and burden squarely on US taxpaters will need to be diverted and renegotiated and revised over and over again for many years to redistrubute this burden more evenly or else effective demand will collapse in US which will lead to an erosion of moral and social contract. The problem creating this burden and negative trade-off is systemic. The Fed holds the exclusive privilgege of increasing currency to account for new growth. The Fed is private, their govenors are not elected, just like the EU board of bankers, not elected, meet in private… the world banking system is not a democratic and they don’t answer to the american people, the european people, anyone but their own class and folks with their level of power. The bankers job is to grow the ecomony visavis the growth and destruction of the real money supply. The repackaging of securities into arcane financial instruments by banks permitted by the us gov was giving the greenlight to private banks to generate a precurser pointer for each new future $ generated by the Fed. This bailout was probably in the works for many years now - the best means they know of to effect real grow of the money supply Think about it, how could they possibly generate legislation so quickly for approval…? They’re slamming it down our throats with crisis threats… don’t get me wrong, the threats are real, but not imminent like, tomorrow or else… The US is growing the money supply to support and fuel the expansion of the world economy which is growing so rapidly, new money needs to be created to maintain it and grow it continiously. another downside is…if regular americans fail to recognize how they are effected and don’t organize to protect their vital interests they will discover that the social contract will erode… like with every generation, each has to re-establish it’s place and expectations… universal healthcare, home ownership, comfortable retirements… well funded schools, affordable college tuition, these privileges will not be handed over based on some democratic “princples” they must be articulated carefully and expected, or else the interests of common folks will likey have these rights renegotiated away and will be unceremoniously ignored if unconscious and disorganized and unclear what their value is worth and what they expect.