So…we had this big ass bailout get passed and what happened?

Shit got worse.

To put it into context, the Dow Jones this week cratered by dropping 18% (18.2 if you want to get all technical and precise). In July of 1933, a watershed point in the Great Depression, the Dow went down around 17%. So, you know, that’s bad.

As near as I can figure, here’s why…

  1. Banks know they’re full of shit. The fundamental problem is banks aren’t lending. They fundamental reason is they know the bullshit accounting techniques they used to value their assets are totally misleading and assume (probably correctly) that all the other financial institutions did the same thing. Meaning that Bank A doesn’t really know how bad it’s situation is and certainly has no idea how bad Bank B’s situation is. Meaning that it has no idea if Bank B is going to still be solvent in a few days which means that Bank A is reluctant to risk loaning a damn thing to Bank B. So when Bank B asks Bank A for a loan, Bank A suddenly finds it has terribly important meetings to attend but it swears it’ll call Bank B back just as soon as it can.
  2. Investors are waiting to sell their assets until the government bailout kicks in. The bailout package will buy up the crap assets that banks (when I say banks I’m referring to any and all financial institutions that qualify…so, banks, and investment banks and insurance funds and all sorts of other bankish entities) have. So, they want to find out how much they can get from the government before they try selling anything off on the market.
  3. Buying crap assets doesn’t actually improve the bank’s position: All it does is give them the cash that they claim their paper assets are worth. This would work fine, or probably would, if the problem was, as the government has hoped, illiquid banks (they ain’t got enough cash right at the moment). The problem arises from the emerging information that banks aren’t so much flirting with a lack of liquidity but that they’re flirting with outright insolvency (they don’t have enough money and assets to cover how exposed they are to crap assets). With insolvency being the problem, banks need to be reimbursed for their fictitiously valued crap assets and have some more cash piled on top of that to cover their exposure. If they don’t, they will continue to not lend.
  4. Investors don’t believe the government knows what the hell it’s doing. A point on which they’re absolutely correct. The bailout as Paulson wanted it originally (and one can presume how Bush wanted it…although that implies he even understands the problem and I sincerely doubt he does) dealt with, as mentioned above, liquidity. Which, it turns out, ain’t the problem. As a result, investors are saying fuck you and your bailout. What investors want is something along the lines of what Britain just did and what Sweden did in the 90’s…direct capital injection into the banking system through the purchasing of preferred shares in selected banks. Meaning the government has partial ownership. Which is also called “nationalization”. The ideological vapor lock of the neo-cons (markets are always good, they can self-regulate, and government sucks) made such a proposal impossible for Paulson, or anyone from the Bush Administration, to even consider as viable. Until now. ‘Cause their cute little laissez-faire mewling isn’t working.
  5. It’s a global economy - it requires a global solution. Using our example from above, let’s say Bank B is in Iceland. It needs cash. It needs cash because it invested in a bunch of exotic securities that bundled up crap mortgages on over-priced condos in Florida. Those condos turn out to be worth about half of what they bought said exotic securities for and a huge percentage of them are in default. I mean, it needs cash really, really bad. Bank A, based in the US ain’t giving out any money, and neither is anyone else. Bank B fails. Bank C, in Ireland, has loans out to Bank B from way, way back (like, August) when no one knew Bank B was totally fucked. Now, Bank C is in deep, deep trouble, ’cause it had alot of money it was owed by the now defunct Bank B (and Banks B1, B2, B3…Bn). Bank C tanks. Bank A, which wisely chose to stay the fuck away from Bank B has a whole lot in loans it had made to the Irish Bank C. And now Bank A is hosed because Bank C failed. Houston, we have a situation. It is primarily the global nature of this crisis that makes things like the utterly daft House Republican proposal of a few weeks ago, and the equally daft Lefty proposal pushed by Kucinich (headed up by William Isaac a former hondo with the FDIC…Isaac has been all over the op-ed pages in the last couple of weeks pushing a plan that would have been really good in 1933…and his assertion that we need to re-regulate these markets is one I agree with but while that is neccesary later it doesn’t do shit for the crisis unfolding right now) useless. They ignore the fact that the world economies are now interconnected to a degree never seen before and, as such, there is global exposure to a problem originating in one country. We’ve seen shit like this in the last few years with some relatively small economies in Asia. However, the country of origin this time around is, well, us. Which means it requires a big, coordinated response.

So, the net of it is that the most effective move we’ve seen thus far was this week’s announcement by Britain that they are going to directly pump capital into the banking system by buying shares in banks. This puts the government in the position of picking winners and losers, ’cause it can’t shore ‘em all up. Doing something like that runs completely counter to everything the neocons have trumpeted for the last 30 years or so. Which probably explains why Paulson (a neo) is reluctant to do it. In the bailout bill that passed, Congress gave the Treasury the power to do just that, even though Paulson, at the time, didn’t want it. Two days ago he started talking about how maybe, just maybe, the government will go ahead and do that.

Which is a start down the right path…we hope. Truthfully, we ain’t never seen nothin’ like this before so everyone is guessing at this point. Along with that move, though, there has to be similar moves made globally, particularly in Europe. And, as fucked up and fitful as the US response has been, the non-response out of the EU has been spectacularly more fucked up. The EU was founded to deal with shit like this and so far they haven’t gotten in the same time zone of a coordinated strategy across its member nations. They’re all pursuing their own paths (most of ‘em stupid ones) and telling each other how fucked up they are. Again, if this were the 1930’s…or even the early 1990’s…that kind of myopic nationalist response would probably work. Now, not so much.

Ultimately, the answer is that no one knows the answer. There are alot of smart people with good guesses. Sadly, none of them are in the Bush Administration. Hopefully, Congress will cowboy up.

For the future, there will be some changes coming down the pike. We are, undeniably, in a recession and a pretty big one. We have, thanks to the Republican Party, horrific deficits. We have a financial services sector that is dying from overdosing on its own greed, which was allowed to run wild (again…the Republicans). We are going to have to address those things through regulation, tax cuts (I know), and government spending on infrastructure programs.

About the last time you want to raise taxes is in a recession. Doesn’t matter if your deficits are insane. You gotta lay off that shit. At minimum you need to hold them steady but you may well have to cut them a bit to stimulate economic activity. You are going to see, regardless of how we bailout the financial institutions, a recession. Lots of people out of work (indeed, the unemployment rate has been marching steadily upward). You have banks that aren’t lending and even when they start again will be doing so exceedingly carefully. More companies will, as a result, pull back (or entirely die off) on their investment and hiring. Meaning more people out of work. To address that high unemployment and to stimulate economic activity the government is going to likely (and it damn well should) embark on some public works programs (fix the roads and transmission grid, the schools, build a nationwide high speed fiber optic network…shit like that) that will benefit the country and will also put people to work and trigger spending in related areas (the government hires workers and buys supplies, workers spend money on personal work supplies, on housing, on food…there’s a pretty big multiplier effect associated with a dollar of government spending on infrastructure). I’m sure any conservatives weird enough to read this blog will bitch about that. Bring it on. I’ll enjoy the arguments.

What, you may wonder, does that mean to you? It means this…if you have a job, keep it. If you have money, hold on to it. If you have debts, try to shed them (like you weren’t already)…particularly anything variable as I’m pretty sure it’s going to go up. If you have some extra money lying around…hell, buy some stock, everything is undervalued at the moment (but buy it expecting it to have a looooong payback period). Maybe most important, get involved politically. Yeah, that means vote, but it means, too, use your voice. There isn’t anyone in Congress who is without sin in this. Ask your representatives and senators what plans they have to apply legislative and regulatory oversight. Demand that they develop some. Don’t allow yourself to be distracted by small things like earmarks and executive compensation. I’m totally for bringing earmark spending under control and the fact that there were Reps and Sens who attached earmarks to the bailout legislation is obscene. But so what? $18 billion (the total earmark spending last year) against a trillion dollar problem is chasing, literally, pennies. Same with executive compensation. I’m all for making sure executives who tanked their companies and the fucking economy don’t get big fat benefits out of doing so…but so what if they do? That amounts to about $5 billion. Which ain’t even chasing pennies, it’s chasing half a penny ($5 billion is 0.5% of $1 Trillion). The two critical questions you should demand your representatives answer are: how will you inject money into the financial system?; how will you ensure, through regulation, that this won’t happen again?

Other than that, hold on to your asses. It’s gonna get weirder.