The financial bailout plan got scrapped. This “rescue package” failed and the stock market didn’t like it.
I won’t lie — what happened in late September, 2009 to the stock market has made me nauseous, and no, it’s not just because I’m trying to recover from a nasty flu bug. The stock market is being fueled by fear at the moment, sparked by the failure of our government’s “rescue package” for troubled financial institutions.
The market’s behavior tells me that investors want the bailout to pass. And in the absence of any approved fiscal solution, we instead get the worst point drop for the Dow Jones index in its history. Note of course, that the absolute point drop here is only around 7%, and does not qualify as one of the worst days in terms of percentage loss.
Seeing that the market is unhappy about this turn of events, you may wonder why the overall consensus here by the investing public is for the bailout to pass. I’d say it’s because the market wants resolution of some sort and would like to move on from the uncertainty brought about by debate and wrangling in Congress. The public wants the ongoing drama to be over and believe this artificial solution is the ticket. The dire warnings of some of our political leaders — about how the financial contagion going on unchecked could raise the potential for a terrible recession (and us hurtling towards the next Great Depression) — may have riled up the markets sufficiently. And I’m sure the media coverage and hype help quite a bit too.
Arguments Surrounding the Financial Bailout
But where do we stand in all this? One thing’s for sure: that we won’t all agree. Personally, I actually find myself agreeing with many of the points made that support the rejection of this bailout. Here’s a sampling of what I’ve read:
- Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bailout insurance companies, investment banks, hedge funds and foreign companies.
- It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?
And here is a short list of arguments for and against the bailout:
For the Bailout
- The bailout will help quiet the global financial system and markets.
- It will instill confidence in investors. Even Warren Buffett is for the bailout.
- It may help circumvent the threat of recession.
- It will prevent job losses, especially in downed institutions.
- It will keep liquidity in the markets.
- Bank assets bought by the $700 billion bailout may be worth more in the future.
Against the Bailout
- The bailout can be pretty costly to taxpayers, if bought assets don’t recover.
- It can cause the budget deficit to balloon as the bailout will mean more government borrowing.
- Who knows what the true bailout will cost when the plan is finally executed.
- Bank and financial company leaders will get away with their mistakes. No lessons learned.
- Do we want more government intervention? The state may obtain a stake in bailed out firms.
I won’t be the first nor the last financial blogger to review these matters, but for what it’s worth, here’s my .02 on this: I’m not sure I buy into the ongoing fear-mongering we’re being subjected to at this time. I’m also one of those who’s fine with letting the cards fall where they will, even if it means working out the pain in the near term (though many folks would prefer anything to arrest their pain right now). I believe the bailout is expensive, and yet comes with no guarantees; worst of all, it sends the message that there’s no accountability among the higher ups.
I’m all for bailing out of the bailout and letting the financial industry find its own footing out of this quagmire.
So how about you? How do you feel about this failed rescue package?
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