Informed Speculation

…only to close off a mere 300 and change, after going down about 125 on Friday, you must be joining me in saying “Thank God we passed that bailout!”…but at least we have the broader markets. Um, okay, scratch that…

Now, of course, that’s not entirely fair – the bailout was not aimed specifically at the stock market (though supporters shamelessly used the Dow’s precipitous drop one week ago as a reason to vote aye), but at the credit markets, and the program is only being worked out at this point (though surely one aspect of stock market performance is future expectations).

I think it is ENTIRELY fair, however, to reflect on the continued tanking of the market with respect to the fear tactics used to pass the bailout. We know now that Bernanke and Paulson told senators in the now-infamous closed-door session 2 1/2 weeks ago that, if Congress didn’t rush through a plan THAT WEEKEND, “we might not have an economy come Monday”. Well, it’s two Mondays later, the bill has been signed by the president, and the economic situation has gotten worse.

Would it have been worse still without the bill? Who knows, though I have my doubts…but Paul Krugman is starting to look prescient when he predicts that we’ll soon see Bailout 2.0.

Mark Landler puts it this way in the New York Times:

When the White House brought out its $700 billion rescue plan two weeks ago, its sheer size was meant to soothe the global financial system, restoring trust and confidence. Three days after the plan was approved, it looks like a pebble tossed into a churning sea.

What’s my point exactly? Am I suggesting that the government should have stood by and done nothing?

Well, yes and no…let’s take no first. Supporters of the bailout accused opponents of inaction of the “Nero fiddling while Rome burns” sort…but the need for SOME action was not equivalent to the need for this particular bill. And certainly we now see that there was no rush to get the bill passed – its passage did not magically restore the market’s confidence – in fact, the market is shakier now than it was before Paulson and Bernanke started their scare campaign, which, no matter its basis in reality, certainly achieved a monumental spooking of investors worldwide.

Now, let’s argue, just for argument’s sake, that perhaps the government should have done precisely nothing. Unconscionable, you say? Appalling, do I hear?

Well, I know a little bit about gambling, and I know a little bit about debt, and this situation is equal parts of both. And when a gambler gets down big, he’s better off just walking away. It hurts to walk away a giant loser, but anyone who gambles with regularity has had to do it…and a person who is severely in debt, whether the American consumer or the American taxpayer (two sides of the same coin) doesn’t make things better by taking on more debt.

The point is simply this: this crisis is severe, and will probably be deep and prolonged…and it doesn’t appear that anything done by the central banks of the world is going to avert it. There is a limit to how much taxpayer largess can be strewn around recklessly to stave off the inevitable – and that limit should have been less than we are already committed to.

When Bailout 2.0 DOES come around, the opposition has to be stronger and united. We can’t afford to throw any more good money after bad. The fallout is going to be painful…but if we don’t have any other answer than to throw money at it blindly, then we need to sit back and ride out the storm…

UPDATE 10/07 12:04 a.m.: Of course, when we speak of Bailout 2.0, we’re referring to coordinated efforts that require legislative approval…but the worst part of it is that the Fed and Treasury keep committing to massive outlays that DON’T require the rubberstamping of Congress. Case in point:

As pressure built in the credit markets and stocks spiraled lower around the world on Monday, the Federal Reserve was considering a radical new plan to jump-start the engine of the financial system.

Under a proposal being discussed with the Treasury Department, the Fed could buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities, according to officials familiar with the discussions. If this were to happen, the central bank would come closer than ever to lending directly to businesses.

While the move would put more taxpayer dollars at risk, it underscores the growing sense of urgency felt by policy makers in a climate where lending has virtually dried up.

This is a timely reminder of everything I have warned against above: it’s a Hail Mary gamble, with taxpayer money, that is attempting to stop a flood with a water pail. The Fed’s plan to buy “unsecured debt” of struggling companies means, quite simply, this: you’re about to get screwed again. Royally…

Here’s more:

The United States government appears to be pressing ahead with other radical efforts to shore up the financial system, even wading into corners of the markets where it has rarely interfered.

Buying commercial paper could open the Fed to difficult conflicts of interest, because it would be juggling the goals of protecting its investment portfolio with its traditional goals of promoting stable prices and low unemployment.

“The Federal Reserve really would become the buyer of last resort, trying to jump-start the commercial paper market by taking on credit risk,” said Vincent Reinhart, a former top Fed official who worked under Alan Greenspan, a former Fed chairman, and Ben S. Bernanke, the chairman now.

The Federal Reserve has already stretched its resources to the limit by providing hundreds of billions of dollars in short-term loans to banks, Wall Street firms and money market funds.

On Monday, the Fed announced that it would once again redouble one of its key emergency lending programs, increasing the size of its Term Auction Facility to $600 billion, from $300 billion. On top of that, the central bank plans to provide an additional $300 billion to banks to meet their end-of-the-year cash needs.

$600 billion here, $300 billion there, a $700 billion bailout, $85 billion to AIG…hey, pretty soon we’re going to be talking serious money! But heck, we print the money, so who cares?

To pay for its burgeoning responsibilities, the Fed has no choice but to keep printing more money. To prevent that flood of new money from reducing the central bank’s overnight interest rate to zero, the Fed also announced on Monday that it would start paying interest on the excess reserves that banks keep on deposit at the Fed.

Now, for the economic illiterates among us, let’s point out what printing money like crazy does – it makes the value of the existing dollars lower. Translation: it erodes your standard of living through inflation.

Here’s the money quote:

But so far, the myriad efforts by government regulators to shore up confidence have seemed to yield little relief among investors, some of whom believed the actions have taken on a haphazard air.

“People are slowly but surely coming to the realization that playing ‘Whack-a-Mole’ with each of these issues as they arise, on an ad hoc basis, doesn’t get the job done,” said Max Bublitz, chief strategist at SCM Advisors, an investment firm in San Francisco.

You don’t say!…

UPDATE 10/07 12:35 a.m.:  Let’s throw in a quote from the NY Times editorial board:

As stocks cratered on Monday and lending and borrowing remained frozen, the Bush administration rushed to implement the $700 billion bailout enacted on Friday. The Treasury Department said that it would soon post help-wanted ads on its Web site for asset managers to run the program and that because of the urgency, the hiring may be “through other than full and open competition.”

Is it any wonder that the markets lack confidence? One business day after the bailout was enacted, and it already had a tilting-at-windmills quality.

Yes, precisely – how can the markets have confidence when Paulson and Bernanke exude panic?  And while I’m at it, since I’m often quite critical of the Times, let’s just say they’ve been all over this recent financial crisis…I smell many Pulitzers coming their way…