Monday, September 29, 2008

Bailout bill failed! Good times ahead!


Bailout plan rejected - supporters scramble

NEW YORK ( -- The fate of the government's $700 billion financial bailout plan was thrown into doubt Monday as the House rejected the controversial measure.

The next steps were unclear. The abrupt defeat left the Bush administration and congressional leaders scrambling to figure out whether to renegotiate the bill and introduce it again as soon as Thursday or to try other options.

Stock markets reacted violently. Investors who had been counting on the rescue plan's passage sent the Dow Jones industrial average down well over 700 points. The stock gauge closed 778 points lower - nearly 7%. (Full coverage)

The measure, which is designed to get battered lending markets working normally again, needed 218 votes for passage. But it came up 13 votes short of that target, with a final vote of 228 to 205 against. Two-thirds of Democrats and one-third of Republicans voted for the measure.

This is actually very good news for the average American. Yes, times are tough for us all, and they will be for quite some time, but the failure of this bill means that we'll all be getting back on our feet sooner than would have otherwise been the case.

What really started all of this was the Clinton era (following into the early Bush-era) deregulations on mortgage lenders to make it easier for lower income families to buy homes. This ultimately made for a spike in housing demand, which resulted in higher home prices. Higher home prices resulted in higher property taxes. Add into this higher fuel costs (and that whole snowball effect) after Katrina in particular, and all of a sudden, you have thousands of families in homes that they can no longer afford. Foreclosures skyrocket, and the entire (ultra-high risk) sub-prime market goes bust. This spells financial disaster for the lenders. All the while, homebuilders continue building, and end up with entire neighborhoods full homes that won't sell. Additionally, you have the sub-prime lenders that are trying to escape foreclosure by selling their homes, not to mention thousands of homeowners that are trying to sell their houses so they can live more within their means by renting or buying a smaller house. Right now in the US, there are enough homes sitting vacant to take every single homeless man, woman, and child in the US, put each one into their OWN house (yes - one per house), and still have thousands of houses left over. The supply outweighs the demand so much that it's caused the debt to be essentially worthless.

This doesn't apply only to the sub-prime loans anymore, but to all loans. How many of you are homeowners that bought your house through a standard mortgage? How many of you are now noticing that the value of your home has declined since you bought it (unless you bought it after the housing crash)? How many are refinancing to get a lower rate on a lower value?

When all of this gets rolled together, it makes for trillions of dollars in worthless loans to investment companies. I'm no financial genius, and I understand all of this. Surely a banker or loan officer should understand this too. I think it's mostly a case of they understood the risk, but didn't care until it was too late.

What benefit would the bailout bill have provided? Another false sense of security - just like all of the security bills passed after 9/11. Ultimately, the bailout bill would have been more damaging to the American public than any recession would be. Had the bailout bill passed, it simply would have put off the collapse of various financial giants for six months to a year, and when the money ran out, these banking firms would have collapsed anyway, but with Uncle Sam having absolutely no money left to do anything. The United States has always had a capitalist economy - one based on supply and demand, market risks, successes, and failures. This economic collapse is a basic part of capitalism, as taught to me in elementary school civics classes.

It can be looked at, on a much smaller scale, in this example: Joe's Hardware opens up shop, providing fair prices on hardware to the community. His bestselling item is a hammer. He sells the hammer for $10. Meanwhile, John's Hardware opens up just across town and starts selling the same hammer for $9. Joe knows that his cost on hammers is $9, so he can't sell them any lower without suffering a loss. Joe's business is suffering though, and in order to bring customers back, he starts selling his hammer for $8, hoping that sales on other items will make up for the loss. Meanwhile, labor costs start to skyrocket because there's not enough labor to meet the demand. Customers start cutting back on buying anything because it costs more for labor. John manages to stay afloat for a while, because he's still charging $9 for a hammer. Joe, even knowing the risk, continues selling his hammers at $8, hoping he can make more money off of customers that don't want to spend the money. John, in an act of desperation, drops his hammer prices to $8 as well. Both companies eventually fold due to complete market saturation of hammers, and ask the government for $700 billion because they ran their companies into the ground.

The fact is, the economy needs to return to an equilibrium, where market demand meets market supply. While this happens, financial times are going to be really rough for Americans, most of whom live beyond their means through their credit, much of which is now worthless. The only ones that are really going to have a relatively easy transition are the ones that never relied on credit in the first place - and even they are going to have a rough time.

Without this bailout, the economy will likely find an equilibrium in about five years, compared to a decade or more if it passed. Tighten your belts and stock up on ramen. We're in for a wild ride. Filet Mingon all around once we find stability again!

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