by wjw on October 3, 2008

So . . . congress passed the bailout today.

The markets went down.


Ralf the Dog October 3, 2008 at 10:30 pm

It’s the jobs report and fear of what Congress will do next.

Ty October 3, 2008 at 10:56 pm

I had assumed it was because they watched the VP debate and despaired.

Steven Gould October 3, 2008 at 11:30 pm

While ralf is probably correct, ty’s answer is aesthetically more pleasing.

What a maverick he is.

Ken Houghton October 4, 2008 at 2:07 am

Neither is correct. (If it were really the jobs report, it would have been down out of the gate—the opposite was true.)

Old Wall Street Rule: Buy on the rumor, sell on the fact.

Ken Houghton October 4, 2008 at 2:27 am

Graphical details (If necessary, change time period to “1d” and scroll down news items to G/H/I range.)

Note: Jobs report came out an hour before the market opened. You can see the direction of the opening.

stevem October 4, 2008 at 3:28 am

It could be that the markets don’t like the fact that the government just printed another $850 billion dollars. As we didn’t have anywhere near a surplus, this means we’ve printed more money. This further devalues the dollar. This is not a good thing in either the short or the long term.

My interpretation of the bailout bill was a bunch of chicken little politicians were are afraid of being viewed as do nothings, so they did a stupid thing.

S.M. Stirling October 4, 2008 at 5:01 am

The bailout was essential, but not sufficient.

Hopefully it will prevent the looming catastrophe — which was not a fall in the stock market, but the seizing-up of the economy’s short-term credit mechanism, which is how almost all businesses meet their payrolls and pay weekly bills.

With enough of the worst of the unsaleable mortgage-secured paper off their hands (and with a whole bunch of banks sold at fire-sale prices to other banks) the normal commercial lending can get going again.

That leaves the “normal” recession we’re about due for. Capitalist economies are inherently cyclical: she go-a up, she go-a down. That’s built into the nature of the market pricing system.

Also, of course, this is not just an American credit crisis.

The French President is demanding a bailout fund of 300 billion Euro for -their- banks, the housing market in Britain is in freefall, banks are crashing globally, etc.

Interesting times. Glad I’ve got no debts and a lot of cash!

S.M. Stirling October 4, 2008 at 5:10 am

Note that the 700 billion is not being -given- away.

It's to be used to buy assets; securitized mortgages, basically.

The government -gets- the assets as its property. That's land and houses.

Eventually the government will sell them. As I said, she go-a up, she go-a down.

Right now this paper is toxic — nobody will buy it, except at about $0.25 on the dollar, which is what the buyers of WaMu and Wachovia paid.

The government will pay more than that — part of the purpose is to recapitalize the banks — but it won't pay full face value, or anything like it.

The houses and land are still there, people still need houses and land, and the population of the US is growing briskly.

(One reason our problems are nothing compared to Europe's prospects.)

The same thing happened when the Resolution Finance Corporation was set up to buy unsaleable assets after the S&L meltdown in the late 1980's.

Eventually the government made a small profit on the S&L mortgage assets.

At best, it may do so again this time; at worst, the loss will be modest. Mostly foregone interest on the $700 billion — the "opportunity cost".

Right now so many people are buying Treasury bonds that the interest rate is -negative-. It shouldn't be hard to raise the money at very low rates of interest.

Of course, since those Congressional imbeciles of both parties wouldn't pass the original (3-page) legislation, it ended up as a 100-page monstrosity.

Larded with an extra $150 billion in pork, most of which represents -real- spending, not buying assets. That's $150 billion out of our pockets for good and all.

But that is a mathematically inevitable and utterly predictable result of running it through Congress' alimentary system a couple of times.

Each pass-through loads it up with more boodle, booty, plunder and pork.

Giving politicians an opportunity to spend money is like giving free scag to junkies.

You KNOW what will happen.

S.M. Stirling October 4, 2008 at 5:16 am

As for “devaluing the dollar”, note that the dollar went -up- against the Euro and other currencies on the news.

Being the world reserve currency gives the masters of the dollar options nobody else has.

We can (and do) simply make everyone else eat our inflation, for instance. They do it and smile, because they’ve got no choice.

And no, nobody’s going to switch to other currencies as the reserve.

The Euro is an absolute dog — the Eurozone economies consistently grow more slowly than ours, and their demographics are terrible — and the political risk of the yuan is unacceptable.

Plus China’s economy, while growing swiftly, is still only about the size of that of France, at PPP, and China’s long-term demographics are just as ghastly as Europe’s.

halojones-fan October 4, 2008 at 8:16 pm

It’s worth pointing out that had Pelosi called for a vote last Friday, the bill would have passed as it was written. She insisted that it be “unanimous”, and when the Republicans wouldn’t play along she called the whole thing off in a fit of pique.

S.M. Stirling October 5, 2008 at 5:33 am

>She insisted that it be "unanimous", and when the Republicans wouldn't play along she called the whole thing off in a fit of pique.

— yeah, massive unimpressiveness was committed.

Oddly enough the Shrub acutally did the right thing, at last.

I've often thought we could do worse than simply abolish the House of Representatives, and leave the Senate to fulfill all the legislative functions.

It's a lot more grown-up than the House, which is full of gerrymandered safe seats. At least Senators have to get half of a whole State on their side.

Ken Houghton October 5, 2008 at 4:18 pm

I would believe S. M. Stirling’s declaration that we’re not giving away the $700B except for two things:

(1) Since the government will, as he notes, hold the assets, they should have no effect on the debt. (If the government spends $100 buying T-bills, it credits itself with the asset value of $100.) Since the bill explicitly included raising the debt ceiling by $715B, the goal appears to be to overspend by around $700B.) and

(2) I can't create—and haven't seen anyone else do it—a model where (a) the market clears the sale of those assets to the Treasury at (b) a fair price, and (c) liquidity is added to the system.

(This is in part because there are already mechanisms in place (TSLF, PDCF) to loan those assets to the Treasury on a long-term basis [28-days, but can be rolled over indefinitely—which also means the firms would realise the appreciation of those assets as they return to the value they claim they should have] at their current market values.)

It's a giveaway. A necessary one, to be sure,* but a giveaway, and we shouldn't pretend otherwise.

*Those wooden arrows are another question.

Ralf the Dog October 5, 2008 at 5:47 pm

Ken Houghton said,

“Neither is correct. (If it were really the jobs report, it would have been down out of the gate—the opposite was true.)

Old Wall Street Rule: Buy on the rumor, sell on the fact.”

I think your second point has quite a bit of merit, however, I was Watching the talking heads on TV. Ten seconds after the vote they were talking about nothing more than the fact that this was only a bandage an the jobs report was bad.

When the volatility goes up, people go crazy. Sometimes I think it is silly to try to find rational behavior from stock traders.

One solution to the stock craziness would be a 50% capitol gains tax that lasts 14 days along with dropping the long term capitol gains tax to a much lower level. Get people investing not speculating.

halojones-fan October 5, 2008 at 5:52 pm

So it’s a giveaway. So what? We have welfare, Social Security, Medicare/Medicaid, all sorts of giveaways that we already do. At least this one is “buying” something, rather than just pissing money onto people.

One way or another the taxpayers would have paid–either paying the government a little bit every year, or taking a huge hit when the bank failed.

What we need to do is move past the childish idea of vengeance–the idea that we need to “get back at the people who did this”. For one thing, the people who “did this” have long since taken their money and run. For another, the only way to “get back” at people would be to screw EVERYONE, including a bunch of property owners whose only crime was to be furthest from a chair when the music stopped.

Yes–bad people will not lose. I’d rather see a situation where most good people and some bad people come out okay, than one where EVERY good person loses and MOST bad people lose.

Thai October 5, 2008 at 10:56 pm

I agree with you Ken, it is all about jobs.

It seems to me the bailout is little more than rearranging deck chairs on the Titanic. It does nothing to solve the underlying total debt (household + business + state + federal) problem and to the extent more money is diverted to unproductive endeavors, it will actually harm the economy.

On the other hand IT WILL hamper the ability of the government to borrow funds in the future when people are in trouble.

In fact the only way I can really see one ascribing to the bailout is IF one were to subscribe to the idea that increasing federal debt is a kind of ‘starve the beast’ agenda designed to ultimately force fiscal discipline by pushing the US government closer to a default ‘end game’…. I realize some fiscal conservatives believe this; I reject the approach as immoral.

Notice that the CBO’s own projections suggest we are accelerating towards this ‘end game’ of US federal insolvency faster and faster. (The Federal Reserve has already said we are moving towards insolvency fast– not even including the unfunded $55 Trillion Medicare liability) And then realize these projections are based on the overly rosy assumption that federal tax receipts will continue to increase- an assumption I think everyone can agree is wildly optimistic at best (California is learning this fallacy right now).

FYI- even if the US stops ALL activities in Iraq and Afghanistan tomorrow (est. annual savings $185-200 billion/year), the US government will still run a deficit… I suspect our deficits will be MUCH larger than these projections with dropping tax receipts from increasing unemployment/falling asset prices and increasing entitlement spending.

Personally, I think we have passed the tipping point and after the US dollar carry trade unwinds, foreigners will increasingly realize that the US population is politically unable to make the tough rationing choices needed to prevent a cross boarder capital flight- California’s inability to reach a budget compromise is but one example of what I think will increasingly be played out all over the country… remember American foreign borrowing as a % of GDP is likely to INCREASE if we do not make tough choices soon.

And if we do not cut unproductive uses of capital and unproductive uses of tax revenues (the combined state, local and federal government represent almost 50% of all economic activity in America), but instead continue to focus tax dollars on preventing human suffering- at first interest rates will increase as we try to persuade foreigners to lend us money (of course this will further contract the economy as productive capital is crowded out for unproductive ‘compassionate’ capital) but eventually, our dollar will collapse. And when that happens, our suffering will be just like Argentina’s in 2001.

We can pay now or pay later but (imo) either way we will pay.

Thai October 6, 2008 at 1:17 am

Ken, sorry, typo, I meant to say… “BUT at some level it is still all about jobs (remember this is not an econ blog like yours). Wall Street is finally selling on fact”

Ralf the Dog October 6, 2008 at 3:02 pm

The trader next door just jumped out of his window. Lucky for him he jumped out of his first floor window. Unfortunately the bush he landed on did not survive.

I would rank the current market as an E ticket ride. Lets hope it does not end with a brick wall. 🙂

S.M. Stirling October 7, 2008 at 5:49 am

Thai, have you taken a look at what’s happening abroad?

Compared to the situations in East Asia and Europe, the US is in financial paradise.

Our taxes are lower, our governmental debt-to-GDP ratio is lower, and our upcoming retirement problems are MUCH lower.

The yield on US Treasuries is now negative — in other words, people are willing to buy them at above face value and forego interest.

The US gov’t can, therefore, borrow money for free.

This is a “flight to quality”, and the world markets have pronounced that US-dollar bonds are the highest quality refuge around.

Incidentally, national governments can’t run out of money.

They can devalue it by creating too much, but they can’t actually -run out- of it, because they’re the people who get to say what money -is-.

S.M. Stirling October 7, 2008 at 5:51 am

“(1) Since the government will, as he notes, hold the assets, they should have no effect on the debt.”

— not in the long term.

In the short term, the government will be paying more than “market value” for the assets, which are currently fetching about one quarter of one cent on the dollar.

The government will pay more than that, but less than the long-term value when the market has recovered in a few years.

“(2) I can’t create—and haven’t seen anyone else do it—a model where (a) the market clears the sale of those assets to the Treasury at (b) a fair price, and (c) liquidity is added to the system.”

— again, these things don’t happen at the -same time-. They’re sequential.

Ralf the Dog October 11, 2008 at 12:12 am


It is mathematically imposable for the Dow Jones to have a negative value. The end is near!

Ralf the Dog October 11, 2008 at 1:54 pm

After watching the markets on Friday, I think I have the solution. Start with 30 days or more of rehab followed by 10 years of Narcotics Anonymous for everyone who works on Wall Street. Get them off of the meth and things will be allot more sane.

If you work on Wall Street, Please do us and yourself a favor. check out this link.

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