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How Can This Be?
The sun came out again today. The birds are singing, food tastes the same, and I still have a job. Why should this be a surprise? Well, according to President Bush, many members of Congress, Treasury Secretary Paulson, and many pundits, the failure to pass the Wall Street bailout plan by Friday Sunday Monday [insert new date here] was going to precipitate a financial meltdown of historic proportions. When negotiations fell apart over the weekend and ultimately the plan went down in defeat on Monday, their dire predictions seemed prescient, as the Dow Jones Industrial Average fell 777 points upon news of the 228-205 vote against the bailout bill in the House of Representatives.
But something funny happened on the way to the fallout: the stock market rose over 500 points the next day, after people had time to digest the information and realize the details of what happened the day before. Then the next day (today as I write this), the stock market closed about the same — down less than 20 points out of over 10,800, or about 0.2%. Two more banks were swallowed up by larger institutions (I suppose no more "woohoo!" is going on at WaMu), and the market is going about its business, which is to say, business.
The problems caused by the housing bubble and the subprime mortgage jam still remain, but the public at large and many economists remain unconvinced that the answer to the current crisis is for the government to inject more cash into the market with the purpose of bailing out entities who, with the encouragement by and incentives from the government, made the bad decisions that put us into this mess to begin with. As Harvard economist Jeffrey Miron writes "a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending [and] encourages companies to take large, imprudent risks and count on getting bailed out by government."
Ultimately, I predict that some kind of "reform" bill will pass. I've been hearing for the past several days an idea that I do think makes sense, and that apparently both Presidential candidates have endorsed: increasing the FDIC protection from $100,000 to $250,000. I might even be in favor of a further increase to ensure that more small businesses are protected. But that's insurance, not a bailout per se; financial institutions (and therefore, ultimately, the depositors themselves, through lower rates of return) pay premiums for that protection. Since the government has already taken over Freddie Mac and Fannie Mae, I've seen prudent plans put forward for selling off their assets and ending them as government-sponsored enterprises. And, I'm guessing a final bill, since it will have to be the product of negotiation, will have some bailout terms; too many of the big financial firms pay too much money in campaign contributions to get nothing out of the final bill.
The rush to get something, anything, through the Congress has, however, at least died down somewhat. The artificially-prescribed deadline(s) came and went without the dire consequences predicted by advocates of a Big Government intrusion into the market. Our 401(k)s took a big one-day hit, no doubt. But the world didn't end as we know it, and the resulting government action, while likely to be less efficient and effective as a freer-market approach, will be better for the further debate and negotiation.
But something funny happened on the way to the fallout: the stock market rose over 500 points the next day, after people had time to digest the information and realize the details of what happened the day before. Then the next day (today as I write this), the stock market closed about the same — down less than 20 points out of over 10,800, or about 0.2%. Two more banks were swallowed up by larger institutions (I suppose no more "woohoo!" is going on at WaMu), and the market is going about its business, which is to say, business.
The problems caused by the housing bubble and the subprime mortgage jam still remain, but the public at large and many economists remain unconvinced that the answer to the current crisis is for the government to inject more cash into the market with the purpose of bailing out entities who, with the encouragement by and incentives from the government, made the bad decisions that put us into this mess to begin with. As Harvard economist Jeffrey Miron writes "a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending [and] encourages companies to take large, imprudent risks and count on getting bailed out by government."
Ultimately, I predict that some kind of "reform" bill will pass. I've been hearing for the past several days an idea that I do think makes sense, and that apparently both Presidential candidates have endorsed: increasing the FDIC protection from $100,000 to $250,000. I might even be in favor of a further increase to ensure that more small businesses are protected. But that's insurance, not a bailout per se; financial institutions (and therefore, ultimately, the depositors themselves, through lower rates of return) pay premiums for that protection. Since the government has already taken over Freddie Mac and Fannie Mae, I've seen prudent plans put forward for selling off their assets and ending them as government-sponsored enterprises. And, I'm guessing a final bill, since it will have to be the product of negotiation, will have some bailout terms; too many of the big financial firms pay too much money in campaign contributions to get nothing out of the final bill.
The rush to get something, anything, through the Congress has, however, at least died down somewhat. The artificially-prescribed deadline(s) came and went without the dire consequences predicted by advocates of a Big Government intrusion into the market. Our 401(k)s took a big one-day hit, no doubt. But the world didn't end as we know it, and the resulting government action, while likely to be less efficient and effective as a freer-market approach, will be better for the further debate and negotiation.
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