Treasury Secretary Paulson gets the Oscar for Worst Salesmanship in Support of a Financial Rescue Plan (Super-Heavyweight Division).
I think you’d be hard-pressed to find one person out of twenty who understands that Paulson’s bailout plan is not a transfer of tax money from the middle class to the wealthy. It’s not the slightest surprise that more than half of Congress would find it impossible to vote for.
Speaker Pelosi, on the other hand, gets the Oscar for Most Disingenuous Performance by a Legislative Leader Not Running For President. She looked so stupid and incompetent in not getting the bailout approved by the House yesterday, that one suspects this was somehow her plan all along.
The stock market, which had been led to expect approval of this piece of legislative sausage, promptly had an aneurysm and went on to its largest point loss in history, dropping nearly nine percent of its value on the day.
What happens next?
It’s possible that it won’t make much difference if some version of the Paulson plan passes, even though this would give a large (and probably short-lived) bounce to the stock market. The time to have enacted this plan was ten days ago. Since then, we’ve lost half a dozen major financial institutions here and in Europe, and credit markets have become more frozen with each passing day.
The world’s central banks have created an amount of new liquidity that is nothing short of mind-bending. The numbers look like typos, they’re so big. That’s supposed to make bankers comfortable lending to each other, but the result has been that they’re lending only to central banks and governments.
For the time being, we no longer have a functioning system of private finance, and that’s no exaggeration.
What I think Congress has done is prove to everyone that the US government doesn’t have reliable equipment to protect financial markets. It’s hard to imagine what it would take now for them to restore confidence. The outcome that the bailout plan was intended to forestall is going to happen anyway.
Undercapitalized financial institutions will continue to fall, here and in Europe. The underlying reality in banking and finance is that massive capital losses from housing values will have to be written off. That’s a tremendous amount of equity that needs to disappear, somehow.
This morning as I write, stock markets in the US are showing indications of a strong recovery from yesterday’s sell-off, amid signs that Paulson’s brain trust at Treasury are scrambling to come up with something new and different.
They’ll need to do a much better job of selling it to Congress and to the people this time. Apparently, Paulson and Bernanke figured that all they needed to do was tell Congressional leaders what was really happening in the credit markets, behind closed doors, and fear would do the rest. That marketing plan turned out to be nowhere near good enough.
Meanwhile, credit markets continue their near-total freeze. Today is an unusual day because it’s both a holiday (so a lot of people, including Congress, aren’t in the office), and the last day of the quarter (so short-term funding needs are unusually high as people close their books).
Tomorrow we should get a better picture what the near-term pressures are in money and credit markets. At this point, it’s very far from clear what can be done to relieve the tension.
Happy and Joyful New Year to all my friends, and all of RedState's readers. Shana tova.