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The Rescue

Version 2.0

Last night, the Senate approved the revised bill that implements the proposed plan to bailout (read ‘rescue’) the financial markets after an already long week and painfully drawn out past couple of weeks. Now, the bill will move on to the House for more political butchering of policy that is already late and less than top-notch quality.

Yes, there is no surprise … this legislation is not perfect. It wasn’t perfect when Paulson first proposed it more than ten days ago to Congress. However, since the first introduction, the quality has only further gone down hill; meanwhile, the market response has been increasingly bad and the price tag has only gone up exponentially each day that has passed without a rescue.

I have commented on this ad nauseum, so there’s really no reason to rehash why this rescue is important. But, I do want to point out two things.

First, I can’t help but add a little “I told you so” to all of those folks over at Redstate who disagreed with my assessment that a bailout would inevitably happen. There have been all sorts of claims as to why a bailout would not happen, but I think the primary reason it did leads us in to my second point.

This legislation that has commonly been referred to as a bailout is now being distinguished as a ‘rescue’ plan. Just like many of the ‘expert’ Monday morning quarterbacks out there have claimed a bailout won’t happen, people have also claimed that such a bailout would socialize the markets and contradict our economy’s very basis of capitalism. I have said over and over again just how absurd this argument is, not the least of which is due to the fact that a mandated role of the Federal Reserve is to intervene as a lender of last resort injecting liquidity into the financial markets in the event of widescale systemic failure and insolvency.

But, more importantly, this bill was approved because the markets needed to be rescued. They could not handle the stress of illiquidity without the necessary assistance from the monetary system. Thus, it is not a bailout and the term ‘rescue’ is much more appropriate.

It is a rescue because a bailout would constitute an unequitable payment to the markets at no value and no potential for returns. However, this package involves an investment with government capital in the financial markets at a rate of pennies on the dollar and a high margin of returns. This rescue plan will make the country money, in addition to adding stability into the markets.

The good thing is that most people are starting to realize this. That’s why most of the voters who originally opposed this bill for all the wrong reasons called their Members of Congress to urge support for it after they saw the fallout of the failed vote earlier this week. Further, the people that are supposed to be governing and preventing such widespread catastrophe have also started to understand just how significant the costs are of not doing anything. Indeed, even Newt has urged policymakers to pass the rescue plan, because the costs of the alternative are too much for the economy to absorb.

So, the next time you’re thinking about expressing your opposition to the ‘bailout’ package, think again as to what this package actually is, and how it is not even a bailout in any shape, form or fashion.

Note: This post was originally published on my blog at www.marktomarket.typepad.com on October 1, 2008.

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