Monday, September 29, 2008

$1.1 Trillion Loss

Here's an understatement. Today was a really bad day.

Democrats and Republicans in Congress failed to come to agreement on a $700 billion bailout for Wall Street investment banks as the vote failed 228-205 in the House. Reacting to the unexpected stalemate, the stock market plunged a record 777 points in two hours. How big is that? A 7% drop that we saw this afternoon is a $1.1 trillion loss in wealth. Everyone with 401k's, IRA's, individual stocks, bonds, mutual funds in the market -- we're all affected. And the bloodbath is sure to continue tomorrow.

There is no shortage of blame to go around here. Investment greed is part of it -- from Wall Street banks to irresponsible mortgage peddling to individuals that bought homes they could not come close to affording. I'm not going to pretend I understand derivatives and complicated mortgage backed securities that fell like a house of cards. But that is why I, Joe Average American citizen, rely on elected officials to appoint people to positions to understand this and oversee it. So lack of regulation was a part of this collapse too.

So while I want the causes of this collapse to be investigated so we learn the lessons for the future, I am even more disheartened by the vote today. First of all no one wants to sign up for a $700 billion bill. It is a mind-boggling sum of money on top of all the problems we face and our kids and grandkids will face.

But when two of the foremost financial minds in the country -- the Treasury Secretary and the Federal Reserve Chairman -- beg and plead for bipartisan action to be taken to avoid certain impending financial hardship for the country, it is deflating when politicians fail to take action. No wonder people think so little of their elected government in Washington D.C.

Politicians from both sides have to shoulder the responsibility of this not passing. From the Republican side this vacuum of leadership from the President to push this through is the single biggest reason why I want a change in November. The President's capital is so bankrupt from all the failures and missteps for the past eight years that he cannot rally a majority of his own party in Congress to support the bailout his Administration put forward.

Enter the Democrats. To their credit they got 2/3 majority of their Representatives to support the buyout. But what does the Speaker of the House do right before the roll call vote? She takes the opportunity to lecture the Republicans with a snotty partisan "We told you so" speech that added a degree of divisiveness that completely could have been avoided if she would have taken the "This is for the greater good and unfortunately is the medicine we have to swallow" approach.

So while I understand the Republicans' frustration with her pettiness and I somewhat sympathize with the reluctance of many not to support government intervention in the free market (I'm a free marketer myself), the majority of Republicans in the House refused to put the needs of the country ahead of either pure ideology or childish partisanship. It is just completely disheartening and frustrating.

How bad is it going to get? We are about to see. This piece from Steven Pearlstein's is the best summary I have read on the situation in one page -- "They Just Don't Get It."

The basic problem here is that too many people don't understand the seriousness of the situation.

Americans fail to understand that they are facing the real prospect of a decade of little or no economic growth because of the bursting of a credit bubble that they helped create and that now threatens to bring down the global financial system.

Politicians worry less about preventing a financial meltdown than about ideology, partisan posturing and teaching people a lesson. Financiers have yet to own up publicly to their own greed, arrogance and incompetence. And leaders of foreign governments still think that this is an American problem and that they have no need to mount similar rescue efforts in their own countries.

In the coming weeks and months, all of these people will come to understand how deep the hole really is and how we're all in it together.

They'll come to understand that the giant sucking sound they hear is of a massive deleveraging of the global economy and the global financial system as households and governments, businesses and investment funds adjust to living in a world with less debt and more inflation.

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