Friday, September 26, 2008

Economic Blogging - The Bailout is about Main St. not Wall St.

Two things: 1) The bailout is necessary 2) the bailout is about main street not Wall St.

Ok, so I stole the second one from Obama, but it makes the point well. This bailout is about the people - normal Americans.

To use an analogy, this financial problem is akin to cholesterol. You never knew you had a problem, until you had a heart attack.

Of course, right now business aren't closing. Wall St. looks flappable, but when is it not? No, the problem is credit, and credit is measured in the long, not the short. Giant financial institutions easily can look a bit evil and completely corrupt... well, that is, until you need to buy a house, a car or send a son or daughter off to college.

Credit is the life blood, and as a rule, institutions don't extend lines of credit when they are weighed down in debt. Unfortunately this is debt that won't be repayed or worse won't be repayed AND are overvalued.

So the bailout price is THE problem... the government can't pay too much because then you reward bad decisions (and the government will have less likelihood in turning a profit on this whole mess), however you also can't pay too little because then the institutions won't be able begin lending again (which is the whole point of this enterprise).

This is not about bailing out Wall St. I read some quote (from a Republican Congressman, no less) who said, "The plan does nothing for those millions of distressed homeowners." Well, he's right, it's not about them either. It's about credit. It's about making sure that when you get fired, and rehired two towns away you can go the bank and get a loan, and the interested buyer of your house can get a loan. It is about making sure that the young business start-up can get a loan so that in ten years they can make the new technological breakthrough that makes Microsoft look like Atari. Credit is the spinach of the US economy.

Every week thousands of jobs need to be created in this country just to keep the unemployment rate stable. Those jobs come from growth in businesses and new businesses. They require credit. We might not see it now, but let a few more of these giant firms fall, continue to let the credit market tighten and begin to watch unemployment soar, watch the dollar plummet (which for exporter is a good thing, but we're in import country, so you do the math), and let the hard times roll.

And if you didn't hear: Yes, Washington Mutual (lovingly, WaMu) was seized yesterday by federal treasury officials. It was the LARGEST FEDERAL SEIZURE IN HISTORY. The story wasn't even the headline for the New York Times today. This financial situation is very serious, and like cholesterol, if not checked, will entail equally as serious consequences.

2 comments:

Hellernot said...

Well the bailout got stopped, the markets sank but hey my bank that just got bought out today--renewed our company line of credit today.
Go figure.

The Catholic Atheist said...

Hellernot,

This is bad. 600 pts is a lot of lost value. Wachovia is just another terrible example of what is going on...

Never thought I would say this, but I sure hope Republicans start listening to Bush.