Bailout a Done Deal, So What Happens Now?

Now that the government has been terrified into rubber-stamping the Wall Street bailout, what happens now?

I wish the news were better, but in my opinion, here's the most likely scenario:

* Hank Paulson & Co. survey the banking industry and decide who will stay and who will go. JP Morgan, Citi, Wells Fargo, and Bank of America will stay. Goldman will probably stay. Morgan Stanley might stay. Everyone else in trouble could go. The government doesn't need to save all banks. It just needs to save some.

* Within a month or two, Paulson buys $250 billion of crap assets. He pays more than market value, but not an egregious amount more (because the public will be watching these early rounds). Over the next six months, he buys $700 billion of assets...and then he--or his successor--asks Congress for more money.

* Confidence improves modestly, but banks continue to hoard capital and credit markets stay tight. Loans stay expensive and hard to get. This keeps pressure on the economy.

* The credit crunch filters through to consumers: Credit cards, home equity loans, mortgages, car loans, etc., get more expensive, putting more pressure on consumers and forcing them to cut back further.

* The economic news continues to get worse: American consumers continue to pull back, housing continues to fall (as of July, the year over year declines were still accelerating), companies begin to cut back, which leads to layoffs--which puts more pressure on consumers.

* The global economy continues to weaken: Europe, Asia, and, eventually, emerging markets. This is already happen, and everyone else is later in the cycle than we are.

* The stock market continues to fall, as corporate earnings come under increasing pressure and hope for an early 2009 recovery fades. Analysts are still expecting huge growth in S&P 500 earnings for next year. These estimates will get cut by at least a third.

* The government enacts further measures to try to stop the fall in asset prices (stocks, houses)--including an expansion of the bailout plan--but these don't work. Governments always try to do this. They never succeed. All they do is delay the inevitable.

* A new round of white-collar prosecutions send a new posse of corporate villains to jail. Some will be guilty. Some won't. All will be hated.

* The government announces a new New Deal, finally investing in the country's infrastructure, in the hopes that this will stimulate the economy (which it will). Investments include broadband, green tech, wireless, physical infrastructure, et al.

* Eventually, asset prices will bottom: Housing down 40% in real terms, the stock market down at least 50%. With luck, this will happen by early 2010, so the recovery can begin. Warren Buffett loads the boat with stocks, but by that time, most people are too depressed (and poor) to follow him.

* Unlike Japan, we finally force our banks to write down assets as far as they need to be written down...and then recapitalize them. This is what we should have done in the current bailout, but we'll get it right next time (we hope).

* We gradually begin a long-term economic recovery, one in which consumers save a greater percentage of income, thrift and saving again become admirable qualities, we gradually begins to wean itself off international oil, and the bacchanalian decades of the 1990s and 2000s become an embarrassing memory.

* The stock market finally begins a new, long-term bull market, in which stocks once again return 10%+ per year. Unfortunately, most Americans will be so sickened by the stock losses they've sustained since 2000 that they'll miss many years of it.

See Also: In Warren Buffett We Trust

Comments

[americancitizensfirst]

Too many deals are being made behind our backs. If ever word of every document were posted for all to see, EASILY on the internet, before any votes in congress, I believe we would remove a great deal of the UNDERHANDEDNESS that goes on behind our backs. Give people the chance to see and digest what we are doing in this country. I searched for days trying to find this bill, which went from 3 pages to 450 pages, and finally found it the night before the house was voting for the second time. I couldn"t read it all in one night how could they!!!! 450 pages COME ON GUYS WAKE UP YOU SHOULD HAVE THROWN IT OUT AFTER IT FAILED THE FIRST TIME AND STARTED OVER, BUT NO YOU ALL ARE CORRUPT!!!!!!!!

American"s are supposed to be responsible and most have proven that, but when people are irresponsible why should others have to suffer!!!! Read the CONSTITUTION and get back to the AMERICAN WAY OF LIFE!!!!! AMERICA HAS LOST TOTAL FAITH IN CONGRESS AND HATES EVERY CORRUPT POLITICIAN!!! I was reading the constitution last night and we need to get rid of every single amendment and leave the original articles we will see an excelent cange in government corruption!!!!!!!

[americancitizensfirst]

The objection is raised: Can we afford it? Where will the money come from? Are we not just making promises which cannot be fulfilled?

Stop the insanity. This is a free market society. To give more money to the government, who is most responsible for getting us here in the first place, is insane. Congress forced these bad lending practices on the banking industry and now we all have to pay their bad practices. They all should be ashamed of themselves! Then they"re going to go back to the same failed lending practices after this blows over! Congress is going to drive this country to another uprising. No wonder your favorability rating is even worse than the Presidents.

You people are going to spend good money after bad money, without fixing the broken lending practices that you all forced down the throats of the banking industry. What has happened to this country? My dad owns a small business and wants to be represented for the tax money that he pays. I am discussed with both the republican and democrat parties, doing more for the people that pay LESS TAXES. They don"t work for us or with us, but rather they work AGAINST us!!!

American"s are supposed to be responsible and most have proven that, but when people are irresponsible why should others have to suffer!! Read the CONSTITUTION and get back to the AMERICAN WAY OF LIFE!!!!! AMERICA HAS LOST TOTAL FAITH IN CONGRESS AND HATES EVERY CORRUPT POLITICIAN!

[blitznstitch]

I would rather spend 700 billion on infrastructure than on this bailout. This bailout will help the big banks, and ignore the mid size and smaller banks. This article reads like an oracle...

[LightningJoe]

No business should be "too big to fail." Else competition -- the very basis of Capitalism -- is taken out of the equation. This is a direct analogy to human technology and medicine obviating natural selection pressures. When natural selection no longer operates, flaws accumulate in a population; and in the end, minus remedies, will make it non-viable.

The same dynamic operates in the business world. If there is no "natural" selection among competing companies, flaws in business models will add up to inefficiencies. Merging such companies together (passing on their genes), will lead to larger companies with the same faults. If their functions enjoy a virtual monopoly, and they are resuccitated by the government, when they should quietly expire -- then our system is poisoned with the direct equivalent of a cancerous tumor. (bigger and bigger, but unchanged in nature; poisoning the system; stealing needed resources from the remaining healthy tissues...)

Soviet Communism was once a beautiful idea: "From each according to ability; to each according to need." Problem was, real humans had to guide the system, and the system quickly grew to reflect not only the human virtues of generosity and sharing (in ever-diminishing proportion), but the human failings of power-greed and the drive for control.

Now it's Capitalism's turn. Unfettered market forces led to what we see before us: manipulation of vast economic power for individual benefit, with no limits. Marx was right about that, at least.

We must harness this beast.

[beaupritchard]

A dark read but accurate. This bail out is just for those at the top of the heap .... those at the middle and middle bottom still are going to get hit hard ... just now from both ends. Those at the bottom already know how to live poor and are just going to keep mining the underground economy of other peoples illicit illegal immoral wants and needs.

A lot of this is like watching a snake eat a rodent. As the electronic industry then the steel industry then the automobile industry went overseas it was inevitable that the finacial industry would someday go over the lips and past the gums.

True unless you believe foreign banks are going to continue to aloow US banks to manage their money after this debacle ...

[derik]

And after all this is said and done we then move to a more moderate level of credit as consumers. Maybe, just use money we have instead. Oh yes, maybe not be on a feeding frenzy to buy everything all at once. Life would be simple with less leverage for everyone. Even corporations would be less leveraged. Life then becomes simple, once more until the next frenzy.

[apeman637]

Paul Harvey would say : "AND NOW YOU KNOW THE REST OF THE STORY" So what are you gonna do? Vote for more incumbents and wait for change, or VOTE EM OUT and demand change! Even along party lines. They all brought us here, now you know what you must do to get home on your own Is there any other way? Then follow me into the voting booth and do what I'm doing at least I'll feel clean.

[Mason]

How can this bailout be regarded as anything other than a sophisticated armed robbery. We the People are going to be forced to pick-up the tab for a reckless, expensive, and destructive bailout that the Senate passed yesterday and the House may pass today under enormous pressure to do so to supposedly prevent the sky from falling. An armed robbery is defined as taking property from another person by the use of a deadly weapon or threatened use of a deadly weapon.

Once again Congress is poised to capitulate to Bush and Paulson and this time without even bothering to consult with the most knowledgeable and least biased people on the subject of our economy -- our economists. Instead, Congress listens to Paulson, Bernanke, and their pals who will profit handsomely from this bailout if it passes.

This is armed robbery, pure and simple. It certainly isn't a solution.

[Mason]

Our government is out of money. To fund this bailout, it must borrow, which increases our debt, or print new money, which causes inflation. Given Wall Street's past performance, why would anyone trust it to free up credit markets. Most of the money will be siphoned off to further enrich the rich and the rest will be hoarded because the $700 billion is just a drop in the bucket and within a few months we'll be facing the same situation.

We've been told that time is of the essence, but 10 days have passed and the sky hasn't fallen. A committee composed of our most respected economists could have been assembled, met several times, and released a report analyzing the systemic problem and recommending short and long term solutions to solve it. We need a multi-year plan with yearly goals instead of an early Christmas present for the reckless and greedy thieves who created this shameful and destructive mess.

[Bobotheclown]

One of the often hinted goals of this administration is to destroy the middle class. The middle class is the home of the Democratic base. The neo-cons would like to turn much of it into a low wage labor pool that can compete with the starving masses of the emerging markets. That will reduce the balance of payments disparity which will strengthen the dollar, increase exports, and begin a new growth in business and the stock market. Those who have a seat at the table after this transformation will benefit from a new capitalistic prosperity. The majority of Americans, including the late Democratic base, will see little difference between the slavery of old and the new working class.

Reagan said government is the problem not the solution. The founders of our country said government is the only guarantee of individual rights. In 1776 Benjamin Franklin was asked outside the secretive first constitutional congress what kind of a government was being created. He said "A Republic, if you can keep it." How do you think we are doing lately?

[pa104inf]

Considering this problem began under the Carter Administration with the Community Redevelopment Act, I wonder how Reagan is involved? It was Carter, Clinton, and Democratic legislators who decided that lending institutions shouldn't verify id, employment and income history. After all, the Congress told lending institutions don't worry about the ability of the lendee to pay the loan back, Fannie Mae and Freddie Mac will buy it from you. All that remains the same. I want an investigation since strangely enough the Democrats aren't calling for one.

[SamEllison]

Wake up Henry, it was all a dream.....

[Mr Grey]

What happens now? The same thing you always get with voodoo economics ...... Nothing Good.

[Rule Of Law]

I also notice how this bailout bill has grown from 3 pages to over 400 pages!!!

[WIpatriot]

Didn't ya hear, Rule, that's how gummint is supposed to work?

[Rule Of Law]

What happened to the paperless work place? Oh, that's right--first you gotta get rid of the paper pushers!

You've been away awhile, Patriot. Haven't seen Olephart or Greedy on the boards either? Thought this whole scam would have had them typing till their fingers bled?

[RevMetheus]

I would like to see just one news agency (more is better) but just one news agency have the epimethean gumption to hold all those "Privatize Social Security" feet to the fire. All those people who wanted to take all of this country's future and invest it in the stock market. I want someone to ask Bush how he would explain to the American people that his great plan bankrupt the future of the US. Every one of those people who would give our money to their friends on Wall Street to invest for our retirement: Bush, McCain, all of them. Let them tell us how great an idea it is now.

[oldfart1]

Right on! And that isn't all, not even by half.

Many small savers, looking for secure income, had most or even all of their life savings in Fannie and Freddie. What Bush would have done to everyone he has already done to millions.

There is a great and tragic story here, and you will hear it from someone in the next month.

[pupbayer]

I think you are confused. McCain only wants to give those going on Social Security in the FUTURE a CHOICE to invest themselves or leave it as it is. That is an individual choice and NO one who is currently on Social Security would have this choice.

I don't mind if you disagree with that because I do, too, but at least get it right.

[Westexacan]

This country has been going down hill for several years now by charging the economy to the national debt. 10 trillion bucks folks. I have not heard a politician try to correct this. They cain't .
It is time to pay the fidler and take the hits and pick up the pieces. Yep let the chips fall. Get in that soup line and then come to your senses and vote those people out of office. I am old , I went thru the great depression, served in WWII , took a hit during the Eisenhower administration and the Reagan Administration. But God help my Grandchildren. George W. Bush should be impeached.

[oldfart1]

Tell it like it is. W should have been impeached, but the country is too stupid to do it.

[Mr Grey]

Impeach Bush and Cheney! Taking impeachment off the table is the greatest mistake in the last 27 years of American history.

[Bobotheclown]

In 1993 Bill Clinton could have prosecuted Bush Sr. and company for Iran-Contra but chose not to do it. The result was that the Reagan-Bush administration was saved the ignominity of disgrace and it is still used as a shining example of integrity by Republicans to this day.
Nancy Pelosi took impeachment off the table in the face of the first true impeachable offenses by a President since Watergate and the first overt attack on the Constitution since the South in the Civil War. The result will be a gradual forgetting of how bad this era was and its eventual use as an example of conservative strength in the face of popular opposition.
When Obama takes office he will choose not to prosecute the crimes of Bush W. and company. The result will be that the neo-conservative establishment that they have funded with taxpayer Billions will establish more think tanks and propaganda centers and work toward the day when they will rise again.
You've been around for awhile. Why do you think this is?