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

Follow Henry Blodget on Twitter: www.twitter.com/hblodget

Comments

[Nooneyouknow]

I'm going to try to call me senators, but Clinton and Schumer are two of the most corrupt Dem supporters of Wall Street. Either of them would murder an infant rather than fail to do what these rich bastards want, because in the end, Schumer and Clinton want to be rich bastards themselves. Makes you wonder what would get their attention, no?

[SGRS]

Why can't the govt. bring cases against all of these CEO's under the RICO Act? Charge them all with criminal enterprise and get them to pay their ill-gotten gains in fines aka: restitution in exchange for not sending them to prison. I am not interested in seeing them sent to prison; I just want them to help clean up the mess they made. Besides, we would have to support them once again if they ended up in prison. Their hundreds of millions of dollars would go a long way toward fixing the financial mess they created. I am sure there is a way to calculate what portion of their monies these CEO's should have to pay in fines based on what they earned during the years they compromised the integrity of their own firms.

[shanedr]

Well Mr. Blodget, if the bail-out is a done deal then a lot of those coming up for re-election in November are going to be really disappointed. From those I have talked with any actual bail-out of Wall Street is going to cause more outrage then I think Congress realizes.

[sdsell08]

Thanks for the refreshing and accurate commentary of our future. No joke. However, you failed to mention the government funded programs that will have to be cut. All of them not just the social programs like Headstart, welfare(ew that is still and ugly word) and military personnel and weapons. So what Change is Obama going to do? He is approving this with a laughing extra $150k Federally Insured in banks. Good grief when are people going to yell at thier congress people to quit listening to Bush and stop being nice (Obama). Just say no, I dont want to get &*&*&*.

[DickTater]

Here's My Take:

700B is like wasting 700B to replace my broken Perpetual Motion Machine.
No, wait, maybe I should get my defunct TelePorter replaced.
No Wait, maybe I should spend the 700B to get a new Time Machine....since my old one isn't working.

What do they have in common with our old economic model?
They are all boondoggles. NONE of them ever really existed....let alone WORKED.

We never had a fair market. We never had a free market. We never had a supply/demand market.
And we never had a stock market that reliably, legally, or factually produced a 10% return for the avg. invester.

We had smoke, mirrors, and lots of theft (accompanied by semi-effective reach-arounds).
Throw in the fact that our media is CorporateComplacent, and wouldn't tell us if our collective ASSES were on fire....and we are well and truly hosed.

The only question is HOW MUCH FREE BILLIONS are we going to give these people, even after their fraud has been exposed. Unfortunately, it won't actually make news, and the avg. american won't really know what has happened or what is happening.

[GrainOSand]

The Great Regression!

Regression -- Relapse to a less perfect or developed state.

[funkalicious]

"When history repeats it always costs more."
anon
I kinda Sorta agree with you Blodgett but we will see a long term decline in lumber and cars,
oil prices will rise and there will be a shift In the world economies the rebuilding of the infrastructure should be carefully considered to account for the new coming reality of the American landscape.
We are in a much weaker position, lack of savings and ever expanding of internal markets. A much different position than in past credit crunch recessions/depressions we are no longer the brains and brawn driving the world.
Energy and resources will dictate a new reality. the Age of oil domination is over we could be like the Dutch at the end of the age of wind or the British when coal was usurped by oil as the fuel that powered the world.
America needs the freedom to be innovative and the freedom to attract the best minds and talent to our shores to keep alive the burning ideals that in America anything is possible and tour government stands by our side not on our throat as we dream and build a better tomorrow.

[DogLeg]

"...and the freedom to attract the best minds and talent to our shores to keep alive the burning ideals..."

I guess this statement supports this drivel, "...we are no longer the brains and brawn driving the world."

Especially with, "...a long term decline in lumber and cars,..." our food supply. Though "...the rebuilding of the infrastructure should be carefully considered to account for the new coming reality of the American landscape." And your tempering of infrastructure is based on oil? If based on alternatives, which is what it needs to be, that is the infrastructure, beside the obvious civil engineering work. We import cheap 'brain' labor and export manufacturing for cheap physical labor. Get it? WE still produce more brain power, but corporations want it cheaper.

[Snoop2]

Still time to stop this bill!
Stop this rip off of our money! We want a guaranteed rate of return which will be sent to the taxpayers
as interest income or as a dividend! We want what WarrenBuffet got nothing less!

Contact Banking Comm. Chairman Chris Dodd and let him know your opinion!

http://banking.senate.gov/public/index.cfm?FuseAction=Contact.Form

Also contact your Senators at www.senate.gov

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[heal57]

I don't know....Suze Orman thinks it will be about 2015 when things get decent again....best advice, don't borrow, live within our means...pay cash...no new auto loans ; buy good used and pay cash,,,let mastercard and visa go to he*l.

[DogLeg]

There is truth there.

[hudsuckerproxy]

A refreshing change from the Pollyanna scenarios painted by the Wall Street cheerleaders over at CNBC.

[starislon]

This is just a problem of confidence, as we all know. If we just have the courage to change, things will be different.

Even symbolic change could help.

If we purged all the negative connotations of predation from our national bird, letting it morph, perhaps, into something more egalitarian, like 'mammon-dodo', while simultaneously dispensing with both the 'donkey' and the 'elephant', by simply re-naming them 'crying-wolf-one' and 'crying-wolf-two', we would raise our self-esteem, not only in our own eyes, but in the eyes of the world.

Or, if you find a more thoughtful, gradual approach appealing, we could breed the blue dog with the red dog for a few generations, turning the two dogs into the one dog, or, the color purple.

[nezumi]

Add to that:

Banks will rig auctions and unload their really toxic (i.e. totally worthless) assets at the taxpayers expense. Forget the frequently stated assurance: 'if held to maturity, these assets will perform finally and the taxpayer might reap a profit'.

Hank Paulson might have also have sacrificed Lehman, and exacerbated the crisis needlessly, just because of an old grudge (he himself had worked for Goldman Sachs, a rival firm, and Lehmans CEO does not look like a really easy-going character, judging from his pics in the media).

[Assassin]

I too am worried about whether the banks will collude or flat-out play chicken at these "reverse auctions". If their lowest bid is something ludicrous like 80 cents on the dollar for this junk, will the government be forced to take it? I really hope not...

[peterg76]

The crisis is a debt bubble. Borrowing money to exchange private debt for public debt cannot fix the problem, but it can make a select few richer.

[KillTheMessenger]

Wow... I was looking for an article like that. Glad you managed to lay it out so clearly and succinctly.

I might disagree about the timescales somewhat. I think we will not have seen the worst in some sectors until 2012, but pretty much everything else sounds dead on.

Thank you!

[VikingQuest]

Well Americans should and will request people goto jail for this . . .

Which won't happen because Dems and Repubs are all in on creating the mess and bailing them out, everyone from Dodd to Frank to Bush all have their fingerprints over all of it. BTW, why are the people that caused this trying to sell us a solution now?

Congress won't hesitate to call baseball players or "big oil" to testify but when it comes to giving out $700 billion . . . silence from all.