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
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Your premise: "Now that the government has been terrified into rubber-stamping the Wall Street bailout, what happens now?"
This was written before the second vote has happened and the first was SOUNDLY rejected.
Also, I spent the whole morning trying to call in to my Senators and it took HOURS to get through. This tells me they are OVERWHELMED with "NO!"
I told my Senators, "If the Dems support a bail-out, I will, for the first time in my life, vote 3rd party or independent STRAIGHT DOWN THE TICKET," among a few other choice comments to the effect that I / we need the Democratic party to listen to us when we say NO. And, if they won't listen, we DO have other choices - and we'll make them.
...I also started with that I voted for the Senator, of course...
YOU CAN CALL TOO - it's not over YET..
Green Party, here we come.
Yes, I agree with blodgett's scenario.
Would add tho: Notice how the intervention in prices with the creation of a market for bad paper with $700B of treasury money comes 1 month before an election. We're having a party girls and boys. Everybody's invited. Drink up. It's DC Kool Aid for the gullible. It is up to the cons to make it look good and that is what they are doing.
Actually, when credit bubbles burst you have this massive sale of goods and services that actually are a sign of great prosperity. This "sky is falling" is just meant to get pols re-elected. (Now there is a bi-partisan issue if I ever saw one!!)
There is unemployment and individual bad luck stories in a credit bust and it is up to government to alleviate those situations which probably involve 5/10% of the population.
The pols should not get in the way of the price mechanism and that is exactly what they have in mind. They will make it appear that they are making things better but the fact is that they will make matters worse as they wear out everybody in the exercise of an impossible task.
They aren't getting the boulder (bad mortgage paper) out of the road; they are just chipping at it with a chisel. Note how nobody is willing to say the Paulson plan will work.
And thats the best case scenario. Fact is they have been doing a secret bailout not for weeks, over $180 billion per week, under the radar while everybody is all distracted by the media hype. More than the "bailout". This is all part of their larger plan to fully implement the North American Trade agreement, and possibly roll out the Amero? Dont underestimate what Bush is doing, this is all part of a very distubing trend that will cause Americans to loose our Freedom.
Link to secret bailout?
IT SHOULD NOT BE A "DONE DEAL"!!!!
here - this link offers many reasons why this bailout should never pass:
http://list.lewrockwell.com/t/1130020/11010986/60088/0/
When I see the gibbets set up for the Neocons who orchestrated this,it will be my only small consolation.Obama is hopefully lying when he talks about another pointless war in Afghanistan.
I really do love that word neocons
The war in Afghanistan was never pointless. It's the only war we ever had to win. And we are losing it because we threw our money and forces at the president's pet project to catch the man who dreamed about hurting his Daddy. That is all Iraq is: a child's pursuit of revenge.
We are losing the war in Afghanistan for the same reason the Soviets lost. Please recall that they had more than 600k troops in country. Now that Dicky Bruce Cheney has provoked the Russians, I would not be surprised to hear that the Taliban has acquired new sophisticated shoulder-fired anti aircraft missiles (something like Stinger missiles).
Both the Taliban and Al Qaeda evolved from the remnants of the Mujaheddin that we created to fight the Soviets in Afghanistan. Ironic don't you think?
Iraq is not about revenge, or at least not much. Iraq is about oil, corporate greed and power, and U.S. imperial hegemony. It's a big resources grab and an attempt to lever the shock doctrine against another hapless, helpless country. It's a whole mess of war crimes, too.
You missed the part where economic depression (let's face facts, folks: there's no longer debate whether we'll hit a recession; the question du jour is: recession or depression?) leads to violence somewhere.
* Police will overreact and the violence will escalate and get out of hand
* Due to the fact that we now all consider the Constitution and our rule of law to be passe, we'll ignore Posse Comitatus and call in the US military to supress the riots
* Some form of martial law will be declared, as authorized by the John Warner bill of '07. I mean, hey, after all, this is an emergency. You're either for us or against us!
* Since we've eviscerated the Fourth amendment and the Eighth amendment, as well as most of the First, we'll outlaw public assembly, protest, and freedom to travel. People will be arrested without charge ("disappeared") when the NSA/FBI dragnet picks up certain "keywords" in their email and phone calls (thanks for helping to gut FISA, Sen's Obama and McCain!) People will be tortured.
* (maybe) the entire population, sick of it all, will rise up in a second American Revolution. The results will be unpleasant; unlike the first Revolution, this time, the enemy is "us" -- it will devolve into sectarian violence, and besides, how could even the US populace oppose the US military? Millions will die.
Likely? No. Possible? Frighteningly, yes.
Bingo. The neocon corporate Cold War on the middle class could get hot. Better a revolution than a civil war.
Have you been to the Half Past Human site? Their linguistic prediction program has outlined a really scary event coming soon, before October 7.
Right on the money, Henry!
Your forecast of events after this bailout debacle is quite realistic. Although, a bit optimistic. How about the following scenario?
The world has given up on the once mighty dollar and the prospects of US economy. Countries like China, Russia dump US T-bills and bonds. The US debt ratio goes haywire. The dollar goes down in a big way. Due to the continued weakness of US economy, the credit cruch reaches out to a new level: collossal default rate on credit card debt, plunging the cosumption-based economy into a tailspin. After banking sector collapse, we have manufacturing, retail, services sector wipe-out. And it goes on and on, until in about 3-4 years the US wakes up and finds itself on the level of a country like Kenya, or Thailand. Then something may change.
The core concept proposed by Bush is flawed. Google Sweden 1992 banking crisis. They had good success promptly steering their financial institutions back to safety. The “compromise” tweeking that was done to the Bush proposal resulted in a toothless and weak 100 page bill that tried to bury and hide its weakness from the voters. Rather than condescendingly claiming that the American people didn’t understand (Cf, McSame of Obama at first debate), or that the leadership didn’t explain it well enough, the reality is that public outrage finally made the Republicans blink, to borrow from Palin. That is their only moral hazard. The bill that failed would not have prevented one of the 10K daily foreclosures, could have been filibustered until Bush spent all $700B, would only have made some parachutes non-tax-deductible, merely required a report “suggesting” how the taxpayer will be paid back, and allowed the same bunch of lobbyists to set prices for their trash that the taxpayers would pay. As a final insult, instead of providing more confidence through transparency, the failed bill would allow Paulson to suspend the mark-to-market rule, just like Enron. I think many voters would accept a temporary governmental equity position in the banking sector as long as the bad guys aren’t seen as maintaining their ability to subvert the programs and continue to rip off the system. Don’t pull another FISA cave.
Good analysis ... although I feel it is likely that even with Paulson buying bad paper the credit market won't budge much do to the exposure of financial institutions in Credit Default Swaps. My sense is that once the banks get some of the bad paper off the books any liquidity they have won't make it to main street before it is consumed by the bank's obligation in the CDS cloud.
Look how much benefit Bernanke's release of 680 billion dollars into the global markets had on the credit freeze ... zip. That's telling.
Well, how about we hold an anti-incumbent election?
We vote for whoever is the new guy and let them know the voters come first and they'll be out on their asses if they screw with us like the current batch of crooks have!
When the new guys get it we push for real campaign reform.
One of the first changes I would like to see is that member of Congress must spend at least 1/3 of the year at home and available to their constituents, I don't mean hiding and partying with their rich friends and lobbyist.
And they cannot convert their campaign funds for personal use when they step down. The idea is that I donate for a cause or specific agenda, not to make them instant multi-millionaires!
"how about we hold an anti-incumbent election?"
That won't work for me because that would mean voting for a Republican. I won't do that.
Then you're part of the problem. It's people like you who keep corrupt politicians in office, voting party over principle. When a criminal is in office, you vote them out. Do us all a favor and stay home.
Henry, as concise and precise a prediction as I've yet seen. And, in a sane country or a sane time--even 1929 was less insane by far--your model would probably be correct.
But our leaders are not "sane" in that they do not act with the best interests of the people in mind. They act in the interest of the Few. And they have stopped even pretending to do otherwise. They want social dislocation. They want poverty and hunger. They want the humiliation of the Middle Class and all their dreams. They want suffering and despair and the power to control that those give them. And They want revolution in the streets to be able to enforce the Patriot Act, the Military Commissions Act and other "laws" they've put into place for just such a contingency, to spy and arrest and fill the FEMA camps in order to expand and extend their power.
They are no longer Americans or Patriots or fellow citizens, but a breed of financiers and their lackeys who fancy themselves above the laws and above all other men. We will see a feudal version of Fascism before we ever see the light of day. Unless--we as a people--stand up for our Constitution and our rights and demand an accounting and a return to the laws that this country was founded on. No one else can do that for us.
There's too many guns out there. Blind support of the NRA to get themselves elected might backfire (no pun intended) after all.
When tyranny is identified, it is the responsibility of the patriot to resist.
Patriots resist tyranny.
And, note, I do not advocate violence or armed rebellion. I DO suggest that the People become intimately involved in their own governance. There is plenty of money to be made by anyone with the drive to do so in this country without cheating, impoverishing or enslaving his fellow men. And Americans have always been admirers of that sort of success story; it is something we can all strive for. An American success story--Yes! Tyranny--No!
I am ready for cheese lines/soup lines, whatever. To hell with Wall Street and the horse they rode in on. If I won the lottery today I would not invest in anything to do with Wallstreet. I would bury the cash and use it till its gone. I have NO faith in Bush/Wallsteet/our Military/Fema. My home was damaged by Ike and, evacuation and expenses mount - Fema now gives you a loan application, no other assistance except for a motel far away, and only if your home is not liveable. And you have to have high credit scores, etc., to get the loan. I have not worked since Dec. 2, 2007 and my unemployment has ran out. I am in the poor house already so a cheese line would be a treat!!
How about this simple step to restore the economy and stock markets. US Government shall not be allowed to do business with any company (including its owners, subsidiaries and sister companies) which has moved jobs abroad in a given time frame. The test will be if there were net USA job losses and net overseas job gains in the same or consecutive year.
In other words... you want the US government to stop doing business completely?
:-)
Sounds about right... The question is, are we going to pressure our representatives enough to drop this pile of dog stuff and craft something useful? :)
There were some sobering recent statictics put forth by a guest on "Fast Money" yesterday.
The total assets on the balance sheets of all financial institutions is $61 T.
The figure of $ 700 B is a little over 1 % of that $61 T.
Equity in these instituions is approximately $5 T.
Say 10% of the $61 T turns out to be uncollectible, and that's probably way too high a figure, sbut as a bench mark you get a loss roughly equal to total equity.
When you look at these kinds of figures, you darn well hope that $700 is going to make a difference, but it seems to be dwarfed by the gigantic size of the asset portfolios.
That's what most reasonable economists (and this physicist) are saying all along: $700 billion is at least an order of magnitude too little to have any effect and it does not have a large enough multiplier effect because of the way it is being used. Of course, you might have noticed that the Fed has already something on the order of a billion dollars in play in different short term loan facilities. So in reality the total stake the government is trying to drive into this vampire's heart is already twice as large as what meets the eye. But that's still far too short.
OTOH, if we collect more taxes, fix our budgets and divert money from the defense to the civilian sector, we might just make it.
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