A Few More Points to Consider

Erick brought up a very pertinent discussion about the crisis emerging after today’s failed vote on the bailout package, in which he outlines a few points for readers to consider. I am not disagreeing with him, but I think the points require some further consideration. As such, I commented on some of these in the original post, but some had recommended to outline these items in a separate post, which I am doing below. Please bear with me on some redundancies, but I believe these points are incredibly important for us all to keep in mind as we watch what happens next in this crisis. First, in response to the claim that the percentage drop is not significant, since it is quite a bit lower than the drop in 1987, if you look at the market response to the failed bailout action in terms of basis points, you will see the drop was significantly higher than that of 1987 and any other recessionary market collapse seen, with the one exception of 1929. One commenter disagrees that looking at the declines from the perspective of basis points is insignificant, but this is wrong, as I responded to those comments. Basis points are extremely relevant, because the core of this crisis has crippled our credit markets, thus sending all kinds of disturbing effects throughout different indices. The drop in rates, such as LIBOR and credit spreads using T-bills, etc, is very important, because as long as volatility continues to go up here, the declines in the equity markets will continue. The crash in 1987 was not the same type of problem. I’ll spare you the historical economics lesson, but suffice to say, the market bottomed out quick, fast and dirty then, whereas now, the struggling credit markets will continue to drive the equity markets down, much further than a one day drop of 7%. So, if you put it in that perspective, then yes, it is very significant.

In regards to the fact that Members of Congress were responding to constituent demands, I have this to say: Rescuing the financial markets is not up to constituents, which is why we have monetary policymakers mandated to manage our economy and thus stabilize our economy. It should never have come down to elected officials driven by politics. Constituents, from an aggregate viewpoint, don’t have the best solution as to how we must act to rescue the markets. That’s why we don’t elect the Fed Chairman and other monetary policymakers. Even Newt agreed that although the package on the table was not politically optimal for everyone involved, the markets needed Congress to step up and do its job of govern, not pander to politics. After all, their job is to govern, not just listen to constituents. Sure, the voters put them there and they represent constituents, but their job is to make the tough decisions that are best for the country, especially when information assymetries exist, not allowing all constituents to be fully informed about the full details. I know this sounds harsh, but monetary policy is not subject to a vote … we elect the people that appoint/confirm monetary policymakers and that is where the democratic process stops, because quite frankly, the economy is not something we can directly leave up to every Joe and Jane Voter throughout the country.

I have been accused of sounding elitist with this comment, but I’m sorry, this just how things operate at that level. I’m not trying to discredit anyone, but do you really think every voter out there really understands what is best for our financial markets? Do you really think everyone knows best how to restore stability into our economy? Come on.

This is another response I had to this question: Sometimes, elected officials have to stand up for what’s best for the country, even when voters don’t agree with it, especially when their disagreement involves many information assymetries. Just because someone says they’ll vote/not vote for you if you do/don’t do something, doesn’t mean that should drive your actions, especially when the risks/costs are what they are today. If McCain pandered to all of the voters on the war, then there’s no way he’d be where he is today. Congress had the Chairman of the Federal reserve, who is one of the most gifted economists in the worlds with unlimited access to information advising them on what would happen if a bailout didn’t happen and why it was so important, but instead, many Congressmen chose to listen to voters (who not only don’t understand the true situation, but also don’t have all of the information), because they want to get re-elected. Remember, their job is to lead, not pander to voters.

In terms of Erick’s claim that if everyone seems to be against the bailout, then the media portraying the GOP as preventing it should work to Republicans’ advantage (I’m paraphrazing the original point), I think that if it were as simple as the media portraying it that way, then this would be correct, but unfortunately, the GOP will come out as costing everyone. Dems will milk every ounce of political capital out of this situation as they can and then will sweep in as the rescuers. The reason the public “didn’t support” the plan was because of the price tag and there is a false perception that this was socializing the markets (which it isn’t). If you look at the price data, after today’s failed vote and subsequent plunge, we paid in the capital markets more than what the original bailout would have costed … and that was a direct hit to the country’s bottom line, which the bailout would not have been. So, businesses will fail, retirements will be depleted, and negative macroeconomic effects will accelerate all because politics took over the wheel. In the end, we will likely pay at least twice that which was originally expected, with over $500b lost just this afternoon.

By letting political pride drive the process rather than cool heads, the GOP handed all of the strong cards over to the Democrats in this situation. Not only did they come out looking like innocents today, but as I previously said, they will emerge as the rescuers when a package actually does pass. And, whatever plan comes down the pipe will inevitably be tilted towards a Dem agenda, because now we have realized just how critical a bailout is. No one will stand by again for another afternoon in the markets like today, not even the most ignorant bullheaded of the bunch.

Finally, I believe that everyone is to blame here: Dems and the GOP alike. They all played politics. But, when it comes to people losing money, they don’t care about the vote splits. Voters are not taking the Sept 29 roll call votes to the polls with them. Their image of politicians will already be crafted by the media and how they associate the fallout in their markets related to how it affects their pocketbook, and then drive their support in that direction. If I am a small business owner, and I need economic stabilization and strengthened credit markets to that I can meet payroll next month (and the next 12 months), then that’s the telescope through which I am seeing things right now … not how the caucus numbers and vote spreads stacked up. Once voters/constituents/citizens are affected this way, all that restoration of fiscal conservatism ideology malarkey will be forgotten. Now, those who voted asgainst restoring stability into the financial markets will be looked at as ignorant, stubborn know-nothings, which most voters already look at them as. This just confirmed it for many.

Again, I am sorry for being slightly redundant here, but I think it is important we see the full scope, rather than just looking at this from a political viewpoint of Republicans or Democrats. I have spent my entire life distinguished by that separation, but I can assure you, the markets aren’t Republican or Democrat and if we do not approach this crisis strategically (rather than politically), then we will continue to feel the pain.