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Thrilled About The Rejection

When I heard that the $700 billion bailout plan was rejected by the U.S. House of Representatives, I grew giddy. It was wonderful and strange to have that feeling caused by politicians, after the constant disappointment I have become familiar with, especially with the Bush Administration. Dave Reichart, for whom I voted, was one of the gutsy Republicans who defied the Administration to vote no.

Principles are those central tenants a person can fall back on when the going gets tough. One of the principles of the Republican party — at least in theory — is believing in the free market and keeping it mostly free. Admittedly, a lot of people figured this out before me, but it has become apparent to me as well that George W. Bush and his administration generally lack principles, or at least any principles that I can fathom. This bailout package is just the latest,and for me the greatest, indication of this.

Perhaps if the Democrats had shown as much guts back in 2003 as the Republicans just did, we wouldn’t be in this Iraq 2.0 mess? Just a thought.

Of course, as a friend recently pointed out, we’re not out of the woods yet on the bailout package. More votes are likely, and this first one may have just been the “well we rejected it once” vote before it gets tweaked and passed, essentially the same. So get up and write your representatives and senators. Lets leave this thing dead for the long run.

The only thing Bush could do at that point to restore any of my respect would be to veto. Anyone want to guess what the chances of that are?

6 Responses to “Thrilled About The Rejection”

  1. ben Says:

    My understanding of the “bailout” is that it’s mainly to insert a stable mark for the credit markets to work with and soak up a majority of the poisoned assets (sub-prime mortgages). This will help prevent this stuff from cascading over into other markets (although it’s already starting to) and causing larger social-economic turmoil. I’m not a fan of it. But I can see some of the logic behind it. I’m not sure the market can operate rationally enough to solve it by itself at the moment.

  2. Scott Says:

    I am generally a free market economists, but I think you might see things differently if you were trying to purchase a car, finance a lucrative business deal, purchase a house, or any other transaction that requires credit. You might even see things different if you were a owner of a medium sized business that needed to raise a small amount of debt to fund immediate cash flow concerns. All of these transactions which are essential to our economy’s flexibility are at a standstill right now. As a libertarian I think you believe that one of the basic roles of government is to provide the infrastructure to a functioning economy such as roads. Road allow people to connect things or people that need to be get from point A to point B. Similarly capital markets allow people who need money now more than they need money later to access that capital by compensating the party at a later date. Right now, the banking system is functioning kind of like the Seattle transit system would function if you took out the bridges across lake Washington. I sense that part of you reluctance to support government intervention is because you believe it does not punish those who caused the mess in the first place and that markets are supposed to let firms that market poor choices die so that their better equiped competitors can gain dominance. The other component that you are probably concerned with is “the cost”. What the politicians have done a terrible job explaining to the American taxpayers is that the government will likely turn a profit from purchasing these distressed assets. What!?!?!? If these assets are likely to be profitable why isn’t anyone buying them. To understand this you must understand some concepts from finance. Every investor has a certain capacity to take on risk in exchange for a potentially larger return. Right now the global financial system is already too levered. The other issue is that even if there were investors who were willing to lever up even more, their cost of capital (the rate they must borrow at) is too high now because the capital markets are not functioning. But there is one investor who has a very low cost of borrowing and almost infinite credit line, the US federal government. One of the best investor of all time, Warren Buffet, estimates the ability to turn a 15-20% rate of return as soon as the financial system can delever (probably 1-2 years). That is a pretty good rate of return considering the cost of capital for the US government is close to 0.1% (short term t-bill) due to the “flight to quality” recently.

    As you point out Principle are something you should be able to fall back on, but sometime principles should not be followed at the extremes because the world is frequently more complicated at the extremes. It reminds me of a great joke that illustrates this logical fallacy “Why is an elephant large, grey, and wrinkly? Because if it were small, white, and smooth it would be an aspirin.”

    Sorry, that’s all the time I have to write: see the following post on my blog if you want to know more

  3. Ryan Says:

    I emailed my two senators, Cantwell and Murray yesterday to encourage them to vote no. Cantwell, bless her heart, voted no, but Murray voted yes. Interesting, since Murray is supposed to be the “Mom in Tennis Shoes” Senator.

    It would be interesting to see a seniority-vs-vote graph. I may work on one.

  4. Ryan Says:

    Thanks Scott for the counterpoint. Also, an excellent post and comic explaining the mess, everyone should go check out both.

    Also, I did the graph. Check it out

  5. nordsieck Says:

    Interesting posts.

    Scott: Yes. There is a bunch of high quality debt out there. Assuming that things go back to normal in a few years, that stuff will make buyers a profit. I wouldn’t be surprised to see a bunch of hedge funds buying this stuff up, at least the ones that have cash on hand.

    There is also a whole lot of toxic waste out there. Least senior tranches in CDOs, credit derivatives, etc. If the government buys this stuff, especially at ‘book value’ which has been suggested in a number of places, it is pouring money down a rat hole.

    Lastly, I’m an Austrian. We’ll have to agree to disagree on what constitutes ‘normal’.

    Ryan: You were right about the unions. I don’t know how I could forget about Regan breaking the flight controllers.

  6. Jim Says:

    I have gradually come to the belief that, at this point, the “bailout” plan is actually trying to save Main Street, not Wall Street. It is possible that some on Wall Street will also get saved — but that will be a side effect, not the main event. Here are links to two surprisingly different viewpoints, both from the same publisher but different people. I like Porter Stansbury’s description of AIG’s fraud. (Or if not fraud, then astonishing incompetence.)

    I also like Steve Sjuggerud’s rather hopeful outlook on our recovery. He compares our situation with that in Japan about 20 years ago. We are in much better shape.

    Read these:

    How AIG’s Collapse Began a Global Run on the Banks

    Don’t Buy the Fear

    Regards to all.


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