Wednesday, October 1, 2008

Bailout

Longtime readers might have noticed that I'm not shy about commenting on current events, and wondered why I'm not commenting on the bailout. Other than posting this cute photo of 2 cats debating the expense of the bailout, I've been silent.


That's on purpose. I simply can't keep up with the pace of the breaking news on this bad boy.


If you must get your fix of the local bloggers' perspective, check out my broker Jay Thompson, The Phoenix Real Estate Guy on the bailout.


I have only two substantive comments on the topic. First, we're facing a crisis of confidence, not money. Newscasters and even politicians who should know better keep saying "we need inject liquidity into the market," which isn't accurate. The Fed's been pumping money into the market for months. We have enough money. What we're lacking is confidence in that money. Banks are increasingly refusing to lend money to each other on over night or short term loans. It's the short-term credit market that's a problem, and that's hard for the average American to "see" on a daily basis.


You can track this trend of no confidence by watching the LIBOR (London Interback Offered Rate). It's the interest rate banks charge each other on overnight loans. The LIBOR shot up like a rocket this week and currently sits at an all-time high close to 4%.


Second, I wish the politicians would stop saying things like, "The consequences of inaction are too terrible to mention. I don't even want to think about how bad it could get if we don't do something." What, are you all twelve?? Use your grown up words! The consequences are terrible, but not indescribable. Banks making short terms loans to other banks and to businesses large and small is what greases the wheels of the American economy. If the short term loan market freezes, it would very likely freeze the entire economy.


Businesses use short term loans all the time to cover everyday expenses like payroll, buying new equipment, expanding into new territories and so forth. If business can't cover daily operating costs with low-cost short term loans, it means they'll have to cut costs or maybe even shut down. Remember, in the business world, "cost cutting" often means "layoffs" or "plant closing". Even when it just means "no raise this year" it hurts the economy in the long run. Workers without jobs or without a meaningful raise start defaulting on their home mortgage payments, their credit card payments, student loans, and everything else. They visit the local unemployment office and start collecting a measly unemployment insurance check. Government costs go up, consumer spending goes down. It's a vicious spiral and it's the result of our unrepentant love of easy credit and mass consumerism.


Fixing the mess we all made isn't going to be easy or pretty. But it's got to be done. Folks who say banks and businesses failing is part of the capitalistic business cycle and we should just let Wall Street take care of itself are ignoring the root causes of our troubles - the housing bubble trickled up to the short term credit markets and is freezing them. If the media would start describing the actual problems (lack of confidence and the short term credit market freeze) instead of focusing on the Dow's gyrations and politicians playing the blame game, we'd all be a lot smarter and feel better about creating a plan to get us out.


Granted, CNN and some other news outlets started talking about these issues yesterday morning, but that was a week and a half into the trouble! It shouldn't take 8 to 10 days for our media to get to the heart of the matter.


On the other hand, two writers I respect tremendously present well-reasoned arguments that the bailout plan is a disaster in the making. So maybe I'm an idiot. With a bailout plan this big and this complex, who knows anymore?? So now I go back to being silent on the matter.


Updated Oct 8, 2008: Ultra conservative Steve Forbes agrees in this video link, saying "the world is awash in liquidity. What we have today is a crisis of confidence, not a lack of liquidity," although he lays much of the blame at the feet of the Fed.