The BBC and the Boston Globe are reporting that the House approved the $700 billion wall street bailout bill.  We'll see how well that does with settling the financial markets.  Certainly it seems the economy continues its meltdown with spiking un/underemployment reaching mid-1994 levels (see the U6 measure reported by krugman), rapidly falling motor vehicle sales, and decreased factory utilization.

I have mentioned to some friends about the SEC's decision to allow the five big investment banks to take on way more leverage (11x before to 30-40x pre-crash) then they were previously allowed.  I first read about it on The Big Picture, who now reports that the NY Times just covered it as well.  As Barry Ritholtz cites and says:

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

(emphasis added)

No wonder the bailout package is so poorly crafted: The
same genius, Hank Paulson, that helped us to get into this, and has
utterly failed to see this coming until it was all but on top of is, is
trying to get us out. He is uniquely  unqualified for this task. How this guy hasn't honorably fallen on his own sword yet is beyond me.

Gotta agree with him there.

Just pointing out:  With the wall street bailout, not only do we have go into debt to the tune of $700 billion, but we get to pay $25 billion each year in interest for the privilege of bailing them out.

Tennis Lilly asked me:

ok Jamie…you’re the money guy…i didn’t want the bailout but they have to do something…don’t they?

I am not an adherent of the “market is always right and will self-organize itself into a better place” philosophy.  Bailouts can be necessary.  Maybe this time.  Certainly the credit squeeze seems well on its way to becoming a serious credit crunch.  The rate at which the banks will lend to each other (the LIBOR) has reached some scary heights, and banks seem to have seriously reduced lending to each other and have fled to treasury bills/bonds.   Doug Henwood, Paul Krugman and some other people I believe are knowledgeable about economics and finance think a bailout is needed to keep the banks working and not cause the economy to tank.

That said, as I pointed out this plan provides little benefit when this crisis is over, will be run by Bush and his cronies, likely won’t solve the problem and will leave our government $700+ billion dollars further in debt.

However, there are other
alternatives including:

• The financial meltdown requires far-reaching Green solutions
• Top 5 Reasons to Vote Against Wall Street’s $700 Billion Bailout (see item 3 for a number of proposals)
• The Working Families Party proposal

For me, the solution looks something like:

• Swedish style takeover of troubled banks,
• ending foreclosures while loans get reworked so people can pay them,
• investing more money in fixing needed infrastructure,
• putting money into energy conservation and alternative energy for the poor and middle class
• and expanding health care for all.

However, such an approach flies too much in the face of Republican free market dogma to pass.  You would think that some of these Republican congress people would remember the Savings and Loan crisis and how the federal government had to take over failing savings and loans during Reagan and Bush the Elder’s terms.  Apparently not.

Looked over the Emergency Economic Stabilization Act of 2008 a bit.  Title I – Troubled Assets Relief Program's SEC. 113 on page 39 is a key part. It specifies that if we buy assets (i.e. toxic waste) from financial firms we can either use a reverse auction (so the treasury will likely purchase these questionable assets at a low price, which isn't horrible.  Alternatively, we can get the assets for equity or senior debt (i.e. first in line if the firm goes belly up), which serves to help recapitalize troubled financial institutions.

The serious failure of this bill is that how much equity or senior debt we get is up to the Treasury Secretary.  What do you want to bet that Paulson, ex-Goldman Sachs CEO, isn't going
to insist on getting much equity for the money we pony up to Wall St?  Plus, (3) (A) allows the Treasury Secretary to exempt firms that have troubled assets of not more than $100 million.  I wonder how many subsidiaries these financial firms will create to get that exemption.

There are plenty of other problems with this bill.  Just on the face of it: the fact that it bails out Wall St. for their risky activity, saddles us with the debt and more than likely won't work.  These are the folks who keep thinking we turned the corner, after all.  But to top it off, there is no upside for the tax payer on this one.  Just a hope that Bush's folks act in the interest of the US people.  Just ask the people displaced by Katrina where that got them.