Red Room Where the Writers Are

The bailout sure has calmed the markets, huh? Oh did I say "calmed?" I should have said "fanned the flames of."

The amazing arrogance of the US government astounds me. To think that they have the ability, with any amount of money, to avert a massive market adjustment strikes me as just more of the same old egotism that have made our administration ... well, what it is.

Just compare the scale: hundreds of trillions of dollars of liquidity in question world wide and the US wants to spend 700 billion. They are off by a factor of 1000 or so.

I've come to the conclusion that nothing can be done to stop the correction. My guess is the major financial institutions know this and used their lobbying power to get this law passed so they could cover their own asses. It worked. While the world scrambles to "manage" the market correction that was destined to happen, these companies will be able to stay afloat on the backs of the people.

Sadly, we will not feel much of this burdon, our children and grandchildren will be handed this burdon and will be forced to deal with it. Just like our children and grandchildren will be handed the burdon of a world at war. I'm not talking world war, I'm talking about little wars all over that sap our strength, rob us of our money, kill people, destroy lands, and reduce our efficiency to near zero.

The 850 billion that the federal government just borrowed from our children and grandchildren will do very little to affect this market adjustment. It will also do very little to help people learn from their greedy mistakes. Instead it furthers the attitude of selfishness that pervades human thought and interaction.

My friend Jan, who should be back in Canada now, spent six days in the mountains of Peru (at least I think it was Peru). Before he climbed up there was almost no news on the financial melt down. When he came back down it was the only thing being talked about. He is of the opinion that the human race is going to have an "adjustment" of its own in the near future. His latest idea is that the financial melt down we're having now is merely the start of a massive world wide depression which causes famine, epidemics, wars, etc etc etc. I hope he's wrong, but I wonder if he's right.

If such a thing could happen, would our 700 billion drop in the bucket even begin to help?

The way the world markets work is quite simple: when people are happy and spending, companies profit, people make money and people are happy and spending. Simple right? But when people are not spending, then companies fail and people can't make money and more companies fail. Its worse than that because of the borrowing mentality that people have. We actually borrow money to spend (credit cards, second mortgages, etc), then companies borrow money to expand, hiring more people who borrow against their future pay checks and spend money to buy more things (arguably that they don't need) and when the borrowing / spending is high we call that a "healthy" market. Unbelievable. If we were cash based, then companies would be able to fall back on reserves, but since we are credit backed they have to fall back on loans that they currently can't get. So they are going under. As companies cut back or go under, jobs are lost. People can't borrow anymore, are massively in debt and declare chapter 11, causing more companies to go under... This is just a simple example. Its much more complicated than this.

After the bill passed on Friday, the markets dropped more than 400 points, and this morning another 460 points (as of 12:20 PM EST). The DOW is below 10,000 for the first time in quite a few years. There is no faith in the Paulsen plan. People obviously don't think it will work. People were against it in large numbers but the good republicans house reps who voted against it the first time around gave in because they witnessed the financial markets dry up in a matter of days  (I wonder why that happened. Do you think perhaps the financial companies felt it in their best interest to apply a bit of pressure to the government? It may not have been conscious, they might have done it unconsciously because they wanted the the federal government to bail them out).

After the bailout, the people who matter, the ones who move the most money (that could be a few large investors or a large number of small investors) clearly didn't believe it will help and are pulling their money out of the market, which is causing others to pull their money out of the market, causing a cascade that the federal government cannot hope to contain. The only thing they can do is close the markets, which would be the move of dictators. (just like trying to bail out companies who clearly made huge, greedy mistakes).

"We're just stopping stock trade until things calm down," the government could say. That's what the Russian's did when they rolled tanks into the Baltics after WWII. "We're just bringing in our military to stop the battles among the Baltics." How effective was that? When Soviet Russia failed fifty years later, the Baltics went right back to battling each other. Likewise, I know that stopping trading will not fix the problem, it will just delay the adjustment that needs to happen.

This issue is far more complex than anyone can understand because it deals with human emotions, rational and irrational thoughts, and the subconscious minds of the people on the whole. No amount of government interdiction is going to have much of an effect on the outcome of this adjustment. Selling short our future to try and change the course of this vessel that's sailing right for an iceberg is not going to do anything but make our children and grandchildren suffer. If the vessel weighs 700 thousand pounds and the captain applies 700 pounds of thrust on the nose of the ship, will the ship turn enough to avoid striking the iceberg? Not likely.

I'm tired of being selfish. I'm tired of selling out our grandchildren. We must accept the consequences of our actions and when the dust finally settles, pull together to create a market that is more stable, still free, still fun, and based less on credit than it is on cash. People must be given the freedom to choose how much risk they take (as it has always been) but people who risk big must accept the downside. And I feel government should encourage people to save instead of borrow.

I think the best law they could pass right now is a law that requires banks to keep 50% of deposits liquid. That will slow everything down and might even prevent bubbles from forming in the future. Of course they couldn't make it immediate. It would have to slowly shift to 50% over time. And honestly 50% is a guess. I think we need to tinker with that number. Perhaps the fed could set it like they do the prime rate. During good times when the market is going like gang busters the fed could up the liquid deposit requirement and during slow times they could carefully lower it. The idea being they can help keep the markets stable.

The next law I'd like to see is to change some of the income tax to a VAT (value added tax). This encourages people to save instead of spend. The VAT could be changed according to market conditions. When the market is going like gang busters, then the VAT could be increased and the government could pay down some of its own debt. When the market is slow, the VAT could be lowered to encourage the market to speed up.

Clearly, no regulation isn't going to work, especially if the markets want to be bailed out when they Fudge up.

That's the end of this Mon(ey)day rant.