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Common Sense Prevails – Barely

The failure of the $700 billion bailout plan … um, rescue plan… um, economic stabilization plan… oh heck, let’s just call it what it was – a bailout plan. Well, it failed to pass the House, which means common sense prevailed:

“Doing nothing is not an option,” House Majority Leader Steny Hoyer, D-Md., said after seeing the $700 billion emergency package for the nation’s financial systems fail 228-205 on Monday.

Actually, commons sense probably took a back seat to self-preservation. I believe some people voted their conscience, but I believe the majority of Congress voted based on self-preservation (i.e. pass this bill and you’re not getting re-elected in November, and you’re going to personally have to face the economic downturn like the rest of us).

Now, the question remains: Will Congress continue to do what’s right and let the market correct itself? Unfortunately, I’m not very optimistic. The Dow Jones Industrial average tumbled over 777 points yesterday to close at 10,365.45.

Oh no, the sky is falling! Wait a second. That’s still higher than it was 5 years ago at this time. And, you know what? That was less than a 1% 7% loss. [Oops, that’s what I get for rushing this morning. Of course, the 2.44% increase this morning means my original point still holds.] Sure that’s a lot in one day, but that doesn’t quite seem like an “everybody get out your soup bowls” type of loss, does it? For the record, I did have soup for lunch yesterday, and felt well nourished until dinner. But, I digress.

In fact, there are a good number of economists that don’t believe we are going to see one out of four people unemployed as we did during the Great Depression (subscription):

Hearing some of the dire predictions for an economy struggling to avert a financial collapse, it’s easy to recall 1930s photos of people huddled in soup lines or traveling the country for work, and wonder what a depression would look like in the modern world.

Experts say that won’t happen. Yes, banks are failing and the stock market plunged Monday. And, yes, there is genuine concern that, regardless of the government’s $700 billion bailout proposal, the United States could still land in a severe recession.

But despite the alarms, including dire warnings from President Bush, economists insist there is no risk of a second Great Depression because, for some time now, the U.S. economy has been in the midst of a very different, less-threatening phenomenon: “the Great Moderation.”

The Great Moderation. Folks looks around you. We need moderation. We’re a society living in excess. Our houses are bigger than we can afford or need. We eat too much and have the health problems to show for it, and we’ve become a society of spenders instead of savers. Moderation might not be such a bad thing.

So, what’s the worse part of this credit crunch? We won’t have access to cheap credit for which we don’t qualify. We may actually have to start living on a cash basis instead of in a credit accrual spending reality. And, let’s not lose sight of the root cause of this credit crunch. No, not greed. It’s this taken from John Mauldin’s Weekly E-Letter (he argued for the bailout):

Because of a new accounting rule (called FASB 157), banks had to mark their illiquid investments to the most recent market price of a similar security that actually had a trade. Over $500 billion has been written off so far, with credible estimates that there might be another $500 billion to go. That means these large banks have to get more capital, and it also means they have less to lend.

I’m not a 100% sure, but I believe that new accounting rule emerged as part of Sarbanes-Oxley – the government’s last great idea in response to the Enron fraud financial crisis. So, does the government need to print $700 billion in new money to avert this “economic crisis.” No, all they have to do is kill Sarbanes-Oxley and let failing businesses fail.

There is an upside to all of this. People suddenly became aware again that investments have risk, and spending money you don’t have may not be the smartest move. Eventually, the piper has to get paid.

A final note: Congress, if you want to get your approval rating up, don’t be wishy washy here. Let the market work.