More Economic Reaction

For those of you who have been completely removed from all sources of news, Congress passed its economic bailout plan for Wall Street today. Wall Street responded with a further 157 point drop in the value of the Dow. My friend Mike, who is retired and has considerably more time than I do to write about these things, posted the following column yesterday. If you like what you read, you can check out what else he has to say at his site, and click on "Brain Static". Either way, have a good weekend.

The tuition is pretty high, but it’s not an elective course so, little by little and mostly against my will, I’m learning Economics.

The Senate passed a minimally modified version of the bailout, so the House gets another crack at it when they get back. (The House took two days off for Rosh Hashana but apparently there are no Jews in the Senate.) If I understand correctly, here’s how the Senate changed the bill: to make it look like they care about the average Joe, they will increase federal insurance on bank deposits from $100,000 to $250,000.

Now there’s a real weight off my shoulders.

I don’t think it’s the guy who has $250,000 in cash lying around who needs help. Personally, I wasn’t really worried about that anyway. Whenever I find myself with piles of cash exceeding $100,000, I find another bank. That will work until there is only one Bank of the Universe left and by then it won’t be a concern, since BOTU will have reached the ultimate Wall Street goal: Too Big to Fail.

But until then, if you only have one bank, and you have a quarter of a million in it, the Senate is looking out for you. Under the new rules, when your bank collapses, you are protected. If the bank runs out of money, the government will pay you back up to $250,000. The government—hey! That’s me! And Uncle Kenny and you and your mom and the mailman. Why, that could increase the $700 billion projected cost of this thing to …oh, wait. The only reason this new concession won’t be worse than the original plan is that it won’t actually do anything. Okay, then, never mind.

There’s another change the Senate made that should help keep the banks and brokerage firms from collapsing: doing away with the “mark to market” rule. Right now, they are required to value their assets at the price they would get if they sold them today. They say this is a problem, since nobody is willing to buy mortgage-backed securities at any price and that makes valuation “difficult.” It isn’t difficult for me here on Main Street—if I can’t sell it, it isn’t worth anything. But on Wall Street, the result is that the financial institutions have to report enormous losses, which has the same effect on the paper shuffling they call The Economy as sugar in your gas tank has on your car’s engine. So under the new plan, the bankers won’t have to do it that way—they can make up a value for the assets. This worked quite well for Enron, as I recall. For a time.

But that’s for (or against) future problems. For the immediate problem we—that’s you and me again—are going to buy up those “toxic assets” (you know it’s serious when “troubled” becomes “toxic”) to save the asses of the asses that currently own them.

Secretary Paulson emphasizes that we won’t be paying face value for them, but will buy them at the “distressed” price so maybe they will eventually go up and we won’t lose the whole bundle. I’m not sure how they will calculate the distressed price but I don’t doubt that they will come up with something. They could get advice from Jeff Skilling and Andy Fastow—they should be easy to find…

While they were at it, the Senate added some sweeteners to the bill. What they actually did was tack on an old tax bill that the House had already rejected. It gives new tax breaks for making movies, revises the law to help people avoid the Alternative Minimum Tax, and a few other things. I think Ted Stevens may have a bridge in there, too, but I’m not sure.

Oh, and it’s not called “the $700 billion bailout” any more. Now it’s “the rescue package.” The $800 billion rescue package.

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15 Responses to More Economic Reaction

  1. Beth says:

    I have watched this whole thing unfold with disgust.  I agree with your friend Mike when he said Quote:  But that’s for (or against) future problems. For the immediate problem we—that’s you and me again—are going to buy up those “toxic assets” (you know it’s serious when “troubled” becomes “toxic”) to save the asses of the asses that currently own them.
    I couldn\’t have said it better.
    I hope you and your family have a great weekend Jorge.

  2. Deborah says:

    Honestly I wish that I was as stupid as Congress thinks we all are.  At least then I would sleep knowing that they were doing something.  Unfortunately I\’m stunned and tossing and turning worrying that my son won\’t be able to find a job since being laid off by the mortgage company he was working for.  At least he has a degree in theology so perhaps he can pray for a job.
    Blessed be

  3. Hope says:

    Don\’t know what to say here Jorge..other than we the people better wake up..for there is a storm on the horizon.. as for the "daily news".. ya right.. we hear what "they" want us to hear and nothing well dear friend.. continue to be "aware"and pray pray pray

  4. Michelle says:

    It is so frustrating to see the writing on the wall.
    I hope you have a great weekend.
    P.S. I finished Anatomy! It wos very interesting. I learned so many new things. Next is Pathophysiology.
    Abrazos para los dos,

  5. sweeti's says:

    Hi Jorge
    U know my lil country Belgium????
    Fortis bank!!!!!!!!!! trouble…the shares went down with turbo speed..Now the Belgian government is putting money in the bank.
    Our tax money…MINE!!!!!!!!!
    They investigate now  the cause of alll these probs.
    CEO got a pressie….. a golden handshake  hmm 5.000.000 euro.Well its good to be a CEO dont u think?
    So  Jorge
    ohhhh BTW  our money is safe in the bank…Maximum 20.000 euro..
    We are in the same boat..
    ours is  a sailing ship…Urs  is a  cruiser lol
    Keep smiling  oke???Mr.Economist

  6. Kathryn says:

    (I\’m glad the walk went well and there was good attendance! yay!)

  7. Joe says:

    Hey J,
    Thanks for stopping by.  I can relate to the college student tuition…my daughter has started her second year of nursing.  She lives frugally, living in the dorms & commuting by Vespa to her job at a dialysis (sp?) clinic.  As for the $250K, it\’s a little late now, but the rest of the "package" is just in time to bail out failing financial institutions.  However, like most my age, we listened to our financial advisors and stayed "calm".  Someone sold, but it wasn\’t me.  No need to sell now.  In theory, I can\’t retire for a several years anyway so I hope it will come back.  But if it does, my financial advisor\’s objections to my liquidating stocks will fall on deaf ears.

  8. Cheryl says:

    I live in Enron\’s back yard and this smacked of Enron all the way.  I agree about the 250K.  If anyone is to stupid to have all of hteir 250 in the same bank then they deserve to loose it….  I laughed when they added that because of course it is not worth anything in reality….  I am on my way to check out your friends writings…

  9. LORI says:

    See now Jorge???? I learn something new everytime I visit here as well, because I thought (silly me) that the Federal Reserve bank WAS "The Bank of the Universe."
    This thing seriously raises my blood pressure… SERIOUSLY it does.
    WE NEED RESCUING TOO!!! All of us "little guys" paying this out. Why don\’t we get a minor piece of that pie too then?
    The decision makers are making me ill is what they are doing. I suspect that there will be much "pinching" of that pot as well. They are all too crooked to keep out of it.
    Did I mention that this whole thing makes me sick????
    I love your ironic sense of humor too by the way.

  10. Neora Chana says:

    Things are getting bad when you sound grim, my friend. 
    Don\’t know what to think about all this….OTOH, luckily, I don\’t have enough assets to worry about losing.  OTOH, if Iwant to get ahead, how will things be changing?  Will I still be able to begin putting some things aside safely?  Right now, my extra cash is under the mattress and, and, and…..

  11. Fenix says:

    Hello Jorge
    I didn\’t come to your space for some time, sorry…there were sad moments in my life.
    The situacion economic is terrible.  In EEUU and the rest of the countries. All the countries have to be implied in finding a solution to this problem.
    Hugs and have a great week

  12. Bittersweet on-the-hill. says:

    Hello Jorge,
    Good read. At the moment I\’m still reeling from my anger toward Congress, Wall Street, etc. I shake my head at what Mr./Mrs. Middle Class has lost from the market, our 401\’s and 403\’s and assortment of pension plans.  It will takes us years to recover and today being Wednesday doesn\’t look any better. And while we\’re saving Wall Street we still haven\’t helped Main Street or all those folks struggling to avoid bankruptcy.
    I remember some of the media video last Christmas when low level, middle level, and executive level employees from the Wall Street brokerage house where walking with their end of year bonuses.  If they didn\’t make their $150,000. bonus, they weren\’t doing their job. Such gluttony. And now we pay for it all.  I am incensed. On top of it all, they have no shame. 
    If you recall, there was the suggestion of a plan for the individual to open up their own investment portfolio in lieu of social security. What a disaster that would be.  We could go into another slump in 20 years and people would be holding worthless paper as many are now.
    Other than the economic picture, I hope your world is doing well.   Peace……Bittersweet

  13. Cheryl says:

    I found this gem about the bailout:  Thought you would appreciate it.

  14. Holy says:

    oy vey….we have this whole new vernacular from the Bush admin. – they may even need to publish their own thesaurus – ensuring words like newcueller make it in there.Tell me you weren\’t planning to retire anytime soon….

  15. EbonyWyvernDragon says:

    First……..I want to say thanks – your friend has quite a sense of humor and that was very much appreciated this morning…… Second – uh – I wouldn\’t worry too much about that multi-billion dollar bailout because its not your tax dollars that will pay for it. In fact, your tax dollars won\’t pay for much more than the interest on the current debt…….. In the last 50 years, the times between recessions has gotten less and less. And as surely as there is a sun rising in the sky, there will continue to be recessions. In the last 50 years, each recession has gotten progressively worse. This is, very simply because, the current economic structure of the world is based on two things:1.) Credit.2.) Gambling.The biggest casino in the world is the stock market. And it is legal and has been for over 100 years. As long as we have debt / credit, and legal gambling – and we base our global economies on those two principals, we will continue to spiral ever downward. Additionally – more than 3/4 of the worlds currencies – including ours – is backed by absolutely NOTHING. Ft. Knox is a myth. Ok – it isn\’t a myth. But, the gold it houses wouldn\’t back the current bailout bill – nevermind the rest of the debt of this nation. The solution is not to bail out or restructure or revamp or revise. Very high level: The solution is to stop the music. What you have when the music stops is what you have. And valuate it based on hard assets.  Gold, silver, land, coal, oil. Not the so-called cash in your pockets. Then, you restart the economy. MINUS WALL ST. (Yes, the so-called \’investors\’ are going to have to get a real job instead of being poker dealers in suits and ties). NO MORE GAMBLING!!!!!!! NO MORE CREDIT.  You live within your means because there is no way to do otherwise. As long as our economy is based on gambling and debt, it cannot survive. Until we change that basic fact, we are on a roller coaster ride that does not end – and the hills get higher and the downward spirals get rougher.Oh – and by the way – I said that this is not our tax dollars because it is actually our great-great-great-grandchildren who will actually be paying JUST THE INTEREST on this debt.FiscallyDisgustedDragon

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