A Little Bit Of Context

Floyd Norris of The New York Times tonight on Charlie Rose just noted that in today's stock collapse $1.2 trillion of value disappeared.  One of the largest dollar-figure drops in history.

That collapse occurred due to the market's reaction to the failure of the rescue package.

The number bandied about since Treasury Secretary Henry Paulson's proposed package has been circling $700 billion.

The great protectors of the market, a.k.a. the House Republican, balked at signing off on a plan that had a $700 billion tag laid on it, a figure no one could really verify, pin down or stand behind. As a result, $1.2 trillion in value vanished in a matter of hours.

Had the bill passed, the normal legislative and executive process would take over and things would have continued, the market would have likely responded positively and the process of trying to untangle this gordian knot would proceed. The $700 billion figure is a fixation, but the final figures are unknowable at this point. A steady, but slow, accumulation of selected assets through this bill may have allowed the private investors to return in confidence, thus reducing the need for government intervention. 

Now, however, we are perhaps worse off that we were had there been no vote at all. How many of the Republican members' assets were part of that $1.2 trillion that evaporated thanks to their inaction?

- Murphy

Whip It Good

Missouri's own Rep. Roy Blunt (R-Springfield) blamed Speaker Nancy Pelosi's (D-CA) speech today for turning key Republican votes against the financial rescue package. Even the 12 members he thought he had whipped in line bailed on the bill.

It's worth noting that Blunt is the Republican whip in the house, charged with bringing members in-line when the leadership (of which he is a part) decides to press an issue.

An issue, perhaps, like the package President George W. Bush, Republican Presidential candidate John McCain and House Minority Leader John Boehner (R-Ohio) all promised would pass with the support of their Republican colleagues in the House. 

Sen. McCain went so far this morning as to remind voters that he went so far as to suspend his campaign for President, in order to go back to Washington and help hammer out a deal (which he believed in taking credit for this morning, but since the vote has been incommunicado on the subject).

After two-thirds of the Republicans in the House bailed on the bill, Boehner and others tried to place the blame squarely on Pelosi whose speech (read the transcript here) emphasized the role deregulation and Republican support for pulling economic oversight played in the economic catastrophe before us. It was a rebuke to Republican policies, to be sure. And even perhaps badly timed (it couldn't have hurt to wait until after the vote?). 

Yet if the Republican members had been serious about supporting the bill, in the belief it was the correct move, than it certainly should not have dissuaded them.

In fact, it looks more likely that a majority of Republican members were not happy with the bill and after not convincing their leadership that their alternative (assuming they had a practical one and not simply the "insurance" plan) was preferable to amended Bush-Paulson proposal, they decided to deep-six the entire deal.

Where does that leave the markets and the American voters? With the greatest one-day point drop in stock market history and greater uncertainty for the workers and business owners who are wondering where their retirement funds went and whether they will be able to maintain the lines of credit necessary to allow their businesses to continue.

There was an unattributed comment circulated late last week that said, essentially, "better to risk a Great Depression, than sacrifice the 'free market'". I guess we can chalk it up to the Republican members of the 110th Congress.

- Murphy

Fannie and Freddie Frozen?

(via Washington Monthly) The New York Times is reporting that Freddie Mac and Fannie Mae  have been put on notice that the government intends to take control of the two mortgage giants soon. The head of the Federal Reserve, Ben Bernanke, and Treasury Secretary Paulson, Jr., have apparently decided they had given the companies enough time to clean up their books and restore investor confidence.

Effectively, the government is putting them into bankruptcy and cleaning house. The heads of both companies and their boards will all be replaced. The investors will see their stocks dwindle to nothing. The taxpayers, meanwhile, will be pickup up the tab as the companies are rebuilt; and hopefully confidence in the institutions will be rebuilt as well.

This is one of those "oh, nuts", moments economists were worried about. Why? Fannie and Freddie own or guarantee approximately 50% of the mortgage market, almost $6 trillion. While they are hamstrung by their efforts to rescue what is left of the company, they have not been performing their role of adding liquidity to the mortgage market, their appointed role since their inception (Fannie Mae in 1938 and Freddie Mac in 1970). Less liquidity means fewer loans which results in slower growth.

This move, one of the largest takeovers in history, is far from an example of an economy that is "fundamentally sound", as Sen. John McCain recently said.

Currently the economy is not providing a better life for most Americans. Productivity is up, but wages are stagnant, and job loses are growing. 

Whoever occupies the Oval Office, they will have to confront the shaky economic reality that many families struggle with every day. So far, McCain's comments on the economy do no relate to the world most people see; perhaps reflecting his admitted ignorance of economics. 

There are no perfect fixes, but reducing the burden on those making less, creating a more fair health care system, finding ways to encourage businesses to expand and hire more workers in this country, and not pretending their is no problem would be a good place to start.

- Murphy