With that perspective, we can see that the market has finally gone ahead and begun fixing itself. To do that, the market simply erased an account on the other side of the country's balance sheet - the shareholder equity account. That is to say, if the $700 Billion of collective toxic assets in teh market are in the worst case cenario completely worthless then the devalution of the collective equity of the economy should more than take into account that risk. If the Treasury's numbers are credible, then we should have reached the bottom. Of course it's possible the $700 Billion was a soft sell number, a best guess by policy makers who don't really know how to calculate the amount of un-tradable debt out there. But let's give Treasury the benefit of the doubt. If the market has gone cold turkey and corrected itself, why is Treasury still asking for a do-over in Congress? Well, there are a few possible reasons.
Reason #1: Treasury really does not beleive that the market can correct itself, and does not believe in the fundamental proposition of risk-reward. That is to say, if the market is risky, investors who buy into the market should have the ability to be highly rewarded by buying in at a deep discount. And those who reaped the reward in the past from their risky investments should now see the downside of those bets.
Reason #2: The political ramifications of wiping out aproximately US $1.2 Trillion in wealth in a single day, setting aside global losses in foreign markets, is simply not palatable. For example, callers to the local news shows are now beginning to dial up to complain about losing 10% of their 401k plan. Well, I must say this amount of loss is nothing new. Across the country Americans have seen 100% of their investments in their homes lost. For every "zero down" mortgage that has gone into foreclosure, there are scores of 20% down homeowners who have seen their entire investment erased. But there are three differences that cause this fact to be lost in the shuffle.
First, the loss in home value does not show up on a quarterly account statement. You cannot "log-in" to see what the value is today. It takes something like a notice from your bank saying that your equity line has been closed to signal that there is no equity left, and even then nothing actually spells out to the homeowner that their equity balance is $0.00.
Second, the real estate market responds slowly, in individual adjustments of expectations over time There are no market orders to "buy" or "sell" fungible homes. The loss of homeowner investments has dragged out over the past 3 years or more, making the rate of loss over time lower, even if the cummulative loss may be equal or greater to the individual.
Third, home buying traditionally has not include a significant risk-reward premium. The value of the home as a place to live, the utility and security of homeownership, dominates the pricing equation when the average person buys a home (ignoring flippers, and overleverage cash-out's). The homeowner has not traditionally required a "risk" discount to be built into the price of the home that they buy. That may now change for the foreseeable future.
Looking at these three diferences gives an explanation why policy makers have largely ignored taking decisive action to step in as a buyer of last resort or otherwise to support home prices, but has suddenly engaged in a "bet the economy" strategy consisting of nothing less than a "sky is falling" panic message to voters and a shakedown of the Congess.
Reason #3: The treasury doesn't get it. Just as in the early days of the Iraq war, the administration tried to buy their way out of much needed change in course, now we see the same approach being employed to economic stabilization. The problem of cheap credit and overleverage is a crisis of economic strategy. To speak of credit as the motor oil of the economy is perhaps an reasonable analogy, but as anyone who knows anything about cars can tell you, if you put 20 quarts of oil in your 6 quart engine, you are going to be making a lot of smoke and burn up a lot of oil... and your engine isn't going to run any smoother.
Monday's stock market drop should tell us that the market is capable of allocating losses for the toxic debt securities to the people who took the risk and reaped past rewards for doing so - the equity holders. Yes, there will be spill over to the traditional economic players whose growth will slow due to more responsible lending practices. Would it have been better to gradually come down off the speed of fast-and-loose lending than to go cold turkey after the suppier has cut you off? Perhaps. But by scaring the be-jeebers out of Congressional leaders and attempting to do the same to the American public, it seems Treasury and the Bush Administration, for whatever reason, rather than checking the economy into rehab, set the stage for a high-stakes gambit to score another fix for Wall Street, but instead got busted and are now reaping the consequences of going cold turkey in jail detox.
And in this light, it seems unwise to dangle in front of the market another score. If only Congress will go along, we can all get the economy high on credit again. The irony is that by not even waiting for markets to open on Tuesday before turning on the spin machine to peddle the do-over vote, we now have lost a singular opportunity to know whether the market had gotten clean and sober after one day of massive correction, or if the shakes had not yet passed from Wall Street. The Washington market guru's surely reconized what they were doing, and we can only question why they are so craven? The market would resond to prospects of a new package regardless if the news was peddled at before markets openned or thirty minutes into trading. That is, if you believe in the free market.
I for one beleive in the free market. I beleive that the 70% premium (i.e., (1,200-700)/700) exacted by the US Market on Monday was a clearing of the decks to make furnishing capital to the marketplace again attractive to investors. But we will not have another chance to know until after the governments "stash" has been confiscated and put out of reach of Wall Street.
And for that, Congress must gird up for another fight. This time, they may be disoriented by the short term swing of the market on Monday. But all those steadfast leaders who opposed the bail out on Monday must maintain their perspective and stay the course. Wall Street has had a first dose of the medicine needed to get clean. We should not allow the misgivings of a lame-duck administration to snatch defeat from the jaws of victory. The spinning heads of investors after Monday's sell off , including individuals who have been logging in to watch their 401k balance lose 10% of its value, cannot be viewed in isolation. It must be viewed next to the images of the bent backs and crushed spirits of the American homeowner, who has know high profile advocate or lobbyists in Washington.
And to those homeowners, if you do not remind your Congressperson that you exist, and that you will not vote for someone who has turned a blind eye to Main Street for years but now lavishes money on Wall Street, then the risk is very real that you will be lost in the babble about "crushing one day losses" when it comes time for a re-vote.
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