Wednesday, October 01, 2008

Well, Thank God We'll Wave The Excise Tax on Wooden Arrows and Save Economy!!!!

Well, the Senate passed the new bailout bill. In effect, this is the same bill with a minor adjustment to the FDIC insurance limits ($100k to $250k) and 350 pages of pork.

The FDIC Insurance limit is a non-issue, if you are really worried about your bank balances spread your $250k around among 3 banks and you effectively have your $250k insured.

In order to put the House of Reps on notice, the Senate wanted to take up this bill first. In order to do that, the Senate had to take an already approved House spending bill and add the bailout bill. So, Secretary Paulson's 3 page proposal has become a 451 page behemoth, including renewable energy tax incentives, relief from the Alternative Minimum Tax, Mental Health Parity provisions, among others.

My favorite pieces of pork - Transportation Fringe Benefit To Bicycle Commuters, A Seven-Year cost recovery period for Motorsports Racing Track Facility, and the soon-to-be-infamous, Exemption from Excise Tax for Certain Wooden Arrows Designed for Use By Children. I think one of the unintended consequences of this bill's passage is that thousands of Americans actually read this bill and within minutes had posted the best pieces of absurd pork on the web.

Here's the deal - This bailout does not do anything to enhance credit and lending issues. My belief is that under the most likely scenario the major banks will be happy to sell their worst assets to the US Government and then sit on their hands. There is going to be no rush to lend because their is a great fear that the assets remaining on their balance sheets are still not solid.


It's the economy stupid: The auto industry posted their worst monthly U.S. sales performances in more than two decades. Industry wide sales declined for the 11th month in a row, the longest slide in 17 years. Many people are making the argument that locked up credit markets were a major contributing factor. Perhaps, but the declines were widespread across all economic classes (low-end and high-end dealers) so I tend to think it is the broad economic weakness in the US.


Finally, for all the breathless panic on Monday about the biggest point drop in history for the Dow Jones Industrial Average, I think it's worth noting that the Dow is actually up slightly over the past 5 days. The drop on Monday dominated the news cycle and led everyone to draw a straight line between the bill failing and stocks falling. That was a simplistic view on Monday and it remains a simplistic view today. Stocks are poised for a 5-15% relief rally in the near-term if this passes the House (even though Asian markets are now down on the bill passage and our futures are lower), but I'm more convinced than ever that this bill simply postpones the inevitable and puts us in a position for a Japanese-style 10 to 15 year recession.

Consider this well reasoned comment from a reader of another blog:

" In 2005, 16 years after the Nikkei topped at 40,000 in December 1989, I analyzed many Japanese banks which were trading 90% below their highs, as major bankruptcies were mostly avoided in favor of dilutive public capital injections and outright bailouts of financials.

As a result, stronger competitors were made to pay for the decisions of weak institutions which should have been removed from the competitive landscape. Today, almost 19 years later, the Nikkei trades at 11, 259.

However, Japan entered its “Lost Decade” with a mean consumer savings rate of 17.6% for 1970 to 1993, a government budget surplus, and a large trade surplus. The US is a in the red on all three trend measures entering our economic crisis. The implications of more foreign- financed deficit spending, repayable with interest, especially to plug black hole Wall Street sunk costs, are profound for our children and grandchildren. The alternative, letting the market work, ensures a much quicker rebirth for the financials."

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