What's Coming No Matter What (Or Why Revised Bailout Plan Remains Bad Idea)
By Pat Richards, Columnist

Everyone keeps saying that the $700 billion "rescue" plan will "unfreeze" the international credit markets, and then the sun will rise again on Wall Street and light up a new day for our economy. That's a sweet dream, but it's only a dream. Here's why.

$700 billion is a drop in the bucket compared to the massive total of all the national and international mortgage and derivatives debt which has been allowed to accumulate on balance sheets all over the world under the de-regulation, de-supervision and de-reporting of the past 2 decades.

And because of the de-reporting, absolutely *nobody* knows for certain how much of that massive total is currently "bad debt" or will become bad over the next year. That's the huge, almost unthinkable amount of unknowable risk which has the big corporations / investors / lenders running scared -- that's why they will sit tight and let the markets churn for quite a while yet, no matter what the Federal Government does.

On Sept. 30, 2008, Charlie Rose interviewed two astute financial experts -- one from the N.Y. Times and the other from U.S. News & World Report. While both guests parroted the herd-like belief that "something must be done and done quick," under Charlie's persistent questioning they both candidly admitted that this bailout plan will not stop what's coming and will do little if anything to improve the credit markets.

Only a stabilization in housing prices, a complete restructuring of the home insurance industry and a slow, steady return of investor confidence to the global stock markets can do that. And that will take a lot of time and *trillions* of dollars and most of it will have to come from the private sector (the money is actually there right now, parked in Sovereign Wealth Funds and a whole slew of private investment capital companies who are sitting on the sidelines of this debacle, like vultures, waiting to pounce when the dust finally settles and they can get a clear view of the corporate corpses).

The critical point is that both guests admitted that this "rescue plan" has been over-sold and won't do anything like save either Wall Street or Main Street. That's why I'm now taking the (for me) purely Libertarian position of saying that the Fed should do nothing right now (or rather, it should do no more... people seem to forget that Treasury Secretary Paulson *already* spent $350 billion of our taxpayer dollars over the last two weeks before he realized it wasn't working and hatched this $700 billion 'rescue' plan of his).

Instead, we should save what's left of our government's "full faith and credit" to spend over the next couple of years for the rebuilding process.

As for the moral hazard of the socialism angle... Folks, it's too late to worry about that, because during his spending spree over the past two weeks, Paulson actually bought 80% of AIG for the U.S. Treasury. We taxpayers legally own 80% of the world's largest insurance company.

We also own several banks surreptitiously, behind a screen of guarantees to the two companies who supposedly bought up Washington Mutual and Wachovia. If those companies can't digest those those buyouts (very likely), we taxpayers are *already* obligated to cover anything over $30 to $40 billion in any losses they might incur.

Mind you, *before* Paulson proposed the currently $700 bailout proposal, he did all this and more -- including lending $250 billion to the international banking centers on Sept. 18 so they could buy stocks on the NY market on Sept. 19 and create an artificial rally in the Dow. Paulson hoped to stabilize the markets and calm the panic with that stunt. Hah. That rally lasted for one day only and we all know what then happened over the last 10 days. As far as I can tell, all of that $250 billion has evaporated with no lasting result.

That's the math I've been trying to get people to see: The U.S. Treasury has *already* thrown $350 billion at this market over the past two weeks and it did *nothing* to calm the panic or stem the tide of collapse. So what reason is there to believe dumping in another $700 billion this week will make any more of a difference?

By the way, the media is lying to you again when they shout about how this stock market decline is the worst since 1929. Not even close. So far this market decline has not even been as bad as we've seen in past decades during a 'typical' recession.

Usually the value of the stock market declines about 31% over the course of a typical recession. On Monday, the Dow was only down 26% after the 777 point loss. But the very next day... hey, what do you know? The world *did not* end!
The Dow bounced back with almost a 500 point gain. Now, after two 'historic' days, we are only off 22% from the all-time high the Dow set one year ago. So even if this is just going to be a 'typical' recession and not a 1930's depression, the Dow still has around 10% left to decline (about another 1,100 points).

Look, since so far this isn't even as bad as a 'typical' recession, what's the Big Dang Rush to toss $700 billion taxpayer dollars into the gaping maw of a panicked market right this very minute? It will be swallowed whole in a few days and then the market will continue on to do what it was going to do anyway.

The popular idea that Uncle Sam can come charging in on a white horse and make this mess disappear is worse than naive. Short of completely nationalizing the financial industry in this country, there is nothing the U.S. Government can do which will "restore confidence" to the global financial markets -- and that ain't gonna happen.

The only thing we'll achieve by trying to fake it at this point is to destroy what's left of the confidence in the "full faith and credit of the United States".

It's a really bad idea.

-Copyright 2008 Pat Richards
Printed with permission, use rights only provided to MediaBear

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