Now that House Republicans have thrown the Paulson bailout plan into total disarray, and Washington Mutual marks the largest bank failure in US History, and global credit markets are basically offline -- should we brace for Great Depression 2.0?
While I can't say 'no' with any authority, I tend to think not. Certainly bank failures and the mother of all credit crunches does no good for the economy. And by economy I mean both Wall Street and Main Street. But just because this particular $700bn (really estimated to be more on the order of closer to $2,000bn all told) bailout of primarily Wall Street investment bankers and their compatriots has stalled does't automatically spell the end of capital markets as we know them.
A few points:
- I think there still will be a deal. Realpolitik trumps all when it comes to D.C. All it takes a bit more pain, fear and panic to break even the most ideological opponents of the Paulson bailout plan.
- I think the Paulson bailout plan sucks. I outlined a lot of reasoning around that on another site until they saw fit to delete most of my comments, apparently because they might scare away naive prospective homebuyers. (I'll retrace those comments if any discussion arises here.)
- I think the Republican alternative plan sucks (but not as bad as Paulson's). Insurance is a good idea. More deregulation is a bad idea. Tax cuts are a great idea, but not practical right now and everyone but ideologues realizes that.
- Capital markets are more resilient than anyone seems to be giving them credit for.
- Speaking of "credit", it is increasingly obvious that "dumb money" is mostly counted with the stock market and related derivatives, and "smart money" is mostly counted with the bond & treasury markets.
- Ron Paul is an idiot. For all his good ideas "abolishing the Federal Reserve" is the stupidest idea I've heard in all this. I know he's been saying it for years. So, he's been an idiot for years, just no one took it seriously before. You cannot abolish the US Central Bank. You cannot disarm US nuclear weapons either. Both are necessary simply because other countries have them. Until Paul can magically dissolve all central banks world wide, I'm not listening. While he's at it, please make all the nuclear weapons disappear.
- Many of the otherwise credible "rogue blog economists" like Mish, etc. who have contributed so much to this debate the past 5 years need to quit listening to Paul and supporting him so openly. Now is a time where credibility is gold. Who you ally with and support determines your credibility.
Think. Read. Discuss. Then think some more. Now is not the time to panic. It is the time for concern and determination. Not despair.
Some form of bailout package will be passed anyway. It just might not be the Paulson Bailout Plan. It could be better, it could easily be worse, but Congress will pass something. Don't bet they'll just go home.