The U.S. Economy After The Bailout

The bailout reminds me of a Hail Mary pass thrown to the 5th wide receiver who is being covered by three defenders and is currently on the 5-yard line, whilst the team’s future hall of famer is standing wide open in the middle of the end zone. Sure the 5th wide receiver may catch the ball and yes it would set you up for the field goal that could send the game into OT, but throwing the ball to a triple covered 5th WR instead of your wide open hall of famer is a recipe for disaster.

Ignoring my football analogy for a moment, perhaps the biggest problem with the bailout (aside from my usual gripes) is that the plan’s proponents are setting improper expectations around the plan’s benefits, by assigning benefits to it that the plan simply isn’t capable of delivering upon. The problem with this is two fold: one it suggests that the framers of the plan haven’t a bloody clue as to the true dynamics of the economic malaise affecting the country, and it could potentially set the nation up for a even greater confidence crisis when the plan fails to deliver.

In order to illustrate this point further let’s take a look at some of the plan’s alleged benefits:

Housing Prices: The housing boom was caused by bad lending standards, hyper-expectations and overspending, remove these bad policies/actions/habits from the system and the housing market is going through a necessary (and proper) correction. A correction that won’t be complete until inventories are back to historical levels, and the historical ratio of median income of housing prices is restored.

Nothing short of a Federal agency that demolishes unsold houses and/or gives people money to buy houses that are above their income range can halt the correction, unless (of course) we return to the bad habits of old, but look at where that got us. The claims that the bailout bill can halt the slide in housing prices are fatuous at best, and indicative of the level of ignorant pervasive throughout Washington as to the true causes of the housing crisis. The idea that stabilizing the market for mortgage securities can positively impact housing prices when illiquid mortgage securities have nothing to do with housing prices, is like attempting to wag the dog via his whiskers.

Perhaps the bigger issue here is that people are refusing to accept that the housing market is going through a very necessary adjustment after a period of hyperinflation, and are looking for something, anything to re-inflate the housing market even if it brings dire consequences down the road.

Foreclosures: The spike in foreclosures isn’t so much a function of “bad loan terms” as it is a function of people in homes they can’t afford, and people struggling to make ends meet due to job loss, general economic pressures, etc. To understand the former all you have to do is read an advertisement for an ARM loan from the housing boom era (and even now to a lesser extent), these and other exotic loan products were advertised as a way for an individual to buy “more house” than they could afford with a conventional loan, with the obvious implication that they can only afford the teaser rate.

The government’s ability to modify loans at will aside, how exactly can you “modify” someone out of a situation they could never afford in the first place.

Consumer Spending: Up until last year consumer spending was a product of credit abuse and the housing boom, remove those factors from the mix and add in escalating prices for food, gas, healthcare, etc, and you get a protracted decline in consumer spending. While the bailout “may” get the credit markets moving again, it’s not exactly going to do much to put more cash in the pockets of the average citizen.

I suppose you could argue that easier access to credit will make it easier for consumers to borrow the money they need, however that’s not exactly a viable solution over the medium term let alone the long-term. Furthermore aren’t we in this mess because the entire nation (government, consumers, corporations, et al) spent more than they earned and lived above their means?

Consumer Lending: A lot has been made about tightening credit standards and the impact on the consumer, however it’s important to put this discussion into the proper context by asking the question: are standards tighter by historical standards or in comparison to the housing boom era? While this is something that is hard to quantify precisely I’m of the opinion that the answer leans more towards the latter, and that people’s expectations are still inflated after years of easy credit.

Meaning: Even if the credit markets are magically healthy tomorrow it’s not realistic to expect (or sensible even) the banks to return to the lending standards of old, after all isn’t that what got us into this mess in the first place?

Tighter lending standards are here to stay (at least if the banks have any sense) and are a necessary part of having a stable banking system over the long-term, so people are going to have to adjust their expectations around the availability of consumer credit and consumer spending strength on a go forward basis.

The Dollar: Perhaps the thing that confounds me the most about the bailout plan are the expectations (by some) that the plan will help to strengthen the dollar, an expectation that seems (to me) to be so out of touch with reality that it’s not even funny. A nation cannot flood the markets with $700 billion dollars that it has to borrow from overseas and expect that its currency will rise in value at the same time, while the dollar may rise over the very short-term due to increased confidence in the U.S. economy the medium to long-term impact will be currency deflation.

Commodities: While not cited as a benefit of the bailout plan it’s worth mentioning that due to the currency deflating effects of the plan, it stands to reason we’re going to see sharp spikes in the prices for oil and other commodities.

It appears that one of the key goals of the plan is to inject a heavy dose of confidence into the markets, what happens to that confidence when many of the same problems remain and crop of new ones appear? Will the markets take a deep breath, accept reality and start thinking in terms of long-term solutions, or will we see the very consequences the bailout plan is touted as being able to prevent?

Only time will tell.

I suppose when it comes to this bailout we’re all waiting to see if the 5th WR catches the ball and manages to get out of bounds in time to stop the clock for the field goal attempt, or if the defenders either intercept it or bat it away.

IT goes without saying that in my view even if the 5th WR catches the ball he won’t make it out of bounds in time, and even if the best case scenario (the field goal) comes to pass, I think this team is still going to lose the game in OT.

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Comment by Timothy H. Brown, Sr.

2008-10-13 17:24:35

I have been reading your comment about the “bailout” and what it does to help the “average taxpaying citizen”. I have to agree with you. The average taxpayer isn’t benefiting on a personal basis. It’s the monopolistic banks and mega corporations that benefit from this injection of $700 billion plus dollars. Yet, it is the taxpayer who is footing the bill along with more loans from the Chinese Government. Boy! Now theres a slam dunk on our “Democratic Philosophy” Ya know. I’m a pretty average person. Not one thin red dime is going to me to help better my position or pay off my bad debts because of the mistakes I made in how I spent or invested my money. I’m still not able to recoup my nearly $1,000 a month loss in income that has caused considerable financial stress to my ability to pay my debts off. I’m still struggling to make enough money to keep my head above water, qualify for a home loan, ensure I have propane in my tank for heating and money for food on the table and yet maintain a decent quality of life. I can’t even go out for dinner at least once a month because I can’t afford it. I drive a 12 year old vehicle and wonder if I’m going to have a home next month because my refi was turned down because of my poor standing in the credit score colomn. I still work my butt off 10 hours a day after a bitter divorce 12 years ago and fight constantly with my ex for the child support the court has ordered her to pay to no avail. I don’t have the money to hire a lawyer to collect the back pay and enforce the current pay; so I struggle to pay my bills and support my son as best I can. He is now 17 and I can’t provide the things that I would like to because my ex won’t pay on time and I can’t get a better paying job because; you guessed it…. my credit score isn’t pretty enough. I served this country for 20 years of my life sacrificing my youth and time I could have spent building a business or going to college full time to capture a junior executive job and now those whom I sacrificed my life for and defended their freedom to build their wealth have squandered it on bad decisions and I, the american taxpayer am left to flounder around, struggle, scrape, grovel and crawl to make a living while our government gives away $700 billion to keep the bad decision makers in business. If I had been given the estimated $25,000 per taxpayer the $700 billion would have provided to the average taxpayer. I could have paid off ALL of my debt, paid the two bad ones and been able to invest a few thousand. My credit score would have shot through the roof, I would have been able to get a better paying job and my sons future would have been brighter. Instead. I am now saddled with a share of the debt of someone else to be paid back in taxes that we have yet to see. Boy! Thanks Mr. Bush and Cabinet!!! Thanks Mrs. Pelosi and fellow Senate and House Members!!! Gee… I’m glad you’re looking out for the average american…. RIGHT!!!!

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