Most markets looked directionless on a day when most people had their eye on tonight's Senate vote on what some are calling 'Bush's New Deal.' Some sort of crazed optimism seems abound in the mainstream media. Almost as if they're trying to will the market higher. I'm still trying to do less and watch this insanity unfold.
In my opinion, this bailout is more an attempt to boost confidence, rather than 'support' or 'rescue' anything. The sheer size of this global credit contraction is far bigger than can be bailed. This $700B will be like a drop in the bucket. Of the little it will accomplish, only a few things are certain:
1) Moral Hazard will be fostered further. Investors and executives of poor companies that have blatantly if not fraudulently run their companies in the ground will be taught that no mistake actually goes punished, and will attempt to take even greater risks.
2) Banks will be 'Zombified'. Their business models destroyed, and no legitimate way to make money, these travesties of business will continue to suck on the taxpayer's balance sheets for a decade or more.
3) Price discovery will attempt to be delayed. The value of homes in the middle of nowhere will be propped up to prevent foreclosures. People that borrowed recklessly benefit and those that saved and stayed away from the 'bubble economy' get punished. This teaches ordinary people who live responsibly that taking insane risks are the only way to 'get ahead'.
4) It will drive all of our smartest minds (those that would normally clean up this mess) offshore, where they can earn higher wages.
5) The pool of savings that would eventually be used for re-investing in a recovery is greatly diminished. People will be manipulated into believing that buying financial companies now is a good idea and will lose their savings. This will prolong the eventual recovery.
6) It will put a further tax load on the younger generations, who will most likely try to rebel and be spiteful for the burden they are made to bear for their ancestor's gluttony.
All in all, it may briefly boost confidence in the equity markets. The credit markets have already given a thumbs down. Only General Electric is able to raise money and that is at 10%!
Kevin Depew had a hilarious analogy on the subject in Five Things You Need To Know: Bailout Keeps the Drunk Staggering
Mr. Practical was talking about Too Much Debt. The ticking time bomb of a quadrillion notional derivatives is also covered in a, uh, practical manner.
Michael Ivanovitch just said on CNBC that if the Fed spent $200B a year ago when this was still a 'Subprime Crisis,' we could have stopped the problem altogether. It is apparent that these people still do not understand the problem.