Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

Bailout sinking?

September 26, 2008

Earlier this week we said:

Senator McCain and Senator Obama may be headed back to Washington to "help" resolve the financial crisis -- much like I would "help" a brain surgeon by standing in the operating room doing shots of tequila and playing bongos.

Well, they came to help, and now the deal is foundering. The Wall Street Journal reports this morning:

Earlier in the day, congressional leaders had hammered together the outline of a compromise that involved allotting the bailout money in installments. It was widely expected to result in a deal. However a pivotal afternoon meeting at the White House, attended by President George W. Bush, congressional leaders and the two presidential candidates, broke with no agreement.

One cause of the delay: opposition from House Republicans who have tried to fashion an alternative plan that, instead of relying heavily on taxpayer money, could let banks buy insurance for the troubled assets weighing down their books.

The Intrade market for a bailout deal by September 30 took a beating overnight on news that the $700 billion plan may be foundering. The prediction market had been pricing the deal at 90, meaining 90% likely to pass, but it fell to as low as 60 overnight. The most recent trades are around 73.

The hangup appears to be back home in the districts. Instapundit quotes a reader:

Congressman Paul Kanjorski (D-PA) was just on CNBC and said that his mail and calls on the bailout plan are running 50-50: 50% no and 50% hell no.

This is what Barney Frank is up against. Even if the Democrats ram through the plan without Republicans signing on, they will be left holding the bag if the plan fails, as it very well could, and have to face the wrath of their constituents.

It looks like it will take a Black Friday on the stock market to focus our leaders. As unpopular as the bailout may appear, it will look like free Bubble-Up compared to a 25%+ hit to 401(k) plans and the prospect of factory closings and mass layoffs in anticipation of a shutdown of the lending markets.

Greg Mankiw has posted a defense of the plan from a "smart friend" that echoes the views of my smart aquaintance in the financial world that sways me towards the plan.

Academic economists don't like the Treasury plan, but nearly all of the Wall Street economists are for it. You don't have to be all that cynical to say that the Wall Street economists are talking their book. But I'd like to think that there is at least in part a sense in which they are more attuned to the reality of the situation in credit markets -- that last week we were a day or two away from a breakdown of the financial system.

Meanwhile, I'm off to the operating room with my bottle and bongos.

      Bookmark: del.icio.us • Digg • reddit