Bail or Fail?

So is the “rescue” plan a good one? Are we going to be fine now? No and no! But I’m glad they did “it.” The value is that Congress did a “something” that the markets needed, but the financial world is still looking at a longer term mess. Had our lawmakers not passed “some relevant” legislation, the frozen credit markets would have killed the payrolls of thousands and thousands of businesses, forcing them to close and miss payrolls. And missing those payrolls, laying off workers, would have been a tipping point – probably of no return. We would have seen a ripple effect as laid-off workers, just before a Christmas shopping season, would have accelerated the foreclosure debacle and killed the economic reality of America ’s most significant retail season. We would have had an instant severe, very deep and long term recession, maybe even a depression.

When the government’s Securities and Exchange Commission (the SEC), a an administrative agency within the Executive branch of government under the control of the President, horribly deregulated our financial institutions in 2004 (allowing such institutions to carry debt loads equal to 33 times their equity – imagine if we “ordinary people” lived like that), and Congress knowingly let that market slide into this deregulatory abyss without insisting on or applying any necessary oversight… when funds pushed mortgage lenders to lower their standards to create more deal flow (and more fees to Wall Street traders) in the housing market (and home prices went up because more buyers – the demand side – fought for a fixed set of homes)… well those problems still exist to some very significant extent.

What this means for the rest of us is that there will be some letting loose of the harsh impact of the real costs of borrowing after “teaser rate” mortgage structures expired and that more homeowners should be able to negotiate their way to stay in their homes, even though Congress did not provide what I perceived to be a highly desirable moratorium on foreclosures to give people time to take advantage of this new system. There will be a bit more lending going on, but the standards for loans might still prevent qualified borrowers from accessing that capital. Some kids are not going to get money for college based on their parents’ ability to take equity out of their homes, and some businesses are not going to get the capital they need to grow and create new jobs. Getting money for a new home purchase is not going to be easy enough so that housing prices are going to recover any time soon.

So how do we think of all this? First, and this is essential, if you think of the $700 trillion as a write off, you might as well find another country to live in. Assuming that our government is even mildly competent (a big assumption), that sum has to be viewed as a longer term investment, supported by underlying assets (mostly real estate and the mortgages that are still working). In time we should be able to generate most of that “investment” back, and we may even make a small profit. So we really have to swallow hard and ignore this as a huge black hole.

That means, with fiscal restraint, the government must now shift to creating a platform for viable growth in the near term. I still think we're going to be in a recession for no less than 15 months, but the government has opportunities to incentivize growth though encouraging job creation in the places we need it most: infrastructure, alternative energy and health care. The government also has to stop playing with words in the educational arena. If we want to stop exporting jobs, we need to up the ante in our vested skill-sets, and that means education has to become and remain a priority. Our representatives have to figure out how to make this happen under the perception of the impact of a $700 trillion bailout. And we as taxpayers and citizens have to help them get there.

I’m Peter Dekom, and I approve this message