Financial Market Bailout, Take II

If at first you don’t succeed…

The government’s bailout plan for the credit markets passed in the US Senate last night, after failing in the House of Representatives on Monday. The revised legislation will probably come up for another vote in the House on Friday.

In the first stampeded rush to judgement, the unpopular bill failed, in part because of the very size of the package, and the unprecedented leeway the Treasury secretary was given in handing out $700 billion of the taxpayer’s money. Also disturbing many lawmakers, of both parties, was how quickly the message of the administration changed from “the system is stressed, but still working,” over to “if you don’t give us this authority, your ATM will stop working.”

In order to get more votes for the proposal (note I did not say “make the proposal more popular”) the Senate followed the time honored tradition of packing more lard into the pork barrel. The revised plan now includes an increase in insurance on bank deposits, up from $100,000 to $250,000. It now also includes a grab bag of tax breaks estimated to cost another $100 billion.

Great! Spending $700 billion in one fell swoop isn’t enough. Let’s plug another $100 billion on top of that. I thought this plan was half baked before. The Senate version looks like they pulled the cake out of the oven, saw it was half baked, and decided the answer was to add a bunch more ingredients to the mix.

I’ve heard of smearing lipstick on a pig, but who knew they had invented lipstick body wash?

Adding to the hysteria has been the behavior of the stock market. The House fails the bill, and the market drops 700 points! The bailout is resurrected in the Senate, and the market leaps 500 points! The market opens quiet, waiting to see if the revised bailout passes the House!

I’m put in mind of the two year old who throws a tantrum in the aisle of the grocery store until the parent buys them the candy they want.

Try this on for size: leave the markets alone. If the credit market starts to seize up, let it. In the short run, interest rates will go up, and it will be harder to get loans. But after a while, the boys and girls on Wall Street will figure out that if they don’t play nice, their jobs will go away, and the markets will start functioning again.

At least, that’s my theory. I call it “Free Market Economics.” It’s too bad that we’re not going to see that theory tried out.