Bailout not approved. Why? Is this good or bad?

The $700 billion bailout bill was defeated by a 228 to 205 vote. What happened? Is this a good thing or a bad thing?

How defeated?

Two thirds of the House Republicans voted against the bailout bill, while in comparison, 60% of the Democrats voted for it. This is an interesting defeat since the Bush Administration put this plan together and it was also supported by John McCain.

Another round?

President Bush and congressional leaders are determined to bring the bill back again for another vote; hopefully later this week. Congress was to adjourn this week until after the election, but it looks as if they will all be back by the end of the week. It is unclear as to what the markets will do as the week progresses.

Five courses of action in the plan

• Free up credit - Primary goal is to make it easier for individuals and business to start getting credit again.
• Modify loans - Goal is for the Treasury to modify difficult loans.
• Accountability - The Treasury will be forced to report on their spending of the $700 billion.
• Executive benefits limited- Companies who participate in getting bailed out will lose certain tax benefits. This will limit some executive compensation.
• Taxpayer benefits received- Companies that participate in the bailout must provide compensation that benefit taxpayers once the company heads in a positive direction.

These courses of action sound like reasonable goals. For now they are on hold, but let’s look at the short term effects that have occurred so far because of the defeat, and the long term effects that appear to be on the horizon.

Short term effects

The Dow Jones Industrial Average plummeting more than 700 points yesterday. This was the largest one-day point drop ever. The short-term effects are not good at all. There was an immediate effect in the confidence of the worldwide financial system. Long-term effects might be better.

Long term effects positive and negative

Longer-term, it actually could be positive since it somewhat protects the Federal Government’s balance sheet. The Federal Government may already be looking at trillions of losses because of the FDIC, Fannie, Freddie, the Federal Reserve and the Federal Home Loan Banks. Does the Federal Government need another $700 billion in debt? Give us your comments. We’d love to hear from you.

On the negative side, it is possible there could be a worldwide run on the dollar. Currently, people are running to buy U.S. treasuries. They are perceived to be the safest investment in the world. But dollar assets could fall rapidly once it becomes apparent that the U.S. government is printing a huge amount of currency to pay off its debts.

Advice

The future of the worldwide financial system is looking doubtful. There are different theories out there as to how to protect yourself while the economy is so volatile. Some Wall Street professionals have advised clients to take cash out of their bank accounts and keep it in a safe place. Two months expenses are the goal. Others say to hold on and wait for the craziness to pass.

None of us really know what direction the U.S. economy will head from here. It is a guessing game. Things seem to change rapidly. Feel free to give me a call or email me at 913-642-3334 or michele@wantinsight.com.

Michele “MAC” Cole
913-642-3334
www.wantinsight.com