On the bailout plan… protect mainstreet
So Tim Walz voted it down Monday, and we called over to his office to say thank you. Its not that something needs to be done, but the bill as written is so full of holes it would appear one could sink a battleship.
The bill is really complex… egads, I spent an hour reading it, and a full study could take days, if not a week or more. Granted I’m no politician… but needless to say, with such a short time frame, things will get missed. Perhaps that was by design. Interesting to note the authority to suspend FASB 127 was in the bill, and yet some congressman apparently missed it, or maybe they wanted it pulled by legislation, not sure.
Apart from that, it appears way too much lip service and not enough real solutions. In many ways, this bill seems to be a delay tactic… and if it wasnt so expensive, that would be fine. Solutions to years of problems are not solved in a week, and considering the money involed, rushing is not prudent. Yet, now that the stock market went through a bunch of gyrations… those who didnt understand the ramifications of passing, or not passing such a bill, are likely going to press the issue to get it passed. Ie, Ideologically the bill is very bad, but when folks get a 5-30% hit on their retirement, ideology often goes out the window. The worst part is, any serious judgements errors in this, of which I am certain there are, is likely to have a much worse effect on ones retirement savings, than no bill at all. Its just that the effects will be delayed.
There is the mainstreet aspect in the short term as well. Sun Country Airlines is having their employees take a 50% paycut deferral due to cash flow problems. Granted in their case, it was an issue with private equity, rather than an operating line of credit being pulled. Banks I am sure even if the economy was rolling would be leery to fund airline ops (the risk issues are outside their domain of expertise). Yet, the situation parallels the issue in mainstreet business, ie the need to meet payroll during cash flow problems to say nothing of expansion, or even increased production for the holidays, and thats apart from the huge delays accounts recievable are going to get hit with 4th qtr.
If the banks pull in lines of credit… the same situation with Sun Country is going to ripple through the economy. WHen joesixpack gets asked to take 50 cents on the dollar in his paycheck… things are not going to be pretty. Yet, I sort of think thats inevitable, either by a cash flow issue in the short term, or via selective inflation/deflation over time. And yet the bill’s hope, is that by dumping a ton of cash now, credit will open up, rather than being used to bail out the shareholders… and unless something is explicitly written into the revised bill, I sort of think the shareholders are the ones who will walk away happy, and Joe still gets hosed.
I have serious doubts as to whether this bill will accomplish anyting for mainstreet, other than create a false sense of security for a few weeks, or maybe if we are lucky months, all the while killing off the much needed cash to fix things the right way down the road.
Ultimately though, folks are concerned with the short term… and the long term aspects of the need for real estate valuations to drop by 30%-60%, credit to become much less available, and the killing off of excessive leverage are far off. This weeks paycheck, and the loss of retirement savings ends up being the #1, rather than the much needed changes in order to cause the least amount of collateral damage to those who can least afford it. Imho, a few weeks or months of momentary hardship can prevent years of long lasting and hard to undo damge, and might even get us back on the fasttrack to growth and economic expansion.
So, going forward…. suspending mark to market is idiocy. We need greater transparency in accounting, not less, we need fewer games, not more. Granted there is a death spiral aspect to FASB 127, in that when markets tank, valuation goes away, where as 30 years down the road, the value may be much greater. The key is where things are today, what is something worth, not a gamble on what it might be. Wishful thinking on future valuations all around got us into this mess… we dont need to foster further errant behavior along that line, or it will bite us back later. In addition, suspending FASB, pretty much guarantees during a bailout the taxpayer will pay way way too much, albeit to do so does drag things out, as the house of cards is held up a bit longer.
Mainstreet could be protected by govt insurance of existing business operating lines of credit… selling that would be like selling ocean front property in AZ, but alas, unless something is clearly written in, expect shareholders to reap the rewards, at the expense of Joesixpack and mainstreet getting hosed over. At a bear minimum, expansion of unemployment compensation rules are a must. Joe’s hours are likely to be cut, his pay to be cut, or he will loose his job, irrespective of the bill being passed. (short of the Swedish plan)
World wise… as much as I disagree with Paulson’s plan, as it perpetuates the shell game, a variant may be the only way to go politically in the short term. It likely will fail, and then we will have to consider the Swedish plan (which does have a track record of success, where as Paulson’s historially doesnt). Its a no win deal all around.
Yet, I could be way off in right and left fields… this is a complex mess, and few if any have really looked and studied this enough all around to come up with a viable long term solution. Major economist’s disagree all around, international sentiment is all over the place, and no one has much for confidence in anything. Stepping back, clearly identifying the problems, and then coming up with solutions is really the key, but alas we are out of time. Its not going to be pleasant no matter what.