Out of Control Policy Blog

Eye of the storm: brace for more bailout legislation

We could very well be in the eye of the storm right now. On Friday the House voted to pass the Senate's version of The Bailout plan and President Bush quickly signed it into law. Secretary Paulson said he would go to work implementing the plan.

But for those who were deluded into thinking this $700 billion plan would be the answer to our nation's fear generated financial crisis, a shocking truth is brewing on the horizon. The dark clouds are not lifting and another wave of trouble is set to sweep over the country. There are four big problems we're facing right now--and that's besides the negative fallout from The Bailout itself.

1) Confidence is still lacking
Bush, Paulson, and Congress all cited investor confidence and consumer confidence woes as critical reasons to pass The Bailout. They reasoned that a Congressional rescue would stem fiscal fears and stop the stock market from hemorrhaging money. Yet, on Friday, after the stock market was up 200 points by the time the House took up a vote, the Dow closed down over 150 points. And when the bell opened this morning, the dow had dropped another 500 points within one hour to dip below 10,000 points for the first time since October 2004. That's nearly another $1 trillion in lost wealth since Congress passed The Bailout. I hate to say it, but the lack of confidence we had in The Bailout is appearing well deserved for the moment (holding our breath that there could be a strong recovery).

2) Bailout not the immediate fix many think
We (Reason, free marketers, libertarians) warned that fears against the alternative idea to offer tax cuts being too slow to affect the situation were just as applicable to The Bailout. There will still be several weeks before any of the Treasury's new money can be dolled out as they figure out who to hire to figure out how to choose what to buy and then actually buy it. Any firm that collapses in the near future is not a failure of The Bailout because it hasn't had a chance to kick in, but neither would it have been a failure of tax cuts.

3) Continued legislation
The Congress has continued to hold hearings on oversight for The Bailout. While the legislation has already been passed, allowing the Treasury to move ahead with putting a plan in place, this does not preclude those concerned members of the House and Senate who didn't get their provisions added to the original plan from not pushing new measures. There is also talk of a California bailout (and maybe other states after that), and of a stimulus package to help "struggling" homeowners. I believe the dip in the stock market today is in part related to continued government action skewing the system.

4) Europe is failing
After looking down their noses at us for the past few weeks and months, Europe is now feeling the same pain we felt from improper investments. Their stock markets are getting hit hard (London's market boards are down the most since 1987) and their governments are bailout out banks and saving deposits left and right. Russia has lost over 20 percent today. This problem may continue on to the Asian markets and, given financial globalization, it all comes back to affect everyone.

All four of those points, and more mean we have a rough ride ahead. Buckle up.

Anthony Randazzo is Director of Economic Research


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