We need something.

I may not have liked the proposed bailout package but to vote it down and not have a back-up plan is like going to war and not having an exit strategy. Nobody wins. The down vote today cost the taxpayers more in market losses, though unrealized for the smart ones, than the damn "bailout" would cost. I don't think the general public understands 1) how expensive the plan truly will turn out to be (less than $750 bil.) and 2) the repercussions for doing nothing. It has been a long time since our country has had a financial system crisis like this. I don't believe these people who are calling on their Reps to vote against these "rescue" plans realize that helping the stupid firms (I emphasize stupid because they did screw up big) will help them. Most people can't pay cash for their homes, college tution, cars, small business ventures, etc. If we don't help the banks spending will dry up and the economy will shrink significantly more than it is already going to. I fully believe that if we just let the free market work itself out, we will see double digit unemployment. People think it hurts now and we are only at 6.1%! Passing this bill or something similar is necessary to stop the momentum of a bad situation getting worse. The whole system is so interconnected that now each failure inevitably leads to another. Putting the money into the system won't prevent all future losses but it will at least give us a chance to stabilize for the short-term (6 months) and possibly start growing again later next year. I just don't know how this fragile system will fair if everyone runs on all the banks.

Luckily, I believe that Congress will get together on Thursday and hopefully pass some smaller, potentially less expensive measures to help shore things up on a piecemeal basis. They can start with an idea I've heard about increasing FDIC insurance caps to at least $200k per person. This will help offset the huge problem of money flowing out of banks and into T-bills and money market funds. We need banks to make the system work and banks need deposits/capital to operate. Since the government now guarantees money market funds, any person or business over the FDIC limit who has cash in a poor performing bank will pull out their cash and put it in a money market fund. And justifiably so. So increasing the limit will certainly help to some degree. Probably most important of all, if banks don't have the money they need to make mortgage loans than prices of homes will continue to drop and our economy will absolutely not turn around until housing prices stabilize. It is a tall order but it is possible to get out of this mess without falling into recession of greater than a year but it will take smart and bold moves by Congress at this point to make it happen. The Fed and Treasury have done pretty much all they can without a new law being passed.

Enough.

I have to say that I'm getting sick of these Republican entitlement programs. Every time you turn around these yahoos are giving away taxpayer money to people who are lazy and just don't want to work hard to make a go of it. And of course these actions have the negative consequence of reinforcing such poor behavior. I'm speaking of course about the bailouts that the government is handing to these banks because of the greed and stupidity of their managements. Or are they just greedy and not stupid at all? After all, most of the top management made enough money during the boom times of the past 5 years so that even if their companies get taken over or out and they get canned, they will have enough money in good investments (not their own stock) to live the rest of their lives on the investment income. Because as we all know, once they've made it they don't have to give it back just because their actions caused the company to go under. It's a one way street.

Obviously, my first statement was sort of tongue in cheek reversing the typical shots at Democratic sponsored entitlements but the extent of this bailout is ridiculous and it reeks of politics. Now I'm not one of these crazy pure capitalist Larry Kudlow types but there are serious and long lasting ramifications of bailouts of this size. What was wrong with bailouts on a case by case basis? Now all of the big banks are likely going to survive. The only message the government is sending is that public companies should do everything in their power to grow their business to get to the ultimate goal of earning the label "too big to fail." Once that happens you're gold. You get all the profits without the worry of catastrophic loss. So what incentive is there now to stop the current management practice of maximizing profits for the short-term to benefit current management at the expense of future profits and long-term shareholders? The fear of institutional investors voting out current board members? That happens so infrequently that it is news every time it does happen. Some of us have seen the voting processes for mutual funds and know it is a joke.

The system is so broken right now I wouldn't even know where to start to fix it. The basic idea of capitalism is outstanding but somewhere along the line the incentive structure fell apart. Especially for firms in the financial services industry. Virtually no management of a large public company has a meaningful ownership interest in the company they manage. The only incentive is to maximize their own compensation which is in direct conflict of the owners' goal of maximum profit. It is actually very similar to how the government operates. Ultimately the problem needs to be addressed by the owners' of the firms or at least those who control the voting rights of the owners, which are usually institutional money managers. But again there is no incentive structure for that person to make decisions based on long-term results because they are rewarded on short-term metrics as well.

It is clear that pure capitalism (with little or no regulation) doesn't work for our society. We love the boom times it produces when everybody is doing anything possible to make that next dime but nobody seems to have the stomach for the inevitable bust that comes from the overzealous pursuit of riches. And the financial system clearly cannot handle such extreme boom/bust volatility as demonstrated by these new bailouts. Why is there such bi-partisan support for this huge bailout but not for pre-emptive regulation to tamper the boom periods? I have an idea and it has something to do with buying votes and trying to save face in this current instance. And where the hell is this "invisible hand of the market" that is suppose to reward good behavior and punish bad to prevent market participants from repeating past failures? The government performed virtually the exact same type of bailout during the Savings & Loan Crisis less than 20 years ago. I guess the invisible hand disappeared. (C'mon, that was funny.) It is a shame that the government has to step in to create regulation to force people to make good choices but it is clear that the supposed "best and brightest" on Wall Street are incapable of doing it themselves.