Friday, October 3, 2008

The House Caves in, but it's the Market that Collapses

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

On Friday, the House of Representatives took up the Wall Street bailout bill in a second time do-over and passed it by a comfortable margin of 263 to 171 (the party breakdown was 172 Democrats and 91 Republican yes votes). What made the difference wasn't that any of the horrendous provisions that looted the U.S. treasury on behalf of Wall Street were removed, but more costly measures, at least $110 more billion, were added! These pork runneth over items were for programs that had particular appeal in a number of districts where Congressman had previously voted no. The penny for your district, a dollar for Wall Street game worked like a charm. So did the lobbying efforts of those who benefited from the bill. One representative who switched his vote, said he never talked to so many bank presidents in his life (calls coming into the capital from just regular people were up to 100 to 1 against the bill). The U.S. congress proved once again that like every other regime in history that had created hyperinflation, it deems restraints on government spending to be unnecessary. Both presidential candidates showed their 'lemming to the sea' leadership abilities by not only supporting this legislation, but by helping to round up votes in their respective parties. It was reported that Obama alone helped switch 22 votes.

The passage of this bailout bill represents the third key policy blunder of the financial and monetary authorities in handling the credit crisis. The first was the rate lowering campaign by the Fed that started in August 2007, which flooded the financial system with a tsunami of liquidity. The second was the Bear Stearns bailout, which established a policy that would inevitably lead to bailouts for almost any failing financial institution. Now with this Wall Street rescue bill , the bailouts have gone from individual companies to the entire financial industry. Just as Bear Stearns was not the only bank/broker bailout, nor will this bill be the only industry bailout for the financials (Warren Buffet promptly stated that this bailout isn't big enough to work). The fourth key decision that will lead us down the road toward hyperinflation will be to expand the bailouts outside the financial system. The auto industry has already received its second government loan, expect more to come. This new phase for bailouts though will not be limited just to industry. The Federal government will also have to turn on its money spigot to save state and local governments from going under. Governor Schwarzenegger has already requested $7 billion in assistance for California.

In a little more than two months, the national debt ceiling has been raised $1.5 trillion because of the Fannie Mae and Freddie Mac bailouts (add another $5.3 trillion for their government takeover) and the Wall Street rescue legislation. A national debt of a little over $9 trillion will soon be exceeding $16 trillion, around $2 trillion more than the official overstated GDP figures. It looks like the U.S. government intends on borrowing from foreign governments to pay for this (both the Fannie Mae/Freddie Mac and Wall Street bailouts are sending a lot of money overseas). However, it is more realistic to think the printing presses will have to be scheduled for 24/7 operation.

The stock market spoke very clearly in its reaction to the the bailout bill. It started tanking immediately. The Nasdaq, S&P 500 and the small cap Russell 2000 all closed at new lows for the year - below the crash bottom on Monday. Only the Dow held above this level. Key support around 2000 was broken on the Nasdaq on Monday and this break was confirmed on Friday. The next major support level for Nasdaq is around 1800 and for the S&P around 1000. Expect a visit to these levels some time in the future. Although I suspect the government will try to interrupt this journey - perhaps instead of banning just short-selling, they'll try to ban all selling of stocks.

NEXT: Today's Global Stock Market Meltdown

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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