My analysis of the Senate Bill

(10 am. – promoted by ek hornbeck)

I just finished watching the Senate pass their version of the bailout bill.  I just finished listening to Sen. Reid give his “explanation”.  I just heard 2 economists give their own “analysis” of this bill.  Now, I’m going to give mine.

Let me say, right up front, that the best analogy that applies here is; I am a shadetree mechanic.  The economist is the factory trained and certified mechanic.  Both of us are placed in front of a car and asked, “how do you start this car?”

So, with that said, onward… through the fog…

The biggest thing that struck me in all of these “explanations”, in all of the analysis, is that the credit market is now frozen.  That the banks and credit institutions have all this bad debt that nobody will buy from them, and because of the (few) regulations that remain, these institutions cannot give out more loans.  That is what this bailout bill, according to these individuals, is all about; opening up the credit market and restoring confidence in lending.

First, let’s recap how we got here.

1) Banks and financial institutions were de-regulated.

Instead of merely giving out loans, regardless of race, to individuals who qualified for a loan, institutions were allowed to market any loan to anyone.  They were allowed to jack up interest rates under any pretense.  So, they ran out and gave out bad loans.  They ran up the interest rate on everyone they could as often as they could.  They squeezed every penny out of the consumers they could, and then, they went after consumers who couldn’t pay, but, they got what they could out of them as well before they defaulted.

2) Financial assets were packaged and moved in a shell game.

Once the institutions gave out all of these bad mortgages.  Once they speculated in the hedge funds.  They packaged all of these into one package and sold them off to other institutions.  That institution then did the same.  This went on until the collapse, when suddenly, nobody would buy anymore of these packages, and the institution was suddenly stuck with all of this debt they couldn’t cover.  They then failed as an institution.

Now, let me explain to you why this bill has now, once again, screwed America.

1) During this time, the housing market crashed.

The housing market boom was driven on bad Adjustable Rate Mortgages and over-valuing the property.  The “X” factor here, was the home owner.  Once the economy crashed.  Once the housing values dropped.  Once the ballooning interest in the ARM’s hit.  The home owner couldn’t meet the mortgage and the foreclosures hit.  

2) During this time, the unemployment rose.

While the economy started into recession, businesses were trying to keep their profit margin.  The first way a business does this is with downsizing the workforce to cut expenditure.  So, we saw lots of layoffs.  As unemployment rose, so then too did the credit crisis because people couldn’t afford to pay their bills.

3) During this time, health and dental care rose.

Despite starting a recession, businesses have been trying to get out of providing health care packages to, once again, keep their profit margin.  Health care costs have risen.  Dental costs have risen.  Many people have just not sought needed health care, but, in many instances, they have gotten the needed medical or dental attention, and, have gotten a bill they cannot pay.

4) During this time, families maxed out their credit.

It is simply a case of as your hole got deeper, in order to tread water, you went further into debt.  You found ways to rob Peter to pay Paul.  You needed groceries?  You put it on your credit card.  You needed gas?  You got a gas credit card.  You needed clothing?  You got a JC Penny credit card.  You needed to fix your house?  You got a Lowe’s credit card.  And the beat went on…

5) During this time, and time before this, wages stagnated.

This is simply self-explanatory.  The average persons pay wasn’t keeping up with inflation.

So, the answer that our elected representatives in Congress have come up with is?  To unfreeze the credit market?  To make it so that people can get more loans?

What good does that do to help Main St?  We KNOW how it helps Wall St.!

One answer given is; 401k’s are wrapped up in stocks and if the stocks crash, as they did, so does the average persons 401k.  That means retirement money.  That means college money.  That means savings.  So, by shoring up the credit markets, and thus, the stock market speculation, this saves the average persons 401k.  While this is true, it does not solve the problem; it only postpones it until it gets worse.

The economy runs on the consumer.  The consumer cannot spend if they have no money.  The consumer cannot spend if they have no job in order to make money.  That is the problem.

This bailout saved those whose funds are tied up in the stock market.  It does not save the average person.  It does not provide relief to the average person.  It does not give the average person a job, or, a job with a higher wage.  

I have taken college business, accounting, and economics courses (and left with a 3.75 GPA).  I may be a “shadetree” mechanic compared to professional economist’s, but, this is not a question of rocket science.  It is, almost literally, a “so, how do you start a car” question.  Anyone with even a basic fundamental knowledge knows that the economy is driven by the consumer.  If a person is out of work, or making a minimum wage that has stagnated, there will come a point when their ship sinks.  When the consumer sinks, the economy sinks.

This bill does nothing other than put a band-aid on a severed artery and the politicians, Wall St., and the rich, are all hoping that they don’t lose too much, if anything, before the patient dies on them.  Which in this case means, there is more that has to be done and they know it.  But first, they wanted to insure their status above all else.