Reenita's Wisdom

It’s official, according to the New York Times, the bailout proposition has been rejected by the House of Representatives. The Dow Jones just plunged more than 400 points and America is standing up for itself as the bastion of free market economics!

According to the New York Times, “supporters of the bailout proposal had argued that it was necessary to avoid a collapse of the economic system, a calamity that would drag down not just Wall Street investment houses but possibly the savings and portfolios of millions of Americans. Opponents said the bill was cobbled together in too much haste and might amount to throwing good money from taxpayers after bad investments from Wall Street gamblers.”

Ironically though most Californian democrats have been up in arms about the Fed bailing out the financial industry with taxpayer dollars, the vote to decline it has been purely republican! We are back to the essences of what the fiscal conservatives actually stand for. Even the bailout plan promised relief in the short term, its sustainability over the long term has been seriously questioned by many. As House Representative, Steny Hoyer says, “When it comes to America’s economy, none of us is an island.” The last thing we need is more of a domino effect on the economy.

Wachovia has just managed to save itself from the fiasco by selling tis assets to Citigroup. But as usual, the word on Wall Street is ‘Who’s next?” These last few days there has been speculation that Goldman Sachs would be severely impacted….negatively that is…if the bailout plan did not go through. Don’t you think it is interesting then ‘King Henry’ Paulsen was adamantly pushing the plan….after all he is Goldman Sachs alum!

Related Posts:

Related Posts:

To Bailout or Not to Bailout: Is Free Market Economics Sustainable?
Death of Wall Street, Rise of Main Street
Financial Crisis: What Will The Collapse of Investment Banking Mean for CSR?

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I received an email from a friend in Hong Kong this morning:

Asia is watching in shock and wondering why if the problems are in the US, are the markets here selling off more dramatically.

It is back to fear tactics which immediately offset the fight or flight syndrome. In this case it is definitely all about flight. Asia in particular appears to be more volatile than other markets. It is based on sentiment according to Dan Parr, the Asia-Pacific head for BrandRapport, a consulting firm. Morgan Stanley might have released very positive third quarter earnings but nobody wants to believe that this is any indicator of their health. It is like withdrawing your bet from the fastest runner in the race because everybody else tells you that he’s surviving on steroids. Morgan and Goldman stock has come under such selling assault that their share price has gone down drastically. Investors are instead snapping up three-month Treasury bills with virtually no yield pushing gold to its biggest one-day gain in nearly 10 years. The only truly happy person must be the Indian housewife who has become rich overnight by virtue of her stridhan (gold jewelery inherited by an Indian woman at the time of her wedding).

My friend continues her email:

Also America’s credibility as bastion of free markets has fallen hard.

Indeed the Fed’s bail out of AIG, Fannie and Freddie are perceived by many as a free market detour. A free market economy refers to a system where the buyers and sellers are solely responsible for the choices they make. Free market gives the absolute power to prices to determine the allocation and distribution of goods and services. However, the notion of free market is mainly a theoretical concept as every country, even capitalist ones, places some restrictions on the ownership and exchange of commodities.

Whether the bailouts were a good idea or not remains to be seen. Some remained concerned about the depletion of the Fed’s resources, others remain incensed about the use of tax dollars. However one has to consider the the ripple effects of the failure of a Fannie, Freddie or AIG on the US and then global markets. Shockwaves in Asia are case in point. Personally, I am still annoyed that the Fed would not put up a paltry $4 billion to bail out Lehman Brothers. Had it done so, Morgan Stanley and Goldman Sachs might be having a better day. Not to mention the 15,000 Lehman employees who did not get bought by Barclays.