Stop Playing Politics With Our Futures

Published in Investing on 30 September 2008

US Congress voted down the economic recue plan, sending markets into a tailspin. Whilst trying to punish the fat cats, they’ve actually punished ordinary folks around the globe. They should wake up to themselves, and fast.

What an absolute mess.

US Congress has voted down the proposed US$700 billion economic rescue plan by a margin of 228 to 205.

US stock markets responded with their biggest ever point-fall, the Dow Jones Industrial Average plunging an astounding 777 points, or 7%. The Nasdaq Index fell 9%.

Investors were clearly rushing for the exits, no matter what the price. Panic selling was the name of the game, no matter what the company, and what the sector. The oil price was also caught up in the carnage, falling US$10 or 10% to US$96 a barrel. The only place to hide was gold, long considered a safe haven, which traded above US$900 an ounce.

So now Congress knows a little more about the consequences of them not passing the bill. But I fear…

  • They are still intent on playing their stupid, petty political games, putting votes ahead of common-sense.
  • They still don’t get it. They are intent on punishing the Wall Street executives who got us into this mess in the first place. Sure, they deserve punishment, but it shouldn’t happen at the expense of ordinary citizens both in the US, and across the globe.
  • They don’t understand the effect not passing this bill has on ordinary people. Some are seeing their life savings evaporate in front of their very eyes. Some are facing the prospects of losing their jobs as companies prepare for a long and painful recession. Some are seeing the value of their pensions slashed, forcing them into lifestyle sacrifices, be that spending longer in the workforce (if they can find and/or keep a job) or having their retirement income levels severely reduced.

I Despair About Politics

I wish politicians could see beyond the votes that keep them in a job. It’s at times like these when you despair about the whole political system. When you think about it rationally, we vote in a group of largely inexperienced people every 3, 4 or 5 years, and task them with setting the policies to smoothly and fairly run the world’s giant economies.

It’s not surprising that many politicians govern for votes rather than necessarily for what’s right and proper for the huge economies we’ve tasked them with running. The ideal scenario of course is when one leads to the other – great policies and economic strategies are rewarded with large numbers of votes, and the opportunity to continue in government beyond subsequent elections.

I guess it does happen largely that way around, but it’s a times like these, when US Congress fails to pass a bill, the consequences of which threatens our very financial futures, that forces you to sadly think otherwise.

What Are Those US Politicians Thinking?

  • So why did Congress vote down the bill? What will happen if they don’t pass the bill?
  • The free markets will eventually sort this mess out. Financial institutions who made bad loans will fail. Depositors may lose their savings if they happen to bank with an institution that made bad loans, but heck, that’s their problem.
  • People who work for financial institutions who made bad loans will lose their jobs, whether they be the people at the top or the ones at the bottom. Their bad luck.
  • House prices will continue to tumble. More and more people will lose their houses. They shouldn’t have bought it in the first place. They should have known the economy was heading down the spout. They should have known house prices were over-valued. Silly fools.
  • The recession is coming anyway, bill or no bill.

But at least the Wall Street executives will pay the price for their excesses, except many of them are already multi-millionaires, and that money can’t be taken away from them. Still, at least they won’t be able to earn more millions, and their multi-million dollar stock option packages will be worth only a few million now.

Phew. Thanks Congress.

What Now?

I am still of the opinion this economic rescue package will be passed by the US Congress, maybe as soon as later this week.

Congress today have been given a stark reminder today of the consequences of not passing the bill. Sure Mr and Mrs Average American, those without significant share portfolios, are not immediately affected by the huge stock market sell off of today. But in time they will be affected by Congresses lack of ability to see past the popular vote. They will pay.

Without the bill, this recession will be long and painful. House prices will continue to slump. Interest rates may be cut, but that is not going to kick-start house prices or the economy.

With the bill, the recession may still be long and painful. But with the bill, at least our financial markets will have some chance of being stabilised. Individuals like you and I won’t have to worry about which financial institution will be the next to fail – they are going down about two a day at the moment.

At the rate we are going, large parts of the banking system could end up being nationalised anyway. We’ve already seen Northern Rock and now Bradford and Bingley (LSE: BB.) head that way.

What if Lloyds TSB (LSE: LLOY) suddenly turned round and said it no longer was prepared to buy HBOS (LSE: HBOS)? What if massive Royal Bank Of Scotland (LSE: RBS) got into trouble?

It’s Your Elected Duty

Extraordinary times demand extraordinary measures. In a normal world, we’d just let bad companies fail and move on – it’s what happened during the last bubble, the dot com bubble.

But this time it’s different. This time we’re talking about the heart and soul of world economies – the financial system. It needs to be stabilised, and fast. As I said above, stabilisation won’t avoid the pain of falling house prices, rising unemployment, a falling stockmarket and recession, but it will help us avoid a complete and utter financial meltdown, which is what we appear to be close to facing today.

So, US Congress, stop governing for votes and start governing for the people – it’s what you were elected to do, after all.

> See what thousands of other fellow investors are saying about the credit crisis by checking out the Motley Fool’s vibrant discussion boards. Click here to go to the very popular Banking Sector discussion board.

> Of the companies mentioned in this article, Bruce Jackson has a beneficial interest in HBOS.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

LOJON 30 Sep 2008 , 10:14am

For years we have been told that the stock market and the housing market are overheated. The countries suffering now are those who gained the most in the last 10 years, in a reckless environment without any legislative control. There is no crisis in (most of) the rest of Europe and prices have to be redressed. Tighten your belt, look for bargains.

Why should the taxpayer be supporting the market when it fails? That is as bad as windfall tax or limiting the market when it expands. Banks are meant to be cautious investors, and the risk lies with them.

LOJO

jt64 30 Sep 2008 , 10:43am

So, US Congress, stop governing for votes and start governing for the people – it’s what you were elected to do, after all.

Except that the people I've seen on US TV are telling their representatives they don't want this deal to bail out the banks. It appears that congress may well be doing what it should do all the time - listening to the people not telling the people what to do.

It's called DEMOCRACY. The elected representatives are elected to represent the electorate, not to ignore them once elected.

Now don't get me wrong - I too think the deal is absolutely necessary and we need it ASAP and I was shocked at the vote result last night but if the average voter doesn't want it then that's democracy and those who do want the deal just have to take it on the nose.

Jon.

niw1964 30 Sep 2008 , 11:28am

We're just as much to blame. We elect the idiots in office. We pay the idiots in the financial services sector and WE borrow too much money and live beyond our means. We've all known for years that we cannot continue to live off cheap credit. There's no such thing as a free lunch...an old adage, but true nonetheless.

dunnmt 30 Sep 2008 , 12:04pm

How much of this crisis is the bankers trying to get there hands on taxpayer's money and how much is real. The London Stockmarket has not collapsed, why do you think the Dow jones will. Safeguarding depositers money, within limits is necessary but keeping the bankers in there multi-million pounds salaries is not.

macroeconomix 30 Sep 2008 , 12:08pm

For the health of world economies we need a recession.. it is locked in place and unavoidable. This bill will simply allow the US administration to treat a particular sector with preference to all others and to launder money at the tax payer's expense, propping up asset and stock prices in this way will lead to an inflationary depression. Remember the Weimar republic?

The fairest solution is precisely to let the market do its work. I can only assume that your article is written off the back of emotion as stirred up by the rest of the panicked press, and as a result of GWB's blackmail to pass the bill or else take down people's pension funds, and you also have a vested interest in your HBOS position so therefore talking your book ;)

Our money system and globalisation are to blame, a global fiat money system using the dollar as a world currency and Keynesian economics let by a criminal syndicate is simply not working and is not sustainable.
We should let it die a death and bring back sound money!

elephant888 30 Sep 2008 , 12:25pm

The author appears to be following what is known as Politicians' Logic - which is ironic, since in this case it's politicians that have actually avoided it. It goes like this:

"Something must be done. This is something, therefore we must do it."

But doing nothing is better than doing the wrong thing. The author may want to ask himself if there could be _any_ bailout proposal that he would be opposed to. $7 trillion? $70 trillion? "It needs to be stabilised, and fast", right??

tux222 30 Sep 2008 , 2:02pm

The trouble with politicians, both sides of the Atlantic, is that they are today almost exclusively "career" politicians who have never done a proper job in their lives. The world would be enormously imporoved if no-one was allowed to be elected, who had not at least twenty years real-world experience (i.e. of supporting himself or herself by any means other than working for a political party).

We used to have many un-whippable MPS who went into politics at around 60 for one or two terms, after a lifetime of work, with the intention of serving their constituents. Sadly, the parties have now made sure that nobody gets selected as a candidate, who isn't pliant lobby-fodder, holding few principles other than those he's told to espouse by his party's leadership.

MunroMan 30 Sep 2008 , 2:36pm

Paulson took a typical Goldman Sachs attitude to the problem of looking for the biggest pot of money, Uncle Sam, and throwing it at the problem. There seems to have been little detail and he was perceived as looking after his pals on Wall St. I don't think it is a surprise it was rejected, as will others be if they propose something similar.
Can you imagine Westminster giving Darling similar powers?

pjegeorge 30 Sep 2008 , 2:43pm

The markets are working well, despite government interference. Realistic prices are being put on overvalued assets. This is about solvency and if banks are insolvent, because they are overleveraged, they should go bankrupt like any business. The world won't end and the global economy will recover quicker.

Bartron 30 Sep 2008 , 3:04pm

My fear is about what is done, not what is not done. The people in power seem to be bent on repeating the mistakes that got us into this mess. The media have overused and misused the term "credit crunch". We are encouraged to see the credit crunch as the cause of our problems, when in fact it is our problems that have caused the credit crunch. Oil and food prices haven't risen because of the credit crunch but because of demand. our best steps would be to take action against those aspects which led to the crunch. For me it's irresponsible lending, fat cat bonuses, and too much buy to let. other than that just let the economy put itself right, and make the necessary adjustments (such as house price falls). And if the stock markets are a problem then close them down for a couple of months, and send the staff home (without pay)!
OK the last remark is a bit flippant, but I am a bit annoyed that we have politicians who would be wary about making some of these tough moves, and then propose even more extravagant measures (with our money).
A last comment: people are talking about the risk to any bank savings above £35000. Forgetting about business and other non-personal accounts, if you have that much money you are doing ok and should perhaps put things in a little perspective.

seagull104 30 Sep 2008 , 3:25pm

Any self-respecting Thatcherite has known for the past six years that Domesday was inevitably coming. Now its here thank God there are still enough US politicians who have the sense to avoid the oddly socialist reactions of a Republican president. What a wobbler! Don't mess with the Market.

Blognorton 30 Sep 2008 , 3:45pm

The above postings show that the central issues here are not understood and are being confused by a lot of moralistic irrelevance. When the archbishops (whose salaries are paid for in part by shorting banks) start offering opinions I know the asylum has been taken over by the mad.

The central fact is that the existence of dodgy debt on the banks lending books has created fear to the extent that the banks no longer lend to each other. When that happens the whole system locks up, firms go bankrupt and the ordinary punter loses his job. Serious recession follows. Fixing that is the number one imperative. All else is just so much bull manure.

The only way to resolve that deadlock is to remove the debt from their balance sheets and increase liquidity of capital. That is what Paulsen wants to do and it isn't a new idea. It is what has happened in similar situations before.

Unfortunately the US cabinet is full of arrogant dictators who tried to do this on unacceptable terms that left them totally unaccountable. That is unacceptable. 2/3 of their own party then voted against the president in a mistaken belief that doing so would save their own electoral skins. that is immature behaviour.

At the same time it was noticed that some senior bankers were being removed with their bonuses intact. That too caused anger and frustration. Predictable but unhelpful.If this in't done the people who will suffer will not be any of those who are involved. It will be everyone else who will have to bear a depression much longer then it needs to be.

Remember too this huge some of money does not disappear. The loans were made against assets that have some value, and last time the US governement made a net profit out of the failure of the Savings and Loans collapse. Most of it, and the Northern Rock and B&B will come back in time.
What is needed here is sanity and cool heads not a lot of emotion,panic or populist ignorance. Unfortunately that is what currently there is a huge surplus of.

Cleggy01 01 Oct 2008 , 8:27am

The problem maybe, JT64, that the people who are demanding that this Bill ISN'T passed possibly don't collectively realise or understand the implications of not doing something. They may just think it's another attempt by powerful politicians to shore up the lifestyles and errors of powerful bankers.

Cleggy01 01 Oct 2008 , 8:32am

In fact, I don't claim to know what would happen if this Bill is passed or not...

Zweiblumen 01 Oct 2008 , 1:11pm

This Bill failed at the negotiating table, not in the chamber.

The real problem with the Bill is the lack of quid pro quo. Well, that and the fact that unlimited, anaccountable power in the hands of Hank Paulson was the only thing that scared the senators more than financial meltdown.

jduck1979 02 Oct 2008 , 4:06am

Maybe it's time for another Motley Fool guidebook (from both UK & US versions of the Fool), such as.... "The Motley Fool guide to finances for politicians" (and hand a few copies around) - if the Fool's usually excellant skills at teaching financial knowledge to those who find it mind boggling don't sort 'em out, nothing will.

gordonbanks42 02 Oct 2008 , 2:31pm

"stop governing for votes and start governing for the people" ??? This seems to imply that there is a "right answer" which the politicians should know and implement even if the people are saying they should do something different. Actually I think that is often the case - the electorate doesn't know how to drive a modern economy and what it asks for and what it needs are different things.

How do we provide legislators and the executive with the lattitude to give the electorate what it needs rather than what it asks for (and over timescales long enough for systemic consequences to work themselves out) while maintaining anything resembling democracy?

In a democracy the electorate will tend to get what it deserves, even if that is not what it wants or needs. If the electorate wants something better, it should (i) study economics and history (ii) get real (iii) be more careful what it asks for and (iv) be more choosy who has its permission to represent its interests (e.g. not newspapers, for God's sake). Changing the leadership on its own will not alter the dynamic properties of the system over the longer term.

LOJON 30 Sep 2008 , 10:14am

For years we have been told that the stock market and the housing market are overheated. The countries suffering now are those who gained the most in the last 10 years, in a reckless environment without any legislative control. There is no crisis in (most of) the rest of Europe and prices have to be redressed. Tighten your belt, look for bargains.

Why should the taxpayer be supporting the market when it fails? That is as bad as windfall tax or limiting the market when it expands. Banks are meant to be cautious investors, and the risk lies with them.

LOJO

jt64 30 Sep 2008 , 10:43am

So, US Congress, stop governing for votes and start governing for the people – it’s what you were elected to do, after all.

Except that the people I've seen on US TV are telling their representatives they don't want this deal to bail out the banks. It appears that congress may well be doing what it should do all the time - listening to the people not telling the people what to do.

It's called DEMOCRACY. The elected representatives are elected to represent the electorate, not to ignore them once elected.

Now don't get me wrong - I too think the deal is absolutely necessary and we need it ASAP and I was shocked at the vote result last night but if the average voter doesn't want it then that's democracy and those who do want the deal just have to take it on the nose.

Jon.

niw1964 30 Sep 2008 , 11:28am

We're just as much to blame. We elect the idiots in office. We pay the idiots in the financial services sector and WE borrow too much money and live beyond our means. We've all known for years that we cannot continue to live off cheap credit. There's no such thing as a free lunch...an old adage, but true nonetheless.

dunnmt 30 Sep 2008 , 12:04pm

How much of this crisis is the bankers trying to get there hands on taxpayer's money and how much is real. The London Stockmarket has not collapsed, why do you think the Dow jones will. Safeguarding depositers money, within limits is necessary but keeping the bankers in there multi-million pounds salaries is not.

macroeconomix 30 Sep 2008 , 12:08pm

For the health of world economies we need a recession.. it is locked in place and unavoidable. This bill will simply allow the US administration to treat a particular sector with preference to all others and to launder money at the tax payer's expense, propping up asset and stock prices in this way will lead to an inflationary depression. Remember the Weimar republic?

The fairest solution is precisely to let the market do its work. I can only assume that your article is written off the back of emotion as stirred up by the rest of the panicked press, and as a result of GWB's blackmail to pass the bill or else take down people's pension funds, and you also have a vested interest in your HBOS position so therefore talking your book ;)

Our money system and globalisation are to blame, a global fiat money system using the dollar as a world currency and Keynesian economics let by a criminal syndicate is simply not working and is not sustainable.
We should let it die a death and bring back sound money!

elephant888 30 Sep 2008 , 12:25pm

The author appears to be following what is known as Politicians' Logic - which is ironic, since in this case it's politicians that have actually avoided it. It goes like this:

"Something must be done. This is something, therefore we must do it."

But doing nothing is better than doing the wrong thing. The author may want to ask himself if there could be _any_ bailout proposal that he would be opposed to. $7 trillion? $70 trillion? "It needs to be stabilised, and fast", right??

tux222 30 Sep 2008 , 2:02pm

The trouble with politicians, both sides of the Atlantic, is that they are today almost exclusively "career" politicians who have never done a proper job in their lives. The world would be enormously imporoved if no-one was allowed to be elected, who had not at least twenty years real-world experience (i.e. of supporting himself or herself by any means other than working for a political party).

We used to have many un-whippable MPS who went into politics at around 60 for one or two terms, after a lifetime of work, with the intention of serving their constituents. Sadly, the parties have now made sure that nobody gets selected as a candidate, who isn't pliant lobby-fodder, holding few principles other than those he's told to espouse by his party's leadership.

MunroMan 30 Sep 2008 , 2:36pm

Paulson took a typical Goldman Sachs attitude to the problem of looking for the biggest pot of money, Uncle Sam, and throwing it at the problem. There seems to have been little detail and he was perceived as looking after his pals on Wall St. I don't think it is a surprise it was rejected, as will others be if they propose something similar.
Can you imagine Westminster giving Darling similar powers?

pjegeorge 30 Sep 2008 , 2:43pm

The markets are working well, despite government interference. Realistic prices are being put on overvalued assets. This is about solvency and if banks are insolvent, because they are overleveraged, they should go bankrupt like any business. The world won't end and the global economy will recover quicker.

Bartron 30 Sep 2008 , 3:04pm

My fear is about what is done, not what is not done. The people in power seem to be bent on repeating the mistakes that got us into this mess. The media have overused and misused the term "credit crunch". We are encouraged to see the credit crunch as the cause of our problems, when in fact it is our problems that have caused the credit crunch. Oil and food prices haven't risen because of the credit crunch but because of demand. our best steps would be to take action against those aspects which led to the crunch. For me it's irresponsible lending, fat cat bonuses, and too much buy to let. other than that just let the economy put itself right, and make the necessary adjustments (such as house price falls). And if the stock markets are a problem then close them down for a couple of months, and send the staff home (without pay)!
OK the last remark is a bit flippant, but I am a bit annoyed that we have politicians who would be wary about making some of these tough moves, and then propose even more extravagant measures (with our money).
A last comment: people are talking about the risk to any bank savings above £35000. Forgetting about business and other non-personal accounts, if you have that much money you are doing ok and should perhaps put things in a little perspective.

seagull104 30 Sep 2008 , 3:25pm

Any self-respecting Thatcherite has known for the past six years that Domesday was inevitably coming. Now its here thank God there are still enough US politicians who have the sense to avoid the oddly socialist reactions of a Republican president. What a wobbler! Don't mess with the Market.

Blognorton 30 Sep 2008 , 3:45pm

The above postings show that the central issues here are not understood and are being confused by a lot of moralistic irrelevance. When the archbishops (whose salaries are paid for in part by shorting banks) start offering opinions I know the asylum has been taken over by the mad.

The central fact is that the existence of dodgy debt on the banks lending books has created fear to the extent that the banks no longer lend to each other. When that happens the whole system locks up, firms go bankrupt and the ordinary punter loses his job. Serious recession follows. Fixing that is the number one imperative. All else is just so much bull manure.

The only way to resolve that deadlock is to remove the debt from their balance sheets and increase liquidity of capital. That is what Paulsen wants to do and it isn't a new idea. It is what has happened in similar situations before.

Unfortunately the US cabinet is full of arrogant dictators who tried to do this on unacceptable terms that left them totally unaccountable. That is unacceptable. 2/3 of their own party then voted against the president in a mistaken belief that doing so would save their own electoral skins. that is immature behaviour.

At the same time it was noticed that some senior bankers were being removed with their bonuses intact. That too caused anger and frustration. Predictable but unhelpful.If this in't done the people who will suffer will not be any of those who are involved. It will be everyone else who will have to bear a depression much longer then it needs to be.

Remember too this huge some of money does not disappear. The loans were made against assets that have some value, and last time the US governement made a net profit out of the failure of the Savings and Loans collapse. Most of it, and the Northern Rock and B&B will come back in time.
What is needed here is sanity and cool heads not a lot of emotion,panic or populist ignorance. Unfortunately that is what currently there is a huge surplus of.

Cleggy01 01 Oct 2008 , 8:27am

The problem maybe, JT64, that the people who are demanding that this Bill ISN'T passed possibly don't collectively realise or understand the implications of not doing something. They may just think it's another attempt by powerful politicians to shore up the lifestyles and errors of powerful bankers.

Cleggy01 01 Oct 2008 , 8:32am

In fact, I don't claim to know what would happen if this Bill is passed or not...

Zweiblumen 01 Oct 2008 , 1:11pm

This Bill failed at the negotiating table, not in the chamber.

The real problem with the Bill is the lack of quid pro quo. Well, that and the fact that unlimited, anaccountable power in the hands of Hank Paulson was the only thing that scared the senators more than financial meltdown.

jduck1979 02 Oct 2008 , 4:06am

Maybe it's time for another Motley Fool guidebook (from both UK & US versions of the Fool), such as.... "The Motley Fool guide to finances for politicians" (and hand a few copies around) - if the Fool's usually excellant skills at teaching financial knowledge to those who find it mind boggling don't sort 'em out, nothing will.

gordonbanks42 02 Oct 2008 , 2:31pm

"stop governing for votes and start governing for the people" ??? This seems to imply that there is a "right answer" which the politicians should know and implement even if the people are saying they should do something different. Actually I think that is often the case - the electorate doesn't know how to drive a modern economy and what it asks for and what it needs are different things.

How do we provide legislators and the executive with the lattitude to give the electorate what it needs rather than what it asks for (and over timescales long enough for systemic consequences to work themselves out) while maintaining anything resembling democracy?

In a democracy the electorate will tend to get what it deserves, even if that is not what it wants or needs. If the electorate wants something better, it should (i) study economics and history (ii) get real (iii) be more careful what it asks for and (iv) be more choosy who has its permission to represent its interests (e.g. not newspapers, for God's sake). Changing the leadership on its own will not alter the dynamic properties of the system over the longer term.

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