The Financial Bailout Bill: The Other White Meat

Having read the full text of the Senate's latest financial bailout bill (click here to read it for yourself), I saw one of the biggest problems with our legislature. This bill is so full of pork that only the first 100 pages of the 451 page bill even addresses the economic crisis! I could understand some of the tax incentives that were added in to try to get more conservative votes, and at least have a tangential relationship to the financial situation, but some just strain credibility.

For example, there are provisions giving tax breaks for production and sale of wooden arrows for children. Karim Bardeesy did a good job in the article Bailout Baloney of describing some of these types of these items. Also, check out the New York Post article on this bacon-infested piece of legislation.

There's also another piece of legislation snuck in there that I haven't heard anything about on the news. The Paul Wellstone Mental Health and Addiction Equity Act of 2008 was added in as another earmark (and a huge one at that). I haven't taken the time to really examine that section in detail, except to be able to tell that this has nothing to do with the economic situation. The problem isn't the measure itself, the problem is that this was tacked onto this high-profile bill as an earmark. It should have simply been debated and voted on based on its own merits and not slid into another piece of legislation to sneak it in under the radar. This process has got to stop before it completely destroys our country.

On the Bill Itself:

I'm not a fan of the bailout... I do think that the tax provisions may help the economy somewhat, but the government should not be in the business of buying up troubled assets, even with the provisions that they be unloaded to private investors as soon as possible. This goes way beyond the government's role.

The one piece of the legislation that I whole-heartedly agree with is the FDIC limit increase, except I would have made it permanent, and tied it to inflation. That limit was set way back in 1980, and has not been adjusted for inflation (it would have been around $260,000 by now if it were). This would largely have reduced or removed the psychological effect of troubling news causing runs on the banks.

The other piece I agree with is the controls on golden parachutes for executives when these companies are failing. While I believe that very high executive compensation is completely OK when a company is being run well (meaning the executives are doing a good job and providing value), the execs should not be rewarded for running a company into the ground.

Don't Panic!

The major reason we've seen bank failures and stock price drops is simple:
The panic effect
People hear or read some pundit or "journalist" say that a bank is in financial trouble, and they run out to pull their money out down below the $100,000 limit, so they don't lose it. They are only being prudent, but the trouble is that makes the predictions of the aforementioned "journalist" come true. This run causes the bank to fail because the bank ends up over-extended. If it weren't for the media causing a panic, the bank would likely have been able to recover.

Day Trading

The same thing happens with the stock market. When people hear on the news that "The Dow Jones average dropped X points today," they pull their money out of their investments.. This is a lose-lose scenario, because that both means they take a loss on their investments, and they cause the stock prices to drop further. Now, there are plenty of smart investors who wait for such a thing to happen, watch for the price to bottom out, then buy up as much as they can... Because the market will recover!

Perhaps the thing that is causing many of the issues with the stock market is the advent of day-trading. This whole segment of quick-turnaround investing is not tied to the actual value of a company, but is purely psychological. People try to make small incremental profits throughout the day, often by using the technique of short selling. This allows them, when they see the market is taking a dive, to sell a bunch of stock that they don't own, and then when it bottoms out, to buy back the stock at the lower price. So, if a stock is trading at $100, and they short-sell 1000 shares, then buy it back at the a price of $80 per share, they've made a profit in just a few hours of $20/share (or $20,000). And all the while, they've provided not actual investment capital nor value to the company. It's purely betting on failure.

A real economic recovery plan should have included provisions to ban the practice of short-selling permanently, and provided disincentives to day-trading in general. The stock market would be much less volatile if it weren't so easy to buy and sell stocks (which are supposed to be an investment in the company you've purchased a piece of) based on momentary fluctuations. If that weren't such a profitable "industry", then perhaps that practice would stop and people would instead focus on long-term gains tied to the actual production and performance of the companies they invest in.