$700B Plan Rejected: What happened and what to do?

There were plenty of hopefuls waiting in anticipation for the agreement to a $700 Billion rescue package which was perceived as a done deal. Their hopes and the markets crashed on Monday when the news of the opposition winning the vote struck. The good news is this morning as Bush promises that the package is not dead and negotiations are still underway, the market jumped a little. Not enough to be optimistic about the market outlook but it will have to do for this week as the government continues to work out some kind of a market relief action plan.

However, the US contagion has spread to the point where you have to question if there is anything that the government can realistically do to calm the market down. It is hard to put the blame on anyone when people have little idea what to expect or believe anymore. The biggest problem now is that the government is destroying confidence rather than rebuilding in a system that is built on confidence.

Why was the $700 Billion package turned down?

1. The main reason is based on moral grounds. The US democracy system is built on equality and freedom. With freedom, you need to assume the responsibilities involved. Is it fair to ask taxpayers to pay for the mess or failure of the corporations which have exploited the system for profits? Consider that the high executives and CEOs of these mega-corporations are each earning millions to hundreds of millions per year in salaries; do they not have the obligation to save their company?
2. If the government buys the bad debts from the market, it is basically using good money to buy bad money. In addition, it will promote the corporations to rely on the government further tipping the balance between risk and profit.
   
3. Some lawmakers believe that the market is self-sufficient and able to heal itself based on past experience. The fact is that US has always been ahead of the crowd by promoting the next coming bubble as it did the internet and automobile industries which enable the country to recover from recession very quickly.

Few things to note:

1. People invest in the confidence in the US dollar and the belief that US consumers are the end users. Neither is promising at the moment.
   
2. If they have to borrow to pump money into the market, it effectively means that US is printing money and it will adversely affect the US Dollar value. Meanwhile people are flocking to buy more secure assets such as gold, commodities and US government bonds.
   
3. Every month, there are hundreds of thousands of people going out of jobs. Even if any rescue package works, there will be considerable downsizing and retrenchment to reduce cost. So, people going out of jobs coupled with increased personal and country debt has reduced the consumers’ purchasing power. Who is there to push the economy then?
   
4. On Thursday, the temporary ban on short selling in US will be due. It would be interesting to see if it will be extended and how the market responds.