Is democracy the winner here? Clearly, the people have spoken, through their elected representatives, and they’ve said no to the Paulson bailout plan. If that means a market crash, so be it. At 1,145, the S&P is now 27% off its highs, and 5.5% off where it closed on Friday — bad, but not the end of the world. But it wasn’t a stock-market crash which Paulson was trying to prevent. Rather, it was a complete seizing-up of the credit markets.
Bank of America is leading the financials down, falling 15%: the no-shorting rule can’t prevent this kind of price action. And Morgan Stanley, which was rescued last time only by the promise of a bailout, is down 19% today. But many of the other big banks seem to be holding on OK, and even Morgan Stanley, at $20 a share, is still almost double the price it was trading at a couple of weeks ago.
With any luck, what we’re seeing here is the market doing its worst. If we can get through this and the sun rises tomorrow morning, then maybe a more deliberately-designed and less panicked Congress will be able to agree on a fiscal stimulus bill which could prevent a really nasty recession without being seen as bailing out Wall Street’s millionaires.
But if a vicious spiral in the credit markets takes hold without any hope for hundreds of billions of dollars of US government money to come in and stabilize things, that could spell disaster for an economy which needs credit to grow.
There is one other option. The Scandinavian solution, which involves nationalizing banks rather than simply buying up their assets, could conceivably be implemented without legislative approval — after all, it’s already happened, to some extent, with Frannie and AIG. Since the likes of Paul Krugman and Brad DeLong think the Scandinavian solution is a better one anyway, maybe this will all work out OK in the end.
We can but hope. Or, as one reader just emailed me:
What we all ned to do is Pray to our Lord because he is in charge anyway.
I don’t think he’s talking about anybody in Washington.