Insights & Advice


Pass the Plan

Both sides of the Congressional aisle agreed on a frame work for the multi- billion dollar financial markets rescue on Thursday afternoon. There will be further haggling on the details but it looks as if the deal will pass–it better.

That’s not to say I’m happy about it. It ticks me off that we have to pay for the mistakes of a bunch of greedy bankers and brokers but self-preservation dictates that we go along with the plan. As for the add-ons that Congress is proposing, the more the merrier. After all, the plan will be costing each of us over $2,000 so we might as well have some of that money go to bailing out middle-class Americans.

Frankly, I was a bit surprised at first by the number of Americans that are against this bail-out. In discussing the situation with my wife, who is one of the most intelligent, intuitive people I know, it quickly dawned on me why.

“So why should we bail out a bunch of blood sucking banks,” she demanded.
“Because if we don’t you won’t be able to get a car loan, a mortgage or maybe even a job in six months,” I said.

She looked at me cynically. In order to justify my statement, I knew I would need to explain the arcane business of credit swaps, derivatives and CDS defaults. I began but stopped, tongue -tied. I realized it was just too much to explain or absorb without a deep background in business and an hour of discussion.

Instead, I boiled it down to this: the lifeblood of business is lending– overnight, weekly, monthly or yearly loans–is what provides everything we produce, consume and save. Without lending, everything stops. Last week the world stopped. Lenders were afraid to lend. Borrowers, no matter how credit worthy, could not borrow. If this credit freeze continued it would have ushered in a huge recession if not an outright second depression.

There will be ramifications however. I believe the entire free markets model of the last fifty years will be re-examined while the unquestioned economic leadership of the United States since the end of World War II may now be in doubt. An over-haul and up-dating of regulation is certain. What impact this will have on our financial institutions and the way we do business going forward will provide additional challenges and opportunities. One thing is for sure: it will be a brave new world for all of us.

Posted in Macroeconomics, The Retired Advisor