Why the bailout’s failure was a good thing

Everyone’s dancing and cheering now that the bailout has been rejected. So, as Ice-T used to say, “Bust the cork on the Moët!” (image via Flickr).

The market’s up 500 points and all is well and swell. The guys over at Lombard Street Research certainly are dancing in the aisles. Here’s what Charles Dumas of Lombard had to say about the bailout’s failure at Barron’s Magazine.

U.S. Congress struck a blow for freedom yesterday, giving the lie to its critics on Wall Street and the administration, who have shown a far weaker grasp of principle.

My colleague Brian Reading argued for a buyout rather than a bailout a few days ago, and that seems to be what is happening. The disposal of problems by existing well-tried systems is adequate to the situation, e.g., the U.S. Federal Deposit Insurance Corp. with Citigroup.

The Irish addressed the true issue directly by simply guaranteeing all deposits. Let the shares do what they want.

No more loans? Oh dear! Maybe, in a crisis caused by grossly excessive private-sector debt loads, that is exactly what is needed. It reminds one of our own Tony Blair blathering on about the need for new laws to curb terrorism, while his then Chancellor, Gordon Brown, was busily restraining funds for the police and the Courts.

We do not need headline-grabbing initiatives, we need good administration. Per my note yesterday, the U.S. banking system is mostly not broke — it can be fixed without too much drama. Other countries are only marginally involved.

This last point was highlighted by Hong Kong today. The Hang Seng opened down 5.5% and ended up on the day. Sometime during the day investors woke up. In London, the FTSE-100 opened down 3% and was then up, now down a touch. Yet Britain is certainly closer to the eye of the storm than Hong Kong. Why are they not tanking? Because they are cheap, that’s why! The S&P is (oddly) still quite pricey, on a trailing, special-charges-adjusted price/earnings multiple of over 13 times. The Hang Seng is at 11 times, the FTSE and the main Economic and Monetary Union indices at under nine times.

Huge problems are already overdiscounted, including the fact that Americans will not only not be borrowing for a while, but actually spending less than their income. It’s called saving. Maybe we will have a recession. Nobody has actually forecast one any worse than 1990’s — compared to 1980-1982 or 1974-1975 this is minor, as is the market disruption. And comparisons with the 1930s are ridiculous.

It is true that Messrs. [Treasury Secretary Henry] Paulson and [Federal Reserve Chairman Ben] Bernanke are part of the problem, with their gross neglect of contingency planning followed by attempted blackmail of the Congress. But even if they have not (yet) done the decent thing and resigned, stocks are probably close to the bottom of this downcycle.

But before we get all giddy and goofy on our uncorked champagne, I think you better read this post by Yves Smith at Naked Capitalism. This one ain’t over yet. Let’s just wait and see what happens.

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Sources
Why the Bailout Failure Was Good – Barron’s
An Assessment of Bailout Bill Options from a Former Congressional Staffer – Naked Capitalism