October 3, 2008

With the economy on the brink and elections looming, Congress approved an unprecedented $700 billion government bailout of the battered financial industry on Friday and sent it to President Bush for his certain signature.

The final vote was 263-171 in the House, a comfortable margin that was 58 more votes than the measure garnered in Monday's stunning defeat. The vote capped two weeks of tumult in Congress and on Wall Street, punctuated by daily warnings that the country confronted the gravest economic crisis since the Great Depression if lawmakers failed to act.

Today's vote for the $700 bailout bill has passed after its initial failure in the House on Monday. The Senate has already voted to approve this new package which contained many more add-ons and pork than the earlier failed bill. 218 YES votes were needed to win so it passed comfortably the second time around..

The economy was in serious trouble without this package. But this is just the first step and the economy is still likely going to go into a serious recession that may last a while. I don't think that anyone believes that now that this bill has passed everything is suddenly going to be wine and roses tomorrow. There are still going to be foreclosures by consumers that got in over their heads buying something they really could not afford, or others that were duped into bad mortgages by unscrupuluous lenders. Credit card defaults are still rising. Loan loss reserves are still rising and mroe loans are being defaulted on every day. Unemployment is still rising and jobs are still being lost every day and manufacturing is slowing.

Increasingly skittish employers dropped the ax bigtime in September, chopping payrolls by 159,000. That is more than double the cuts made one month before in August. It was the ninth straight month of job losses. A mind blowing 760,000 jobs have been lost in the U.S. this year so far. We are likely to see more months of job losses before conditions turn around.

The unemployment rate could hit 7 or 7.5 percent by late 2009. If that happens, it would mark the highest since after the 1990-91 recession. Some economists say the jobless rate could rise even more before the situation starts to get better.

Pressure is growing on Federal Reserve Chairman Ben Bernanke to do an about-face and lower a key interest rate in a bid to revive the economy. Many now think that will happen at the Fed's next meeting on Oct. 28-29 or even earlier.

This bill will not be the cure-all for all ills. There are still more bank mergers and failures coming. Most of the activities in the last few weeks have been with the big banks and institutions but the smaller banks and institutions have the same sort of problems and more industry consolidation and shakeout is still ahead. The FDIC insurance limit has been raised to a $250,000 insured deposit limit which should help to calm bank customer's fears.

Strains on Americans are apparent to all of us. The number of consumer bankruptcy filings rose about 29 percent in September from a year ago, the American Bankruptcy Institute reported Friday.

Oil prices are today down to around $94 since it made it 2008 high back in July of around $147. That is off 36% from the July high while gasoline prices have retreated only around 20% during that same time. Oil companies and refiners are sticking it to us right now and making billions in bottom line profits.

Time will tell whether this bailout was the right thing to do or not. What we do know is that to do nothing would have been far worse.