One of my favorite commenters, Not Brian, writes cogently and points the way to something other than print Treasuries thinking in this thread. I’m reposting the full text here because you should read the whole thing:
The market is a short term (down to the second when open) barometer of the price one party will pay for another for a share of a company.
Today’s fast fall in stock prices may be largely due to the reaction to the bailout failure, but if it was not this drop today, it would be other days. Even if the bailout succeeds, it helps banks and will increase short term liquidity. That does not solve the problem.
We have had earnings driven by people becoming heavily indebted. All this excess cash was dumped into the economy. Unless you believe that once the credit markets get settled out that banks will take the same risks, and that houses will increase in value and we will get back to the some liquidity as today then you have to realize there will be less money out there to spend in the economy. Than results in lower earnings.
The market had been priced like the boom was going to go on forever. It needs to come down. Paying banks for having been irresponsible will not help. Bailing out derivatives that will have NO VALUE in a severe recession is not an answer.
Economic cleansing is the only way for it to work.
I could see an an argument for putting the $700Bln into infrastructure (stimulate employment and invest in the future) or for some form of assistance to homeowners designed to help them improve their equity position in their home, but a blank check to the banks is insane. It is a giveaway. It is a crime.
I work for a big FI, it would likely benefit me directly for this to go through. It should not.
People who believe that the stock market will be harmed by this are crazy, it is the tail wagging the dog. People are getting out of stocks because they (and their risk) are not worth what they are priced at, not because the bailout failed. The DJIA is down from 14K… did it lose the first 25% over a year because of anticipation of the bailout not passing? No, because it is over valued. The market needs to settle out, it does not need to be supported.
There is no doubt that something serious is going on here. There is also no doubt that no one has spent any real time really talking about the contours of this problem or what alternate solutions might be or what the real pain might look like. Just because Paulson — many months too late, mind you — decided that he simply could not nationalize everything and needed broad power, authority and money to make it all better doesn’t mean that you always have to conduct the conversation on Paulson’s terms.