Bailout Bill Leaves Markets in Deep Freeze

In physics, Absolute Zero is as cold as it gets. It’s the point at which molecules don’t move any more. It could get none colder. Until recently, the coldest place in the universe (that we know about, anyway) was deep space.

Then along came the Large Hadron Collider (LHC) in Europe. For complicated reasons, you have to keep temperatures very low in a particle accelerator. Just above absolute zero, in fact. The temperature in the LHC is -271 Celsius (-456 Fahrenheit).

There are only two degrees Celsius between the temperature the LHC operates and Absolute Zero. We reckon the credit markets must be in the middle, right about -272 degrees. It’s pretty frigid out there people.

Bloomberg reports that, “The market for commercial paper, short-term borrowing by businesses, suffered the biggest one-week drop on record…The amount of commercial paper outstanding fell by $94.9 billion, or 5.6 percent, during the week ended Oct. 1. ” What does that kind of deep freeze look like? Take a peek…

Commercial Paper Outstanding
Source: Federal Reserve

Global share markets don’t look very convinced the U.S. Senate’s passage of a bailout bill will purge the financial sector of the bad debts which are killing it. Perhaps it’s because the Senate bill was such a joke.

If you haven’t had a chance to go through the bailout bill the Senate passed, don’t cheat yourself. You can find it here.

Those with advanced knowledge of American government will know that the spending bills cannot originate in the Senate. Article 1, Section Seven of that useless piece of paper (the U.S. Constitution) says: “All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.”

This is why the Senate lobotomized a bill already passed by the House. The Senate took a spending bill which had already cleared the House, gutted it as clean as you’d like, and stuffed it full of new spending and tax provisions which the house will vote on tomorrow.

One of the funnier provisions of the Senate bailout bill is Section 503, an “Exemption from excise tax for certain wooden arrows designed for use by children.”

Hooray! Everyone gets the shaft! And it’s tax free!

According to Bloomberg, “Senators attached a provision repealing a 39-cent excise tax on wooden arrows designed for children..The provision…will save manufacturers such as Rose City Archery in Myrtle Point, Oregon, about $200,000 a year.”

And we’re supposed to take the Congress seriously? These are the people in charge of America? They’re the same people who also just lifted the Statutory Debt limit to US$11.3 trillion.

The Law as a concept is worthy of respect. But when bad lawmakers make bad laws, they undermine the whole institution of the Law. That’s what Congress and the President are doing.

It would be funny if it weren’t so serious. The plan, or FrankenTARP as we are now calling it includes restriction on judicial review, a suspension of the normal rules for drafting and debating legislation in front of Congress, and allows for the President and Treasury Secretary to come back as many times as they’d like to get up to US$700 billion “at any one time.”

It’s effectively a down payment on the recapitalisation of the banking system. Once you’ve committed nearly a trillion dollars to a project, it’s a little hard to walk away from isn’t it? And with the other provisions about increasing deposit insurance, renegotiating mortgages, and providing relief to renters, you can see many version of this plan being resubmitted to Congress by President Obama and passing (without debate).

So what do you say? Are you ready for some massive, State-sponsored inflation? It will be very different from what Treasury Secretary Andrew Mellon told Herbert Hoover in 1931. Mellon told Hoover:

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people

The response of the Paulson Treasury Department on the Bernanke Fed is not “liquidate” but “monetize.” They won’t say that of, course. The expansion in Fed credit and the Treasury plan are supposed to be “loans.” We’ll see how that goes. Meanwhile, take a look at the Fed’s latest statistical release.

Federal Reserve Statistical Release
Source: Federal Reserve

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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