Double Whammy Morning

Faced with the failure of the auto bailout in the United States Senate and the collapse of a $50 billion Ponzi scheme markets plumm... well, they seem to have shrugged. At noon, 12/12/2008, the Dow was down 95.02 points and the Nasdaq was up 5 points.

So that just shows you. It’s not the end of the world. Yet.

Most likely, as long as the financial system holds up—and LIBOR rates are down sharply in the last two days—we can deal with the auto meltdown just fine. That’s what the bankruptcy system is for. You declare Chapter 11, you wipe out the stockholders. You make the bondholders the new owners of the company. You wipe out the labor contracts. And you keep going with special bankruptcy loans.

But why then did we have to bail out the banks? The answer is simple. We can’t let the banks fail because they’d bring down the whole credit system with them. We did a nationwide experiment on that in the 1930s. Banks failed left and right, and depositors lost their life savings. It brought the United States to a standstill and a ten-year Great Depression.

Don’t think you’d like a repeat of that? Then bail out the banks.

That’s not to say that there aren’t lessons to be learned. Lesson One is: Don’t get leveraged up like that. Don’t get leveraged up on home mortgages, or credit default swaps, or government sponsored enterprises like Fannie Mae and Freddie Mac. But that’s a subject for beneficial legislation, if Congress is up for the job.

The interesting part, for me, with the bailout failure in the Senate is that Majority Leader Sen. Harry Reid (D-NV) now proposes to go home for the holidays. Oh really? Can’t be all that urgent, can it.

The murmur you hear is that the Dems did the whole bailout thing as payoff for the United Auto Workers support in the election. And the bailout package failed because eevil Republican senators wouldn’t sign onto a bailout bill unless the UAW bit the bullet on wages and accepted “parity” in 2009.

So the Dems took a dance on the floor with the partner what brung them. But, it looks like the agreement was one dance only. Now the partner could be on their own.

Unless President Bush rushes into the breach.

But Mr. President. It looks like the market has already discounted an auto industry failure. And it looks like it thinks that it’s not the end of the world. So why worry?

Yes. There are all those “high net-worth individuals” who got taken to the cleaners by an accused Ponzi scheme. Oh well.