Wow, I don't know where to start. Today was one for the history books. The DOW suffered its largest point drop ever as stocks took their biggest fall since 1987.
"Sept. 29 (Bloomberg) -- U.S. stocks plunged and the Standard & Poor's 500 Index tumbled the most since the 1987 crash after the House of Representatives rejected a $700 billion plan to rescue the financial system.
The Dow Jones Industrial Average slid 778 points for its biggest point drop ever as $1.2 trillion in market value was erased from American equities. The MSCI World Index of 23 developed markets slid 6.9 percent, the most in 21 years.
`Unwind Into Chaos'
``There's a real opportunity for this thing to totally unwind into chaos if we can't get some real direction from Washington,'' said Russ Kamp, chief executive officer of Invesco Quantitative Strategies, which manages about $461 billion in New York."
Today was stunning ladies and gentlemen. The drop today of course was a reaction to the failure of the financial rescue plan today in the house. Its becoming clear that this is developing into a battle between Main St. and Wall St. The government is caught in the middle and doesn't have the answer to the problem. Even the experts seem divided on how we can fix this mess.
There are many reasons why this rescue plan failed today. I believe the main reason why it didn't pass was lack of trust. I don't think Congress or Main St. trusts Wall St. I believe many representatives really personally struggled on how to vote today. They already knew by a 300-1 margin that their constituents hated the idea of a Wall St bailout, but on the other hand they also understand that they have a responsibility to protect the country and make tough decisions.
I think when it came down to actually voting yes or no on the bailout, they just couldn't pull the trigger and hand over $700 billion to the same people that created this disaster through deception, fraud and greed.
I don't blame them. In fact, I applaud them. This was a tough decision because they all want to do whats best for the country. I think that at the last second, most realized this wasn't the answer. 160 economists told them this wasn't the answer. Wall St. was down 300 points before the vote was taken, so I don't even think they thought it was the answer.
I must say that I am proud to be an American today because I think Congress did the right thing. Was today painful? Yes. Did I lose money in my 410k? Yes. However, I think todays vote was more then just about trying to fix a financial crisis. This was a vote on principles, sending Wall St. a message, and doing the right thing for the future of this country.
No one wants to go through a recession. I dread the idea of going through one. However, we must go through one after periods of euphoria. It cleanses the system of excesses and greed. If we had allowed the bailout to pass, our children would have been stuck with the tab.
Where do we go from here?
This is the tough question. The Fed has a major problem with its balance sheet now that the Treasury isn't getting the $700 billion. Take a look at how the discount window has allowed the Fed's balance sheet to start looking like a garbage dump:
As you can seethe Fed is running out of options. All of these toxic mortgages that they took at the discount window have deeply contaminated their balance sheet. The Fed only has $800 billion at their disposal. More than half of it is now filled with the crap sandwiches from our financial system.
The only way we get out of this is through creating transparency within our financials. This will restore trust and get the banks back lending with one another. The second part of the solution is to simply allow the continued deleveraging of our system down to levels of affordability.
Americans do not make enough money to own a $600,000 house. We can't afford to spend $40,000 a year to send each child to college. We can't afford to have two $35,000 cars in the driveway.
The cost of simply living got completely out of hand! We could no longer afford to live without credit cards. We leveraged up the system as high as we could, and now we are facing the consequences of doing so. We must allow the system to revert to the mean no matter how painful it is to our financial system.
Trying to stabilize home prices at unaffordable levels fixes nothing. It just temporarily numbs the pain. You cannot prevent a bubble from bursting especially when its already started.
I compare this financial "innovation" era to the baseball "steroid" era of the 1990's. We all watched in awe in the 90's as Barry Bonds, Mark McGuire, and Sammy Sosa all broke Roger Maris's home run mark. Average players hit 30 home runs because everyone was taking steroids. Baseball's popularity soared as all of the players "leveraged" up by taking shots of the "juice".
After the euphoria wore off, questions started to be asked like "how did all of those players all of the sudden hit 60-70 homeruns?". Rumors started to swirl, books accusing different players of doping were written. BALCO labs was then discovered which provided evidence and admissions of guilt by its owners. The courts then began getting involved. Criminal charges forced players to testify under oath about their usage of steroids. Lawsuits then ensued. Sound familiar yet?
Congress then got involved and before you knew it "POOF!" the steroid era was over. The "deleveraging" of baseball then ensued via drug testing and regulations.
Baseball took a lot of heat for tainting the game. Players were booed and released as their skills diminished as the "leverage" of steroids was gone.
There were some that questioned if baseball would ever gain back their status as America's favorite pastime. Guess What? Over time it did. The game survived and got back to basics. In fact, the home run total this year in baseball was the lowest since 1993. The Red Sox broke the Babe Ruths curse in 2004 and the game hasn't looked back since.
We can recover just like baseball did. It will be done in the same way. We will come up with sound legislation that will regulate our financial game just like baseball found a way to regulate their game.
We all must realize that its going to be very painful as we get back to basics. Many banks will fail, 401k's will shrink, and many pigmen will end up going to jail. However, this too shall pass.
I think we took an important step forward today by shooting down legislation that would have bailed out a bunch of fraudulent bankers. The pigmen kicked and screamed on CNBC warning of financial Armageddon and another Great Depression. I thought the market behaved pretty well today given the doomsday scenario that we were told would happen if this legislation wasn't approved.
I didn't see Armageddon today did you? Maybe this will be like Y2K. All bark and no bite.