Emergency Titanic Stabilization Act of 2008

Earlier this afternoon the Emergency Economic Stabilization Act of 2008 passed through the House (263-171) and was signed into law by G-Dub shortly after. While there are many provisions within the 450 page bill that are aimed to help stabilize the economy (I'd like to think so at least...), I'd like to focus mainly on topics relating directly to the $700 billion dollar bailout provisions in the bill.

Q: The bailout passed.... now what?

A: There is still a significant amount of work done. The Treasury and Federal Reserve have been given the tools and authority they need to start tackling this economic crisis head on. While we know that the $700 billion will go towards removing the mortgage backed securities from the market, it is still to be seen how exactly this process will take place, and how the securities will be priced when the government purchases them.

Q: Isn't all of that included in the bill?

A: Not quite. The bill set guidelines, much like a manager delegates a task to an employee, but at the same time gives them boundaries to work within. In comparison, this is opposed to having your boss micromanage everything you do, when in fact he is a complete moron who has no clue what is going on.  

Q: You said previously that passing the bailout would instill confidence back into the economy, yet today the DJIA fell 157.47 points...

A: Part of this is due to questions that investors still have about how the Treasury and Fed will go about buying/pricing the mortgage backed securities in the market. When those questions are answered in the coming weeks investors should finally start to exhale.

The other part of this is that over the last few weeks the main economic focus has been the bailout, and people have somewhat forgotten the other economic indicators that, across the board, are in the red right now. 

While many of these poorly performing economic indicators can be traced back to the US financial crisis, many have reached the point where they have become so significant that going back and removing the mortgage backed securities from the equation won't just fix them overnight.

Q: Could you give an example of an economic indicator?

A: Unemployment is a big one.  In September alone, over 159,000 jobs were lost in the US due to business trying to cut back on expenses and tighten their belts.  

If you follow the footsteps... the mortgage backed security fiasco resulted in bank failures, which caused lending to slow down, meaning businesses found it harder to borrow and consumers were finding it more difficult to buy things on credit.  This chain of events led to many businesses not reaching their revenue targets, causing them to lay people off.

Q: When is the Economy going to start moving forward again?

A: It could take a while.  In the example above, even if all of the mortgage backed securities were removed from the equation overnight, the people who lost their jobs due to the economic slowdown wouldn't just magically be rehired at the snap of a finger.

Removing the mortgage backed securities from the situation will help stabilize many financial institutions.  Slowly, banks will then start to lend money again, and as confidence improves, consumers will start to feel more comfortable borrowing money to buy things.  Eventually, with consumer spending increasing, business will start to hit their revenue goals and they will start to grow.  In order to do so, they will need to borrow money and hire more employees. Those people, who now have jobs, will then spend then their money and the whole cycle will continue, eventually putting our economy back on the growth track.

Q: Oh, so it's like a domino effect and the government buying the mortgage backed securities is just the first of many dominoes. Right?

A:  Kinda... except that in the Economic World, gravity does not cause things to fall at 9.8 meters/second².  Instead, things in the Economic World fall at 9.8 meters/month².  

Disclaimer: All other applications relating to gravity are the same in the Economic World as they are on planet Earth.

Q: So... are you saying that it will just take a few months to get the Economy back to where it was a year ago?

A: Not really.  How about this... Imagine that the economy is large seagoing vessel.  For fun, lets just call it the Titanic.  Also, lets rename mortgage backed securities icebergs, mainly because I'm tired of typing out mortgage backed securities so many times.

One day the Titanic is cruising along when suddenly it hits an iceberg.  This puts a huge hole in the Titanic and it starts to sink.  Luckily, the Coast Guard (i.e. US Government) is in the area and is able to come to the Titanic's aid in the form of 700 billion mini pumps to help bailout the water that is pouring into the ship and causing it to sink.

Seeing as how there are only a handful of people who know how to setup the mini pumps, they can only turn on 50 billion pumps every hour.  As a result, the Titanic continues to sink, even though water is being pumped out.

Eventually, enough pumps will be turned on to a point where the Titanic will stop sinking, and the Titanic will start to float again.  At that point, the hole in ships hull will be patched up, the mini pumps can be returned, and the Titanic can continue on its merry way.

Q: Ok, I think I get your drift.

A:  Good, because I don't think I have the energy to explain...

Q: Wait a second... what happens to the people on this imaginary vessel called the Titanic?

A: ...zzz...ZZZ...zzz...

-dunkie