Markets plummet 7-9% after unexpected rejection of bailout plan by Congress - 29-Sep-2008 - Generational Dynamics

Banks in America and Europe are falling like dominoes, as credit constructor tightens its grip.

As of Monday morning, it was already clear that the promise of a that the "Bailout of the World" (BOTW) plan would solve everyone's problems.

In Europe, bank activity was almost frozen, as interbank lending interest rates (as measured by the TED Spread and the Libor/OIS spread that I mentioned last week) rose to historic highs.

Furthermore, on a weekend when America's Wachovia bank failed and had to be bailed out, European banks seemed to be falling like dominoes, with three banks failures in Europe: Germany's Hypo Real Estate Holding AG had to be bailed out, Britain's Bradford & Bingley was nationalized, and and the Netherlands and Luxembourg partially nationalized Dutch-Belgian banking giant Fortis NV with a $16.4 billion rescue. European stock markets fell 5%.

The big shock of the day came around 1:40 pm, when the votes started coming in from the House of Representatives on the bailout bill, and it became clear that the bill was going to lose. The Dow Industrials index was already down 270 points, but it immediately fell another 350 points within just a few minutes. The index recovered slightly, but then fell several hundred more points in the last few minutes of the trading day.

I've gone into this detail because I want to emphasize the atmosphere of total panic that was pervading the Wall Street atmosphere today.

The market indexes are now 25% from their October, 2007, highs. At some point, the fall in share prices will trigger forced selling, leading to a worldwide panic.

The Bailout of the World plan is, at its bottom, an expensive psychological ploy to "restore confidence in the markets," but it doesn't change the fundamentals enough to make any real difference.

It used to be that the Fed could lower interest rates 1/4% to get a huge psychological boost among investors, but now even the promise of $700 billion doesn't do the trick. Investors have decided, "Fool me once, shame on you; fool me twice, shame on me."

Even so, pundits have been predicting what everyone will do next: There will be another attempt at some point to pass the bailout bill; the Fed will lower interest rates again. These are both quite possible.

Pundits are expecting a continuing bloodbath on Tuesday, but in fact it's equally probably that the stock indexes will rise, possibly by a great deal.

What's going on are two sides of the same coin -- panic buying and panic selling. Both of them are panic, and what's particularly significant of the last few days is that the level of panic, whether up or down, has been increasing.

It's worthwhile to take another look at what happened in 1929. If we look at my Dow Jones historical page, we can see what happened before the 1929 crash, some of which is extracted here:

As you can see, the 1929 crash was not a huge 20-30% drop in one day. There were several days of wild swings over many days, netting sharply down. It's important to remember that the stock market didn't just fall one or two days; it continued to fall for four years, and from 1929-33 stocks had fallen 90%, to 10% of their peak values.

"Is Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System?

No! It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured Creditors of Banks

Read More Here: Link: http://www.rgemonitor.com/ Nouriel Roubini on Sep 28, 2008.

A recent IMF study of 42 systemic banking crises across the world provides evidence on how different crises were resolved. http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf

Government purchase of bad assets was the exception rather than the rule. It was used only in Mexico, Japan, Bolivia, Czech Republic, Jamaica, Malaysia, and Paraguay.

The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.

It is pathetic that Congress did not consult any of the many professional economists that have presented - many on the RGE Monitor Finance blog forum - alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners."

It doesn't make any difference whether they had talked to the "professional economists" or not. Roubini, the IMF, and the others still don't understand what's going on.

This collapse has been in play at least since the dot-com bubble began in 1995. The bubble grew for 13 years, morphing into a real estate bubble and a credit bubble, and now it's going to collapse for many years.

The deflationary spiral is accelerating, and things are getting much worse very quickly. I'm expecting a generational crash (the first since 1929) pretty soon. Forced selling is picking up among hedge funds, and it won't be long before it turns into total panic. So now would not be a good time for anyone to make any monetary commitments.

It's worth remember again that we're waiting for a similar epochal event -- the massive generational panic that will be remembered forever. This must occur at some point. The last one occurred in 1929, and the next one is overdue. Millions or tens of millions of investors around the world will panic and try to sell everything, causing computer systems to crash or be clogged for hours, or perhaps a day or two. This MUST happen, and it might happen this week, next week, or in the weeks that follow, but it seems very close right now.

Generational Dynamics Web Log for 29-Sep-2008
Markets plummet 7-9% after unexpected rejection of bailout plan by Congress

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Generational Dynamics Web Log for 29-Sep-2008 Markets plummet 7-9% after unexpected rejection of bailout plan by Congress

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Generational Dynamics Web Log for 29-Sep-2008
Markets plummet 7-9% after unexpected rejection of bailout plan by Congress