Bank Bailout Bill Implodes

On September 30, 2098, the U.S. House of Representatives rejected the U.S. $700 billion bailout bill. The opponents were concerned that their constituents would see the bill as bailing out Wall Street at the expense of taxpayers. This caused U.S. stock markets to plummet, with the Dow dropping 770 points, the most in any single day. However, it didn't stop there. Global markets panicked, as well:

• The MSCI World Index dropped 6% in one day, the most since its creation in 1970.
• Brazil's Bovespa was halted after dropping 10%.
• The London FTSE dropped 15%.
• Gold soared to over $900 an ounce.
• Oil dropped to $95 a barrel.

To try and restore financial stability, the Federal Reserve doubled its currency swaps with foreign central banks in Europe, England and Japan to $620 billion. The governments of the world are being forced to provide all the liquidity for frozen credit markets.

The meltdown has been caused by banks who are afraid to purchase more bad debt from each other by lending to each other. They are also afraid to disclose their bad debt, because it would lead to a downgrade in their debt rating, which would then lead to a decline in their stock price. This would then lead to their inability to raise capital, resulting in bankruptcy. This fear of disclosure has led to an overall panic, fed by rumor, which has locked up the credit markets.

Without credit market functioning, businesses will not be able to get the capital they need to run their day-to-day business. This could ultimately lead to a shut-down of businesses. Furthermore, it also means no credit for people to buy homes, cars, furniture and consumer electronics.

It is expected that the U.S. Congress will develop a bailout package by the end of the week to reverse this trend. Until then, expect global markets to continue their decline.

This snafu has further damaged the credibility of the U.S. political process throughout the rest of the world. If the bailout passes, it will increase U.S. debt to almost $11 trillion. Both hamper the ability of the U.S. to remain the premier financial center for the global economy. (Source: Bloomberg, Fed Pumps $630 Billion into Financial System, September 29, 2008; Stocks Plunge After Congress Rejects Bailout, September 29, 2008; CNNMoney, Bank bailouts sweep Europe, September 29, 2008)