Tuesday, September 30, 2008

Another letter to Congressman

I commend you for voting for the bailout yesterday.

I am disappointed at the stock market rise today (almost 500 points on the Dow), which essentially was Wall Street saying, “We don’t need no stupid bailout.” I think, though, that if the experts think there is even a 25% chance of a serious recession/depression, then the bailout is probably worth it.

I have become concerned about a new issue: bank size. With their recent acquisitions, properly done to help the economy in this crisis, several more banks are becoming “too big to fail,” as AIG was. JP Morgan Chase, CitiBank, and Bank of America have all swallowed up large, troubled banks, thus pushing themselves into the “too big to fail” category. Meanwhile, Wall Street darling Goldman Sachs has switched from being an investment bank to an ordinary commercial bank. Once this crisis is over, the government should look at the antitrust implications of these mergers, perhaps a partial revival of Glass-Steagall, or some other approach to limit the risk of these huge banks getting into trouble.

People say that the stock market is not a good indicator of the current problem with the economy, which is the credit market. However, the problem with the credit markets freezing up is that they might produce a recession/depression. By going up 500 points today, Wall Street is saying it expects continued good times, not a recession. One standard for judging a reasonable stock price is the price/earnings ratio. If earnings go down, then the price (and the Dow) should go down. Wall Street is saying that even if there is no bailout, it does not expect earnings to go down. That view certainly supports those who voted against the bailout.

I think we are fortunate to have experienced hands like Paulson and Bernanke at the helm of our economy, and if they still strongly support a bailout, then I say do it, although at the moment it seems to go against the majority opinion on Wall Street as well as Main Street.

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