It's the Economy Stupid

If you remember James Carville's famous line- It's the economy, stupid. Carville used that to keep the Governor Clinton on message against President George H. W. Bush. At that point, the economy was in a recession. G H W Bush didn't want to admit that the economy was in a recession. He thought everything was going fine. It was obvious to everyone else that it was not.

Unfortunately I agree with Marc Farber in saying that the bailout plan will fail. His thoughts on it are here. The fundamentals of this plan are flawed. We're going to essentially just print more money in order to back this. I think a big reason for this problem is the fact that there was actually nothing backing a lot of the poor lending decisions made by banks, meaning they didn't actually have enough assets to cover everything if things defaulted (or went bad). They were supposed to take out insurance on this, and a lot of them did, but those insurance policies weren't backed by anything. All of this was essentially done with Monopoly money.

If I understand what I heard this morning correctly, the FDIC is increasing it's insurance limits to restore peoples confidence. It's also insuring some of this bank debt. Guess what, it has nothing but the US Government behind it, so basically, we're in the same boat. There will be this insurance, but it is meaningless because not everyone can actually cash in if it should all fail.

Wall Street has been compared to Las Vegas by John McCain. Unfortunately, Las Vegas is better regulated. As anyone who saw Oceans Eleven or the TV Show Las Vegas casinos must have enough cash on hand in order to cover all bets on the floor and all chips that are out. The money can't be at the bank. It can't be in investments. It has to be on the physical premises of the casino. A casino can't simply make more chips if it needs to cover something. There has to be something behind the chips.

Perhaps Wall Street can learn something from Vegas.