Wednesday, October 1, 2008

Changing Fortunes for the Bailout

The bailout appears to be gaining momentum on Capitol Hill. The Senate is expected to pass it tonight, and opposition in the House, which just voted it down, is said to be dissipating:
(CBS/AP) The Senate pushed toward passage Wednesday of a $700 billion financial industry bailout, and opposition to the package among House Republican conservatives appeared to be softening as well, thanks partly to a provision to increase insurance for people's deposits.
Still, too many Americans remain unclear on why Washington (and Wall Street) believes it needed. Here's as coherent a justification as I've seen:
One major reason a significant proportion of public opinion is against the rescue plan is the general failure to make the connection between panics in the financial sector and the ordinary lives of everyday people; simply saying that the plan is necessary to prevent (or moderate) a recession smacks too much of “trust me” to be credible.
The connection is that much of the ordinary activity in the real economy relies on credit - think no further than the volume of purchases made using credit cards. (Although banks have been reducing credit limits, there is little risk for now that credit cards will stop working overnight.) And in today’s conditions, when many financial institutions are potential victims of liquidity runs, lending has virtually ground to a halt.
Many businesses rely on short term lending to run their day to day operations. Many items that were once purchased are now leased. That activity is bound to dry up. As companies find that they can't find buyers for their products, they'll begin to lay off more and people. Even those who retain their jobs will stop spending on all but the essentials, and those people who provide other "non-essential" goods an services will lose their jobs, etc., etc.

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