Why The Stock Drop Argument For The Bailout Doesn’t Work.

12 Dec, 2008 by John Hawkins

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One of the arguments that’s being kicked around is that the stock market will take a big hit if the “Big 3” don’t get bridge loans — so, therefore, Bush now has to use TARP money for the loans in order to prop up stock values.

While I would not be surprised to see the stock market take a big hit today because the bailout failed, it would be extraordinarily foolish for the federal government to start throwing around tens of billions of dollars worth of borrowed money based on a short term drop in the stock market.

If you’ll remember, in large part, that’s how they justified the 700 billion dollar bailout. Remember those stories?

Even before the opening bell, Monday looked ugly.

But by the time that bell sounded again on the New York Stock Exchange, six and a half frantic hours later, $1.2 trillion had vanished from the United States stock market.

What had started 24 hours earlier, with a modest sell-off in stock markets in Asia, had turned into Wall Street’s blackest day since the 1987 crash. The broad market, as measured by the Standard & Poor’s 500-stock index, plunged almost 9 percent, its third-biggest decline since World War II. The Dow Jones industrial average fell nearly 778 points, or 6.98 percent, to 10,365.45.

My God! Look at the size of that drop! What was a mere 700 billion dollars in borrowed money compared to 1.2 trillion dollars in stock value?

That was September 29th. Today, almost 2 1/2 months later, the stock market is at $8,761.42. But, wait — how can that possibly be? They passed the bailout! Plus, we’ve committed almost another 8 trillion dollars besides — and stocks have still gone down significantly.

Why? Well, the economy is in the toilet, it’s probably going to get worse before it gets better, and we probably have at least another couple of years of economic woes to go. Additionally, the government is spending money it doesn’t have like there’s no tomorrow, the market is terrified of having a socialist Democrat take over, and the government’s haphazard interference with the market is making it very difficult for companies to know where they stand.

Couple all that with a lot of weak, debt-ridden corporations — (The Big 3 are the front of the line, not the end of the line) and it’s hardly a shock that the stock market is taking a beating.

Granted, it’s tough on a lot of Americans to have stocks plunging like this. Personally, I’ve taken a bath in the market in the last year and I’m sure a lot of other people reading this post have, too. Unfortunately, that’s capitalism. You have up times and you have down times. Of course, that’s nothing anyone likes to hear during the down times, but it’s the reality we have to deal with — and asking the government to privatize profits and socialize the losses in the stock market is a formula for economic disaster.

That being said, this sorry shape of the “Big 3” is tragic, especially for the people of Michigan. However, these automakers have been listing along for decades, slowly but surely becoming less competitive every year, in large part because they’re paying out too much money for wages/benefits to be competitive. Now, they’re up against a wall and we’re in a situation where somebody has to lose. Either the unions, which have cleaned up over the years, have to take a bath or the taxpayers have to take a bath — probably to the tune of over 100 billion dollars — to keep the union members living in the style to which they’ve become accustomed for a few more years. Personally, I wish nobody had to lose, but the reality is that since this isn’t the responsibility of the government or the taxpayers — the union members, as opposed to the taxpayers, deserve to be the ones to “get a haircut” here.

Unfortunately, with the Democrats protecting the unions, the “Big 3” automakers aren’t going to get healthy whether they receive the loans or not and are probably going to continue spiraling downward. That means eventually, the piper is going to have to be paid in the stock market, whether these loans come through or not. That’s why throwing away billions of dollars to forestall an inevitable stock dip would be short term thinking at its worst.