Yesterday the markets sent Congress a message. Today Congress acknowledged receipt. Both political parties have vowed to get a rescue bill passed this week, with President Bush and Senators McCain and Obama in strong support. The stock market recovered with a 485-point gain, and the financial sector led the way. In addition, the FDIC will ask Congress for “the temporary ability to raise deposit insurance limits.” FDIC Chairman Sheila Bair has not specified a limit, although the amount most people expect is $250,000. Nor did she explain what “temporary” means, but it’s hard to imagine that any increase in FDIC protection, once enacted, could ever be rescinded. Not to be outdone, the Securities & Exchange Commission (SEC) joined the Financial Accounting Standards Board (FASB) in issuing additional guidance on fair-value accounting rules. The clarifications allow financial institutions to employ a wider range of tools and practical factors in determining the value of assets when market conditions are turbulent. In particular, banks can use such common sense judgments as the reliability of future cash flows to evaluate loans and securities. In recent months, many financial institutions have been hamstrung by overly rigorous application of accounting rules. Even when the institutions had the ability to carry assets to maturity and good reason to believe they would pay as agreed, they were often forced to take write downs when current market values were difficult to discover. All of these measures have the same goals: to restore necessary confidence in the banking system and get credit pumping again.
The failure of the House of Representatives to pass a rescue bill yesterday has been blamed on just about everyone. Republicans blamed the Democrats for being too partisan. The Democrats blamed the Republicans for not supporting their own President. Personally, I blame the media. “BAILOUT OF WALL STREET!” the newspapers and talking heads screamed. No one, of course, is in favor of bailing out Wall Street. The problem is that Wall Street wasn’t being bailed out; we were, the ordinary homeowners, investors, and yes, taxpayers of America. That was the stock market’s message yesterday. Those Congressmen who claimed to be saving us $700 billion actually cost us more than $1 trillion in lost market value in one day. In a speech today, Federal Reserve Bank of Atlanta President, Dennis Lockhart, made the point succinctly, “A working financial sector matters to us all. Credit is the lifeblood of a modern economy. Illiquid credit markets mean illiquid banks and ultimately illiquid businesses. I don't need to explain to a room full of businesspeople what happens when credit dries up and a business becomes illiquid. Cash becomes king, and cash outlays are reduced. Managers focus on discretionary expenses, and then the biggest categories of cash outflows—salaries and investments. Jobs, and livelihoods, are at stake.”