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Alert: This is unscientific, but then again, neither is the stuff being done to the economy.

On September 20th, 2008, we were warned by the Treasury Secretary that failure to enact bailout legislation would lead to dire consequences – particularly if the legislation was not approved quickly and as proposed. After a flirt with reason, Congress did the expected on October 3 and passed the bill.

Look at what has happened since to three indicators:

Home Prices: fell by 2% in October, fell by another 2% in November, and fell by another 2% in December. That is a 6% decline nationwide in just 3 months. Remember that home prices throughout history have never fallen that much in a single year. If you look at the Fed’s Flow of Funds data, you can see that when the bill passed, the value of real estate in the US was approximately $21.4 trillion. So, a decline of 6% in just three months is a loss of $1.28 trillion of real estate value.

Stock Equity: see the following chart. On October 3, the S&P 500 closed at 1,099.23. Today it stands at 712.87. That’s only a 35% decline in a three month period. Take a guess at how large the single worst year of equity performance has been, and how that 35% compares to it. Again from the flow of funds, the total value of household investments in the stock market and mutual fund shares (not all equity but I am undercounting nonetheless) was $11.45 trillion. So, a decline of 35% in just three months is a loss of $4 trillion in equity value.


Bank Failures: In the 14 months from the start of the credit crisis until the bailout passed, we see that 14 banks were placed in FDIC receivership (i.e. they failed). In the 5 months since the rescue package, 29 banks have been placed in FDIC receivership. And most of the toxic stuff that seems to be causing problems still sits on the balance sheets of the most troubled banks.

Now, I am not sure these real estate and equity losses are to be bemoaned – those values could have been inflated to begin with. The point is however that the bailout was sold to us as a way of preventing disaster.

Phew! Just imagine what would have happened if we had not taken swift and decisive action. I also wonder what would be the government’s definition of “disaster”? They seem to use such a term at their own convenience depending on what they need us to believe. To justify past programs, they will say that the above is not a disaster. To justify future spending, they get to say that it is (listen to the state of the union again).

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