The nosedive anticipated by bailout advocates hasn’t happened. As of this morning (Thursday, September 30th), the DOW is up around 2.5 percent, with the NASDAQ and the S&P 500 posting similar gains, recovering much of the territory they lost yesterday. This is due in part to investors trying to snap up bargains and other short-term reactions, but what if the bailout defeat is eliciting a positive reaction in certain quarters?
The scenario would go something like this:
The world economy is heavily based on the dollar and the U.S. economy. What’s bad for one is bad for the other. At last the U.S. government (in the person of the House of Representatives) is showing some backbone about standing up to endless borrowing by the government, which has reversed the surplus that existed prior to the Bush administration with a colossal deficit that has undermined the dollar and Americans’ purchasing power along with it.
Unfortunately, it is unlikely the coalition of free-market Republicans and progressive Democrats that has defeated the bill will hold together and stand up to the immense political, media, and economic pressure that is being brought to bear to bring them into line, so we will probably get a new bailout bill soon. But it will be weaker and cheaper, representing less of a drain on the Treasury and ultimately on the taxpayer – and on world investors. The rebellion in the House may therefore be a sign that the U.S. will is turning against ever-higher deficits, with the consequences palliated by ever-higher spending and, you guessed it, ever-higher deficits – that economic sanity has begun to return to the U.S. even before the departure of the Bush administration. It would be not a moment too soon.
This, at least, is how many sophisticated investors are going to view the defeat of the bailout plan.
So there may be a silver lining to the defeat of the bailout.