From Panic to Fear

The TARP bailout bill's passage removed the element of abject panic from the marketplace. 700B dollars will be borrowed/printed and used to provide an alternative - because other hilarious, invisible banks are also paying 50-60c on the dollar - market for mortgage-backed securities.

This bill was passed under the presumption that removing mortgage-backed assets from these banks would invite private and foreign investment, as well as prevent wealthy investors from completing a devastating run on the bank that has paralyzed lending. I would say neither scenario is guaranteed by the bill, but it sends a strong signal to international money and credit markets that the US is prepared to dilute owners of Treasury securities to bail out domestic interests. As they should be. Much has been made of foreign participation in the value of the USD, but ultimately the first interest of the Treasury should be to safeguard the safety of the tax base. Which is, substantially, the wealthy and their assets.

TARP ends the panic, but not the fear. Banks still aren't going to be lending at 2006 rates anytime soon, if ever again. That has major consequences for businesses - without a steady diet of commercial paper, they will need to be more liquid to maintain daily operations. That means that corporations will be keeping more cash on hand and less inventory, staff, or expansion capital is available.

It also has dire consequences for industries that float substantial debt or equity issuances to operate, notably in the media, technology, and private equity spheres. Obtaining investment capital is a much higher hurdle today than it was yesterday. The "long tail" of the equity and debt markets, small companies looking for a shot, will be largely consumed as banks focus on stable, less-risky relationships with established firms; the unhappy consequence is fewer Google-type companies sprouting out of sparse capital nutrients. Of course, it also means fewer BananaBread.com's.

The overarching theme, then, is one of limited domestic growth potential in the near term. Globally. The cycle of wealth creation is on a trending down, which means more redistributive philosophies taking root politically. The trickling down will need to be upgraded to more of a pouring or flooding sensation for the eternally growing earnings expectations of the middle class to be met. Do you think anyone sees this and thinks THEY'RE affected? Just look at all the "time preference" credit card spending taking place.