The DOW is down a couple thousand points now *since* the "bailout" was passed. I was thinking about that today when I realized that, at least in the short term, the bailout probably *is* the problem.
I've seen the "bailout" or "rescue plan" called the "splurge", which is probably a better word; so I'll use that - since it accurately describes throwing money at the problem.
One of the ideas of the splurge is these debt auctions which will essentially set a price on the toxic mortgage assets that banks are holding.
The problem is that the splurge isn't going to happen for six weeks or so. Instead of taking an approach that would have allowed the market to work this out on its own, this forces a period of uncertainty until the auction takes place. I think this puts the banks in a holding pattern until that time. Private equity isn't going to come in and price these assets, like they might have if there hadn't been a splurge passed, until they find out where the government is going to price them.
This is with some partial hindsight now. But it explains the fact that other measures haven't worked in the interim (lowering rates, announcing commercial paper buying, etc.).
If this is true, then when the splurge takes place it might improve things simply because it will remove the uncertainty from the credit market that it helped perpetuate. At that point it will be fixing the problem that it helped cause.
So the pro-government-interventionists will be eager to make the point that the splurge worked, when in fact it may just end up undoing the harm that it caused in the intervening weeks (if we're lucky). Only time will tell.
I would have much rather seen a plan that didn't have the government try to fix the problem by becoming an actor in the market, but instead something that put in place incentives to make the mortgage derivative market liquid again. Removing taxes on future capital gains on mortgage derivatives or something of that ilk.
Anyway, as things are, it seems like the splurge itself may have cooked into that things aren't going to get better in the credit markets until the splurge happens.