MONTREAL - Hyped by its backers as the last thing preventing the entire United
States economy from sinking into a black hole of immeasurable depth and
torment, US Treasury Secretary Henry Paulson's multi-billion
dollar financial rescue bill was passed by the Senate on Wednesday
evening - and those Asian markets that were open barely blinked.
The Senate passed the financial industry bailout, increased to US$810
billion from an earlier $700 billion measure, by the margin of 74 to 25.
This was possible only through a parliamentary artifice. By the US
constitution, such bills must originate in the House of Representatives, which
had defeated such a bill earlier in the week.
The Senate, however, has the right to take up bills already pending before the
House. So the Senate chose a popular bill that will provide better health
insurance coverage to those with mental
illness, then proposed to amend it by inserting the bill that the House had
defeated on Monday, with a few modifications. Separate votes were then held on
the motion to amend and the motion to pass.
Asian markets, which were open at the time, barely noticed. It seems the report
of the biggest decline in US car sales in 17 years had more of an effect on the
Asian markets, along with still-falling commodity prices. The Senate action, if
anything, appeared merely to increase doubts that any action by Washington will
be able to steer the global economy away from a worsening slowdown.
Before the vote, Asian markets were mostly up between 0.5% and 1.5%; soon after
the vote, they were mostly even; and hours after, they were mostly down between
0.5% and 1.5%.
Even the Nikkei 225, a bellwether highly sensitive to the Wall Street financial
community, barely hiccuped as it meandered generally lower to close about 2%
down. To take another example, Seoul was rising modestly from the start, up
slightly over 1% when the news of the vote came in, and it then reversed course
for the rest of the day, looking to close out down roughly 1.5%.
Similar movements were observable in most other exchanges, so that one can
conclude a general pattern. With the exception of Hong Kong and New Zealand,
one can observe on the charts of all Asian exchanges open at the time a
reversal downward of a positive open. Markets in Malaysia, Indonesia, India and
Pakistan are closed for holidays, and China is closed all week.
Indeed, the narrative that the markets declined so precipitously on Monday in
response to the House of Representatives' rejection of the bailout is a
convenient journalistic fiction. That vote occurred in the early afternoon, and
the markets in North America had already begun, since the opening bell that
morning, to drop like a rock. Had the bill been approved, it is likely the
headlines would have read something like, "Markets implode despite bailout."
The Senate bill differs from the one rejected by the House in extending $110
billion in tax breaks for middle-income taxpayers and for businesses, and in
proposing to raise to $250,000 from $100,000 the cap on federal deposit
insurance - the government guarantee on savings and checking accounts if the
holding institution goes bankrupt, as it is feared many regional and smaller
banks may do in the near future. Also as a vote-getting maneuver, $8 billion in
tax relief was added to benefit victims of natural disasters in the Midwest,
Texas and Louisiana. A new element in the mix is also a decision by the
Securities and Exchange Commission on Tuesday to relax "mark to market" rules.
The bill will next be presented again in the House of Representatives, where it
was defeated on Monday by 228 to 205, prospectively for a Friday vote. It is
very possible that the new formula will induce enough Republicans who had
opposed the original bill to support the new version, even though some
conservative Democrats may object that the bill further increases the budget
deficit because it does not indicate how revenue will be raised to compensate
for the new tax cuts.
From the fact that the markets began to decline on Monday before the result of
the House vote was known, and that they did not much react to the Senate
passage of the modified bill, it is reasonable to conclude that on Friday the
markets will continue to do what they wish, regardless of what the House of
Representatives does or does not do, and regardless of the "explanatory"
narratives constructed by financial journalists after the fact.
R M Cutler (http://www.robertcutler.org) is a Canadian
international affairs specialist.
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