Bail-Out Plan Goes Down And The Market Follows

An amazing thing happened today...

A group of democrats walked away from their leadership in the House of Representatives and joined arms with a group of Republicans who walked away from their leadership in the White House, and they both agreed to vote down the bail-out plan.

Guess what?

We’re still here. Sure, the market sold off hard today but if you had been paying attention to this blog and studied up on options you likely had a few put options in your back pocket to make the it a bit less harrowing.

As we headed into the weekend, we were told that this bill had to be passed if we were to avoid a total collapse of our financial system. Yes, Wachovia joined the list of failed financial institutions. No sooner than it did, they were bought by J.P. Morgan Chase.

Don’t tell anyone, but I am no financial genius. What I know about the markets is earned from many years of investing, studying, and trading. The sum of my experience tells me that no matter how complex, or “creative”, or sophisticated finances get there are those who owe and those to whom it is owed.

The financial institutions that are failing are victims of their own actions. They loaned money to people they knew, or should have known, could not pay that money back under the terms it had been given to them. It was great fun when housing prices were rocketing skyward, but did they really think the party would never end?

Well, it did and the bill has arrived. So, who shall pay it?

On the one hand you have those who made bad loans, guaranteed bad loans, insured bad loans, and invested in bad loans. You also have those folks who took out loans that they knew, or should have known, they could never re-pay.

On the other side of the equation, you have the rest of the American tax base. The folks who go to work, pay their bills, pay their taxes, and struggle to get some of their income into savings and investments.

Who should pay?

Well, the first group can’t pay because they’re broke. The ones who took the loans they can’t re-pay are defaulting on the loans. The ones made, guaranteed, insured, and invested in the bad loans can’t pay because their portfolio of loans has imploded and the real estate they used to secure the loans is worth a lot less than it was when they wrote the paper. No one wants to loan them any more money, either. Why would they? Look at the mess they’ve already made. How could making more loans to that group make things better?

Oh. But, then there is the Federal government...

Let’s bail ‘em out. Let’s take on the $700 billion dollar mess, pick up these unfortunate “victims” and dust them off. We’ll just add that to the already staggering debt this country already owes. After all, it’s not like our generation will ever be able to pay it off. We’ll stick our kids and grand kids with that. Just like we stuck ‘em with the cost of bailing out Fannie and Freddie. Just like we’ll stick ‘em with a bankrupt Social Security and Medicare system.

Has it ever dawned on you that the Federal government is not very good at fixing financial messes? Has it ever occurred to you that the government is much better at creating financial messes?

I say to hell with the bail out plan...

What? But the world will end. Life as we know it will cease to exist! Or will it...

Will the credit markets dry up? Well, I imagine that those who have money to lend will become a bit more careful about lending it. I’m not sure that’s a bad thing, though.

Will the real estate market disintegrate? I’m pretty real estate will survive. There may be a period of time while foreclosure properties contribute to supply and keep prices depressed, but that’s a market economy and since when did we decide that government intervention in real estate markets is good?

The market is already sorting this mess out. Private equity is funding the purchase of assets at the failed institutions. Those asset purchases are being driven by profit motivations. Someone is going to make money from all of this. Those profits will need to be re-invested. That re-investment creates liquidity.

Oh, but the stock market is selling off and retirement accounts are getting hammered. Yep. But, it wasn’t that long ago that everyone was telling us how great 401k plans are and that we need to save and invest and we’ll all have a great future ahead of us.

The reality is that life is uncertain.

Investing, saving, and just surviving from one day to the next are uncertain endeavors. When crisis arises, we tend to run for shelter and look to the government to make it all better. It’s a peculiar response, because when all is said and done we are the ones who fund the government, along with paying our bills and saving for the future.

With that realization, I am quite comfortable having my representative government pass on this bail out plan. The only reason put forth why this bail out is necessary, or even just a good idea, is the notion that without it all else will come undone and our country will plunge into the abyss.

It’s fear mongering.

The real abyss is the debt this nation owes and the additional debt the bail out plan would create for taxpayers to pay-off. That’s the abyss I fear.

Here’s the bail-out plan I favor. Let’s figure out how to bail-out the tax payer. Let’s come up with a plan that eliminates the staggering debt we currently carry. Let’s agree upon a plan that saves our “golden parachute,” formerly known as “The American Dream.” Let’s bail that out.

I think we’ll survive the fall of Wa-Mu, Wachovia, and even Lehman Bros. The markets will bump and grind along, regardless.

What’s all this mean if you’re a trader?

It’s time to grow up children. It’s time to set aside the childhood fantasy of picking the next big winner. It’s time to learn how to manage risk, create a trading plan, and develop the discipline to trade in difficult market environments.

There is no such thing as security any where in this world. There is only opportunity, and despite the current propaganda our financial markets remain one of the greatest sources of opportunity any where in the world.

If you're inclined to take responsibility for your financial future, now is the time to "step up" to the plate and do something to make your future a bit brighter. McCain and Obama aren't going to do it for us.

My friend and trading mentor, Bill Poulos, is one of the guys that helped me "see the light" when it comes to trading. I've learned a lot of valuable lessons from him. If you're willing to study, work hard, and apply the lessons he teaches there is no reason why you can't enjoy a sense of confidence in your future, too.

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