Yesterday, the Dow fell 778 because the bailout bill didn't pass the House vote.
Today, the Dow rose almost 500 because there is confidence that on Thursday there will be a bailout bill that passes through Congress.
If Congress doesn't pass a bill and it fails in the House again, the Dow will fall 1000 points. That is no joke - I am serious.
That said, the current bailout bill is a disaster for American taxpayers. Essentially, the Treasury Secretary will have power to do as he pleases with $250 billion. Another $100 billion will be available if the President requests it by a simple letter to Congress. Then, another $350 billion will be appropriated if there is progress that can be shown to Congress. So at a minimum, $350 billion will be under the control of Bush and Paulson - a terrible idea on the face of it. Paulson will be able to bail out foreign banks - and I guarantee that he will. This bill does virtually nothing for individual taxpayers - it is literally a bailout plan for big institutions (including foreign financial firms).
If we want a real bailout there needs to be a couple of things added in.
1. Bankruptcy laws need to be changed to allow homeowners the option to go into bankruptcy more easily so that judges will have the power to adjust individual home loan mortgage rates. We need to keep more folks into their homes.
2. We need to create a Consumer Protection-type Agency for banking fraud and predatory lenders. We need to create an agency that has the power to prosecute unethical and illegal actions on the part of lenders and mortgage loan firms.
3. We need to regulate the mortgage backed securities and credit default swaps. These are largely unregulated derivative finacial products that were created by "smart" bankers and Wall Street investment houses to pump up profits. This is the root cause for the possible destruction of the worldwide banking institutions.
4. We need to recapitalize (i.e., appropriate more money) for the FDIC. There are going to be banking failures and we need to make sure that the FDIC has money.
5. Obama's proposal to increase the FDIC insured amount from $100,000 to $250,000 should be passed. This will allow investors to put more money into banks which will allow them to have more cash reserves to meet required reserve amounts.
6. Finally, we need to create a tax on all Wall Street transactions. Putting a 1/4 percent tax on all transactions would bring tens of billions of dollars into the U.S. treasury. This money is the money that will be needed to fund FDIC and other funds that will be used to bailout Wall Street firms.
That's it! We have to allow market forces to squeeze out the weakest financial institutions. Then, for the surviving firms it is likely that there will continue to be tight capital and credit will be tough to come by. The government may very well have to recapitalize smaller and mid-size banks to pick up the credit slack. For any recapitalization, the U.S. government should pump cash in exchange for equity in the form of preferred stock. This way, in 5-10 years, that equity can be sold on the open market for a profit (hopefully).
In reality, Congress is going to pass a slightly modified version of the current bailout bill - it is a mistake but it will likely be passed. Then, next year, we will be trying to figure out how to solve the same problems but we will be hundreds of billions of dollars poorer.