In a move that’s shocked stock markets and economists across North America, many U.S. House Republicans and a number of Democrats voted against the US$700 billion bailout bill. With the Dow Jones down nearly 780 points and the S&P/TSX composite index dropping 840 points Monday, the future of America economy—and by extension Canada’s—is unclear.
“If nothing else happens, there will be more pressure in financial markets and they’ll fall further,” says Paul Ferley, assistant chief economist with RBC. “It’s not clear what other tactics there are to relieve the pressure.
“The bailout package was sizeable, it kicked in quickly and would hopefully rid the system of toxic assets,” he adds. “Without it, it’s unclear on how this all shakes out.”
Richard Kelly, TD Bank’s senior economist says shooting down the bailout bill means the U.S. government is now behind the ball. “The idea was that this package would get to the heart of the problem,” he says. “It’s a step back in terms of trying to get a head of the situation.”
Another economist, Benjamin Reitzes from Bank of Montreal, says simply, “It means more uncertainly for the credit markets. Now we just have to wait and see.”
It was expected by pretty much everyone that the bailout package would pass, but with Republicans and Democrats playing politics in an election year and with the U.S. financial woes a confusing topic for the average American, House representatives panicked and voted no by a 228 to 205 margin.
“I don’t know whether the case was made as clearly as it should have been that this was not a bailout for Wall Street; that it is something that would ripple to every house in America,” explains Kelly, sharing his view on why the vote might have failed. “I don’t know whether in a very partisan environment of an election year and with something that is complex, I don’t know whether the plan was all laid out.”
With the markets’ wild drop on Monday, it’s likely investors will panic, but Kelly says the markets are just doing what they do—responding to uncertainty. If a tweaked bailout plan gets presented in the coming days, and there’s already talk of the government preparing a new proposal, it’s possible the markets will turn around.
“Markets are just responding to a tremendous amount of uncertainty right now in a fragile financial system,” he says. “This would have supported the entire financial system and the entire economy. The bailout failure doesn’t increase risk of anything specific, but removes an option for the government to quickly respond.”
“I think it’ll trade off of comments from politicians in Washington,” says Ferley. “If a slightly modified package clears the House then we might see a reversal of some of these losses.”
So what now? Kelly says a new package could come to the house floor, but they’ll need to do it fast, especially with the election just weeks away. “There are all sorts of options at this point,” he says. “If the government can’t get a big package through, maybe they can put through small little things. But, congress was supposed to have ended last Friday so representatives could campaign for elections, so they need to do that. There’s lots of pressure on them.”
Reitzes adds that only the Treasury Department knows what’s going to happen next. “They’ll probably try to rework something, but if that doesn’t work, hopefully they have a backup plan.”