Paulson's Bailout Plan Is Financial Shock And Awe

It's another Monday and there is another government bailout to talk about in the sub prime mortgage mess.

However, this time its the "mother of all bailouts". U.S. Treasury Secretary Henry Paulson has proposed and the Congress will soon approve a taxpayer bailout plan for everyone.

The Paulson bailout plan will use at least 700 billion taxpayer dollars to bail out toxic mortgages from every United States financial institution and even large U.S. banks that are foreign based.

In addition, the Paulson bailout plan saves any money market mutual fund that was in danger of breaking its one dollar net asset value. There were two such money market funds that were in that dubious category last week.

While there can be no doubt at this point that the Paulson bailout plan was necessary to save the financial markets from the abyss, the plan is financial shock and awe to the American taxpayer nevertheless.

The commitment of 700 billion in new taxpayer dollars to save the financial markets along with the cost of the Iraq war and the already huge federal budget deficit projected for next year will dramatically limit the next President's ability to spend any money.

So, any Presidential candidate that still maintains that he is going to cut taxes, provide National Health Insurance or any of the other myriad of vote pandering treats in the election 2008 goody bag is simply not facing fiscal reality. Make no mistake about this, American taxes are going up and the growth of the economy is going to be subdued during the next Presidents first term in office.

It is really remarkable how poorly our elected politicians and 2008 Presidential candidates have handled this financial crisis during the last week. Last Tuesday, Republican John McCain said: "We cannot have the taxpayers bail out AIG or anybody else." By Wednesday, he had completely changed his mind.

How about this strange quote from the Arizona Republican: "the fundamentals of our economy are strong". Unfortunately he said this as one brokerage house had just filed for bankruptcy, another was about to, and the Dow Jones industrial average had tumbled 504 points in a single trading day.

Meanwhile, America is still awaiting the economic plan of Democratic candidate Barack Obama. He has already delayed unveiling his plan twice. I guess at this point, he has just decided to vote "present" on the current financial crisis. It's apparently a pattern of behavior since he voted "present" on 130 different occasions when he was a member of the Illinois State Senate.

The leadership in the Congress was not much better. In the United States Senate, Majority Leader Harry Reid is quoted as saying "no one knows what to do" while in the House Of Representatives, Speaker Nancy Pelosi initially promised to hold hearings on the crisis after the Congressional vacation.

This week both Republicans and Democrats will spend more than 700 billion dollars of taxpayer money and then go home on vacation. In the 2008 election, it will be business as usual as the candidates continue to make campaign promises that they cannot hope to deliver. However, despite the Congressional commitment of a huge amount of taxpayer money and all those campaign promises, this financial crisis is far from over.

A long and deep U.S. recession has now increased in probability. Indeed, defaults on credit card payments could eventually require the Treasury to commit more taxpayer bailout dollars for banks and credit card companies. In addition, a run on hedge funds is very likely and this whole mortgage mess may well spread throughout Europe.

Paulson's bailout plan of 700 billion taxpayer dollars is certainly American financial shock and awe. However, the sobering reality of the plan is that as an economic solution, it may be only phase one.