Bottom line: Bailouts will waste our savings and remaining credit, and exacerbate the flight of capital and talent from the US.

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I was extremely surprised on Monday when the House rejected the first version of the Crime of ‘08, but I remain certain that an essentially identical bill will become law. When it does, maybe as early as the end of this week, any ensuing rally (and there is no guarantee that a rally will occur) will last a few weeks at most and lead to a very powerful decline as the reality of the depression sinks in this winter. (Obama’s inauguration should be another huge disappointment, just more false hope to be sold.)

The bailout will cost the economy jobs because it is a transfer of savings from intelligent, prudent hands that are likely to deploy it productively to those that create nothing but distortions in the marketplace. The financial scamsters have balance sheets in such horrible shape that it could take up to $5 trillion to recapitalize them, so it is a certainty that this $700 billion is just a first installment to keep the lights on, but not enough to enable them to start taking risks again.

You can lead an investor to credit, but you can’t make him borrow.

On the demand side of the credit equation, the citizenry is fed up with debt. People are saddled with enough of it already, and with their homes and investments falling in price, they feel compelled to save, not borrow. Anyone willing to take a consumer loan right now is the most reckless sort of borrower and should learn to live on earnings alone. Smart car shoppers pay cash, and smart house shoppers are biding their time. It is a bad policy to finance consumption anyway, including home purchases. What’s wrong with renting and saving up?

Many companies have a need for short-term funding, but this is just to put out fires, not to invest in productive capacity. Interest rates on those loans should be high in order to justify the risk of supporting businesses that might be dependent on a bubble economy and therefore deserve to fail. The short-term commercial money market got way out of hand in recent years and contributed to a lot of wasteful expansion, so it is healthy for it to contract.

Today’s ISM numbers are just a taste of what is to come. The industrial sector will need to scale down massively because it expanded too much during the boom. Responsible executives are in no mood to borrow and build. It won’t do any good to offer them even extremely low interest rates because if they invest right now it will be hard for them to generate a positive return.

Companies will start to invest again when the contraction runs its course, when assets and labor are attractively priced and executives perceive a resuscitation in demand. There is nothing the government can do to speed along this process but get out of the way and let the reorganization take place.

Beanie Baby economy.

Think of the economy as a large corporate conglomerate with lines of business in a dozen sectors from Beanie Babies to soybean milling. The company has a line of credit at its disposal, in case it wants to take advantage of opportunities.

The Beanie Baby line was generating great profits until two years ago, but last year kids moved on to Hello Kitty, and the company has had to take some big write-downs on unsold inventory. During the mania, the head of the Beanie Baby division was the highest paid employee outside the executive suite, and the adjustment has been very hard on him. He won’t accept that Beanie Babies were just a fad, but insists that the continuity of this line of business is absolutely critical to the future of the company, and he is clamoring for more funding to make up for the losses on inventory and keep the factory running.

Of course, any CEO worth his stock options knows not to throw good money after bad, and a good executive would probably liquidate the whole Beanie Baby operation and maybe find another use for those employees.

What we have here, though, is a former Beanie Baby division head as CEO, and a board of directors that itself got caught up in the craze and won’t let go of the hope that it can be resuscitated through a capital infusion and a good ad campaign. They decide to drain the company’s accounts and draw down its line of credit so that their favorite employees can keep their jobs and the factory can restock on Beanie Baby materials.

Month after month, the company makes the division’s hefty payroll, and even issues bonds to keep going, but despite their best efforts at advertising, the public just won’t buy more Beanie Babies, even at huge discounts. They have been burned by Beanie Babies and aren’t about to get caught up in that nonsense again.

Thank you for your contribution.

The soybean division, on the other hand, is generating solid profits on account of increased demand for protein in Asia, and they make a presentation requesting funding for a line of tofu. The expected returns look great, and equipment can be bought very cheaply because of the recession. The CEO explains that he is sorry, but the company’s cash and credit have tapped out to keep the essential Beanie Baby division going. All of the soybean profits are to be channeled there as well, and he appreciates the contribution.

The ambitious managers in the soybean division get fed up with this ridiculous and nepotistic company, and decide that their talents would be better rewarded in Hong Kong. Investors eventually make the same decision regarding their capital, and the company’s bonds and shares plunge. The exectutives now see which way the wind is blowing and start embezzling funds, and eventually the heap of the company ends up in bankruptcy court.