House Rejects $700 Billion Financial Bailout Plan

After a long weekend session, both parties were confident that the House would be able to pass the measure today, but it fell short by just a handful of votes. This sent the stock markets into a tailspin, leaving most major indicies down between 7 and 10 percent for the day. Clearly, investors were hoping for passage of this bill, and they have sent a strong message to Washington now that it hasn't.

Not many people are thrilled about the so-called bailout, both regular folks and politicians alike. The idea of helping large companies on Wall Street survive with taxpayer dollars is a bitter pill to swallow, but we're left with few options. While greed fueled many of these institutions to lend money they shouldn't have, and consumers flocked to buy things they couldn't afford, we still need to maintain a healthy financial network to keep the economy running. If large banks are allowed to fail, it will cause even greater strain on the already weak economy.

It isn't just about mortgages and real estate either. Granted, real estate may be at the root cause of this, but banks also lend money to individuals and businesses as well. When a bank is holding a bunch of toxic mortgage securities, they are simply unable to extend credit to anyone, and this includes regular people and businesses. So, if a business can't get the money they need to expand, that means fewer jobs, slower growth, and a weaker economy.

Everyone is calling this $700 rescue package a bailout, but that isn't entirely correct. Yes, some companies will be bailed out in a sense that this measure could prevent them from going bankrupt, but the government isn't writing a blank check from the treasury just to keep companies afloat. This rescue plan is buying assets that have an underlying value. These packaged mortgage securities have plenty of toxic loans bundled inside them, but they aren't entirely worthless, and there are plenty of good loans in these securities as well. So, while the government may be buying the assets at a steep discount, they do still carry a value, and could increase in value over time resulting in a profit.

As the government purchases these troubled securities from banking firms, it then frees up money that they can use to begin lending to businesses and individuals again, which in theory would help keep the economy from faltering even further. Is it a perfect solution? Of course not, but the option of doing nothing at all would probably hurt far greater than what it might cost to implement this plan. Clearly, we shouldn't be in this situation to begin with, but we are, and now we have to deal with the best we can.

If you're invested in the market, clearly you're going to notice a drop after today's performance. Nobody likes to see a loss, but it's important to keep your investment objective in mind when looking at what's happening. If this is money in your retirement plan and you still have a number of years until retirement, then this is just a drop in the bucket. As quickly as the market goes down, it can rebound. If you're trying to time your buying and selling with a long-term investment horizon, you're probably doing more harm than good. If you're still investing on a regular basis, either through contributions with each paycheck in your 401(k) or regular investments into an IRA, it's important to remember that you will be buying some of these investments that just took a hit. That means you'll be buying shares that are five, ten, or twenty percent cheaper than they were a few months ago, and when the market does rebound, you'll experience even bigger gains. This is called dollar cost averaging, and it can help you reduce some of the volatility in your portfolio.