Fundamental Question, What Happens If There Is No Bailout !

[bongo2]

I have read until I'm blue in the face upsides and downsides to the bail out issue that Congress and the Fed are trying to hammer out. One simple question, what happens if there is no agreement ? Anybody have any ideas ?
Why not let the market work ?

It's easy to see that it would be really bad if the banks fail, right? People don't have deposits anymore, nobody can get loans, etc. It's a disaster and the economy takes a long time to recover. Beause the system that moves paper capital around in this country is frozen, the physical capital (building roads, etc), can't be deployed. So, the govmt realized this 70-80 years ago and set up the FDIC. Now we're in a situation where there are a lot of non-bank or psudo-bank entities that have the ability to cause the same amount of havoc if they fail. They have not been regulated as heavily or guaranteed the way the banks have, but the govmt is going to step in and guarantee them anyway to avoid the above scenario.

Unfortunately, it is probably true that the bailout will contain a number of special payoffs that were not necessary to save the financial system.

 

[Art G]

The next question should be, how safe is SIPC?

 

[FinanceDude]

The next question should be, how safe is SIPC?

Don't know, but with virtually ALL the investment firms either being owned by banks or becoming banks, SIPC is ripe for raiding........

 

[Independent]

MM's have been as safe as cash for years. in a 6 month period you have bear stearns, AIG, Lehman, FNM and FDE fail or get taken over by the government to save them. people with money weren't waiting to see who's next to get their savings wiped out. they bought 3 month t bills and the yield plunged to something like .02%.

same concept as 2002 when Enron and Worldcom failed for cooking the books. everyone knew that not every company was crooked but no one wanted to risk capital to find out so the SP500 fell to around 50% of it's 2000 high. once the war started the indexes made a higher low, no more uncertainty and that confirmed that things were changing which is why 2003 was such an amazing year

one time i looked at the investments for my MM fund in my 401k. mostly credit card, retailer paper and auto loans. if the government didn't do something life was about to come to a standstill

I understand that people are surprised to find out that MM funds aren't insured. But I don't see the need to bail them out so they can continue to live in an imaginary world. That seems to be the root problem - too many people want to profit on the upside and have "somebody else" cover them on the downside. I'm afraid the bailout simply reinforces that error.

Nor do I see a problem with the S&P falling to 50% of its peak value. That has happened before. Drops in the stock market do not cause depressions.

I don't see why people are saying that "life was about to come to a standstill".

 

[Independent]

It's easy to see that it would be really bad if the banks fail, right? People don't have deposits anymore, nobody can get loans, etc. It's a disaster and the economy takes a long time to recover. Beause the system that moves paper capital around in this country is frozen, the physical capital (building roads, etc), can't be deployed. So, the govmt realized this 70-80 years ago and set up the FDIC. Now we're in a situation where there are a lot of non-bank or psudo-bank entities that have the ability to cause the same amount of havoc if they fail. They have not been regulated as heavily or guaranteed the way the banks have, but the govmt is going to step in and guarantee them anyway to avoid the above scenario.

Unfortunately, it is probably true that the bailout will contain a number of special payoffs that were not necessary to save the financial system.

I can see the wisdom of keeping the regulated, insured banks going. They will see to it that checks clear. But I don't see the need to extend a bailout to the psuedo-banks.

Maybe I don't understand what you mean by "the system that moves paper capital around this country". That's just too fuzzy for me.

 

[Milton]

this is a very unusual and necessary involvement by Government.

Not as unusual / uncommon as one might think. For a primer on past bailouts, see reportonbusiness.com: When Uncle Sam dug deep into his wallet.

 

[clifp]

I have read until I'm blue in the face upsides and downsides to the bail out issue that Congress and the Fed are trying to hammer out. One simple question, what happens if there is no agreement ? Anybody have any ideas ?
Why not let the market work ?

My first thought is to get work as a gigolo. Unfortunately I am guessing the market for almost 50 year old overweight gigolo isn't real good.

So option #2 is to start selling fruits and vegetables while expanding my garden, at the farmers market. I am hoping to that I can trade my new computer in for some seeds and fertilizer before they shut the electricity off because nobody well sell us oil.

Seriously if the treasury plan looks like it is going to fail. I am going to significantly raise my physical cash (i.e dead presidents) stash. I am not sure that having money in money markets, or CD is particularly prudent and I am willing to fore go the <2% interest.

 

[clifp]

Not as unusual / uncommon as one might think. For a primer on past bailouts, see reportonbusiness.com: When Uncle Sam dug deep into his wallet.

The WSJ had good article about the history of bailouts. It goes all the way back to 1792 with Alexander Hamilton the first Treasury Sec. and the bank of NY.

I really have to laugh at the scream of this country turning into a socialist state. Between 1941 and 1946 the entire country was run by the Federal Govt. wages, prices, executive compensation, what you could produce, and how much you could buy were all determined by government regulation. It worked out ok.

 

[frayne]

My first thought is to get work as a gigolo. Unfortunately I am guessing the market for almost 50 year old overweight gigolo isn't real good.

So option #2 is to start selling fruits and vegetables while expanding my garden, at the farmers market. I am hoping to that I can trade my new computer in for some seeds and fertilizer before they shut the electricity off because nobody well sell us oil.

Seriously if the treasury plan looks like it is going to fail. I am going to significantly raise my physical cash (i.e dead presidents) stash. I am not sure that having money in money markets, or CD is particularly prudent and I am willing to fore go the <2% interest.

I'll have you know that I am 57 and not overweight, however work as a gigolo isn't in the cards. And what is wrong with getting out of MMs and into CDs, at least for the short term until the smoke clears ?

 

[sidney]

Well, its certainly not impossible for the SP500 to fall a total of 67% from peak to trough but odds are highly against it.

That's what the Japanese thought.

 

[mark500]

If there is no bailout, perhaps there will be no money in your local ATM.

 

[HFWR]

The WSJ had good article about the history of bailouts. It goes all the way back to 1792 with Alexander Hamilton the first Treasury Sec. and the bank of NY.

Commie bastard!

I really have to laugh at the scream of this country turning into a socialist state. Between 1941 and 1946 the entire country was run by the Federal Govt. wages, prices, executive compensation, what you could produce, and how much you could buy were all determined by government regulation. It worked out ok.

Looks like our karma has run over our dogma... Now where's my glass of Kool-Aid?

 

[clifp]

And what is wrong with getting out of MMs and into CDs, at least for the short term until the smoke clears ?

Probably nothing wrong with having a CD. In the event of total financial system failure (unlikely even if the bailout fails) I am not convinced that FDIC will be paying deposits in a timely fashion, hence having a wad of cash would handy.

Actually, forget gold, silivers, guns or ammo. In event of a collapse what I want is a contract for a 1,000 barrels of oil. I wonder what it cost to store oil?

 

[Art G]

My grandfather during the depression, put all his money in diamonds. Came out of it pretty well. Perhaps.......

 

[bongo2]

I can see the wisdom of keeping the regulated, insured banks going. They will see to it that checks clear. But I don't see the need to extend a bailout to the psuedo-banks.

Maybe I don't understand what you mean by "the system that moves paper capital around this country". That's just too fuzzy for me.

That fuzzy stuff is to explain why banks need to be kept around. The psuedo-banks need to be kept around becuase the same thing happens when they fail as the real banks except in that case it's not your checks bouncing, but the checks of the largest corporations. Then your bank fails.

There was a nice comment in the WSJ the other day "financial markets work only when institutions have faith in each other's abiltiy to meet their obligations."

 

[Ultimate Cheapskate]

It ain't new to Cheapskates like me and millions of others, but here's the N-Triple-A (New Age Asset Allocation):

1- Carry NO debt
2- Know how to live happily on as little cash as possible.

Assets are no longer about what you have, but about what you DON'T have (i.e. debt and a dependency on money for happiness).

Stay Cheap!
-Jeff Yeager

 

[gqlefty]

RISK

Just like the people who took out ARM's.... did they not understand that first letter in ARM means "adjustable" and the % rate could go UP !!! Now WE have to bail them out for being STUPID ?!!!

 

[HFWR]

It ain't new to Cheapskates like me and millions of others, but here's the N-Triple-A (New Age Asset Allocation):

1- Carry NO debt
2- Know how to live happily on as little cash as possible.

Assets are no longer about what you have, but about what you DON'T have (i.e. debt and a dependency on money for happiness).

Stay Cheap!
-Jeff Yeager

Right on! O0

 

[tryan]

With only 35-36 billion in loans reseting on any given year, it seems Uncle is buying a whole lot more than bad mortgages at $700b.

Seems to me we'ld be better off removing the bandaid quickly (no "bailout") rather than a slowly.

 

[Independent]

That fuzzy stuff is to explain why banks need to be kept around. The psuedo-banks need to be kept around becuase the same thing happens when they fail as the real banks except in that case it's not your checks bouncing, but the checks of the largest corporations. Then your bank fails.

There was a nice comment in the WSJ the other day "financial markets work only when institutions have faith in each other's abiltiy to meet their obligations."

You seem to be saying that when Lehman fails, Microsoft's checks bounce. I don't see why that is true.

 

[al_bundy]

I can see the wisdom of keeping the regulated, insured banks going. They will see to it that checks clear. But I don't see the need to extend a bailout to the psuedo-banks.

Maybe I don't understand what you mean by "the system that moves paper capital around this country". That's just too fuzzy for me.

best buy and wal mart don't have the money to buy up all their inventory for the holiday season so they issue short term bonds via the banks. if the banks fail then people only buy the safest assets. no inventory for the holiday season means a lot of layoffs.

and if the i banks fail a lot of assets will be dumped into the market and prices will fall. interest rates will go up, fear will go up. see above paragraph.

 

[Gone4Good]

I understand that people are surprised to find out that MM funds aren't insured. But I don't see the need to bail them out so they can continue to live in an imaginary world.

The reason MM funds are getting bailed out is because they finance commercial paper which large corporations use for short-term liquidity needs. We were starting to have a panicked stampede out of MM funds which would have shut down the commercial paper market. Then even solvent companies may have found themselves short on cash . . . not good.

 

[Gone4Good]

That's what the Japanese thought.

Maybe, but the run up in the Nikkei index before its crash looked very similar to NASDAQ before the tech bubble burst.

 

[Gone4Good]

Oh, and to answer the OP question "What happens if there is no bailout?" . . . KA-PLOOEY . . . is the technical term.

 

[HFWR]

Also known as kerplunk, splat, thud...