How to Bail Out Main Street....

[audreyh1]

Since the major risk right now is the seizing up of the credit markets with banks not willing to lend resulting in businesses not able to finance their operations.....

Why not have the Govt open a temporary line of short term credit to companies so they can continue to finance their operations. Just bypass the private financial system entirely while it self-destructs and/or is hoarding cash and unwilling to lend. It's probably easier to monitor the credit worthiness of business balance sheets than all the bizarre complex instruments used to package mortgage securities etc.

I'm getting impatient about all these credit default swaps, weapons of mass financial destruction, etc. Obviously there are too many layers to be able to function right now. It needs to unwind. In the meantime, we need non-financial businesses to be able to keep doing their thing.

Audrey

 

[brewer12345]

Um, you might need the banking system one day, so it would be a bad idea to torch it right now. And the banks have spent decades/centuries figuring out how to underwrite small business credit risk: you think the gummint can figure out how to do it tomorrow? Good luck with that.

 

[al_bundy]

www.prosper.com

 

[audreyh1]

This doesn't have to eliminate the banking system. Just provide a bypass for a while until they are willing to lend again.

I find it hard to believe that small business credit risk - especially when you have records of pass business dealings - is harder to figure out than the value of the complex financial instruments that the government is considering taking on board.

Audrey

P.S. I haven't studied Great Depression era financial history, but I wouldn't be surprised if such mechanisms were ultimately put in place.

 

[audreyh1]

This doesn't have to eliminate the banking system. Just take it out of the loop for a while until they are willing to lend again.

I find it hard to believe that small business credit risk - especially when you have records of past business dealings - is harder to figure out than the value of the complex financial instruments that the government is considering taking on board.

Audrey

 

[al_bundy]

This doesn't have to eliminate the banking system. Just take it out of the loop for a while until they are willing to lend again.

I find it hard to believe that small business credit risk - especially when you have records of pass business dealings - is harder to figure out than the value of the complex financial instruments that the government is considering taking on board.

Audrey

it's not the credit risk, but perception

most of the money comes from all over the world, so you might have arab oil money funding a mom and pop shop's Christmas inventory.

every 10 years or so a debt crisis happens because wall street got greedy along with everyone else chasing returns and people are then afraid to lend to everyone except Uncle Sam. after a while it passes.

every 40 years or so it's a really bad one and requires the government to help out. back in the days when the government refused to do it, we had a regular cycle of depressions and double digit unemployment. and right about now we are on schedule for the next 40 year crisis

 

[brewer12345]

This doesn't have to eliminate the banking system. Just provide a bypass for a while until they are willing to lend again.

I find it hard to believe that small business credit risk - especially when you have records of pass business dealings - is harder to figure out than the value of the complex financial instruments that the government is considering taking on board.

Audrey

P.S. I haven't studied Great Depression era financial history, but I wouldn't be surprised if such mechanisms were ultimately put in place.

You don't seem to understand what has happened in the markets. The banking/finance system has been trying to clear/purge for over a year now and it is quite obvious that it cannot without some outside help. If this outside help does not happen soon, you may effectively be eliminating the system for a generation, as nobody will trust the banks any more.

As for how hard it is to figure out small business credit, consider that lenders have an enormous financial incentive to get credit right with small business and yet still screw up with depressing regularity. How well do you think a disinterested bureaucrat will do?

 

[audreyh1]

I'm not sure of your point al_bundy?

Audrey

 

[audreyh1]

Well it seems to me that lenders have had more incentive to overleverage and rake in fees and chase fancy instruments and now have no incentive to do the basic lending.

I'm simply looking at where this thing is spreading and how it might be contained.

No one will trust the banks any more? They sure don't trust Wall Street and financial companies now. I don't know what it will take to turn this around. Right now the financial companies don't trust each other at all - hence they aren't willing to lend to each other.

I'm not sure what can be "saved". But it certainly seems that if something needs to be "saved", it's main street.

Audrey

 

[al_bundy]

we get a big crisis every approximately every 40 years

2008, 1968, 1929, 1873, 1836 are all the approximate years of a crisis and the start of a major depression. except 1968 where the government pumped money into the economy and we had inflation

before the 1929 depression the government had a hands off policy and we would have periods of 20 years or so of stagnation. in the 1970's we had inflation.

i think today we have a choice of risking deflation like 1929 and other depressions or having the government step in and prevent a possible catastrophe that can result in 20% unemployment here.

if you look at the money spent in the 1930's and on WW2 and account for inflation, $700 billion in current dollars is pocket change

and if you take the above years 2008, 1968, 1929, 1873, 1836, 1800, 1760, 1720, 1680 and go back farther in the past and look at other events like say wars that enveloped the entire European Continent or the world, there is a lot of correlation.

 

[brewer12345]

I'm not sure what can be "saved". But it certainly seems that if something needs to be "saved", it's main street.

Audrey

I don't know how to make it any simpler: you cannot have a functioning, healthy economy without a banking/finance system.

 

[Hamlet]

Brewer, so far most of this "purging" has had very little negative impact on Main Street. I'm not certain that letting things run their course will be disasterous.

People will still trust banks, since for the most part their failures are not going to affect depositors. WaMu's demise appears to have been seamless.

Credit has become harder to get, but that is probably a good thing long term. Credit can be a dangerous tool. Many people may be better off with it not being available.

Credit is still available to people who are solid risks. I'm pretty sure that I could walk into US Bank, or Wells Fargo and get all of the money that it would be prudent for them to lend to me.

I think that the people in banking see this as a much bigger problem than it is to the country as a whole.

You don't seem to understand what has happened in the markets. The banking/finance system has been trying to clear/purge for over a year now and it is quite obvious that it cannot without some outside help. If this outside help does not happen soon, you may effectively be eliminating the system for a generation, as nobody will trust the banks any more.

As for how hard it is to figure out small business credit, consider that lenders have an enormous financial incentive to get credit right with small business and yet still screw up with depressing regularity. How well do you think a disinterested bureaucrat will do?

 

[al_bundy]

Brewer, so far most of this "purging" has had very little negative impact on Main Street. I'm not certain that letting things run their course will be disasterous.

People will still trust banks, since for the most part their failures are not going to affect depositors. WaMu's demise appears to have been seamless.

Credit has become harder to get, but that is probably a good thing long term. Credit can be a dangerous tool. Many people may be better off with it not being available.

Credit is still available to people who are solid risks. I'm pretty sure that I could walk into US Bank, or Wells Fargo and get all of the money that it would be prudent for them to lend to me.

I think that the people in banking see this as a much bigger problem than it is to the country as a whole.

so why did Hoover get blamed for the Great Depression? until 1932 things were OK and it was just a recession. people could still get money from the bank. it was only in 1932 that the bank runs started and spread like wildfire and wiped out the banking system plunging the country into a depression.

 

[audreyh1]

Brewer, so far most of this "purging" has had very little negative impact on Main Street. I'm not certain that letting things run their course will be disastrous.

Ummm - this is the problem. When Main Street businesses can't obtain the credit they need for their day-to-day functioning - not for expansion, not for anything fancy, just the basic inventory, payroll, etc. - the businesses start to shut down. This snowballs as people get laid off, suppliers are not paid, etc. Turns into a depression. You do not want this.

Thus something has to be done to unfreeze credit to these companies.

Audrey

 

[audreyh1]

we get a big crisis every approximately every 40 years.

OK - I get that we get a big financial crisis every 40 years and the govt either steps in or main street/US economy suffers extended and deep recession or depression. I'm just discussing where the government intervention might be applied.

Joe Blow on Main Street is having a really hard time understanding why the crises on Wall Street has anything to do with him. And doesn't understand why Wall Street itself has to be the first in line for help.

Audrey

 

[Milton]

the banks have spent decades/centuries figuring out how to underwrite small business credit risk

Recent history does not inspire confidence in the ability of US banks to competently underwrite any risk. Since they couldn't even handle residential mortgages, does any thoughtful person genuinely believe that they can accurately assess more complicated exposures?

 

[ziggy29]

so why did Hoover get blamed for the Great Depression? until 1932 things were OK

I think "OK" is overstating things, but in any event, Hoover was still president for all of 1932. FDR wasn't inaugurated until March 4, 1933.

And if something was already breaking down by 1932, it was obviously building for last few months and years... all on Hoover's watch. It's unfair to blame Hoover for all of it -- it's not like he passed all the laws or caused all the speculative froth of the 1920s that led to the crash and the subsequent bad legislation (though he did have to sign it).

Curiously, the Dow had one of its best years ever (on a percentage basis) in 1933 after reaching bottom in the summer of '32.

 

[cute fuzzy bunny]

Hey, maybe this 'capitalism' thing really doesnt work all that well!

 

[brewer12345]

Joe Blow on Main Street is having a really hard time understanding why the crises on Wall Street has anything to do with him.

Joe Blow also typically does not understand how cars work, how computers work, how most medications work, how to run a refinery, etc. So what?

 

[ziggy29]

Joe Blow on Main Street is having a really hard time understanding why the crises on Wall Street has anything to do with him. And doesn't understand why Wall Street itself has to be the first in line for help.

I suspect it's not being spelled out for Joe Blow.

If Joe's employer is a capital-intensive business that relies on borrowed money to flourish, turning off the spigot of credit puts Joe out of a job.

If Joe has a 401K or IRA, he can look forward to watching his retirement feel farther and farther away as it shrivels in value.

If Joe has a pension, he can watch as his pension fund crashes in value, threatening its solvency -- and perhaps that of his previous employer.

If Joe is retired and on Social Security, he can worry about how a collapsing economy and massive job losses will allow SS to continue taking in enough payroll taxes to pay benefits.

 

[al_bundy]

I think "OK" is overstating things, but in any event, Hoover was still president for all of 1932. FDR wasn't inaugurated until March 4, 1933.

And if something was already breaking down by 1932, it was obviously building for last few months and years... all on Hoover's watch. It's unfair to blame Hoover for all of it -- it's not like he passed all the laws or caused all the speculative froth of the 1920s that led to the crash and the subsequent bad legislation (though he did have to sign it).

Curiously, the Dow had one of its best years ever (on a percentage basis) in 1933 after reaching bottom in the summer of '32.

it was a rally after a 90% decline

 

[ziggy29]

it was a rally after a 90% decline

True, but if you bought in 1932, that didn't matter, did it?

 

[audreyh1]

I suspect it's not being spelled out for Joe Blow.

If Joe's employer is a capital-intensive business that relies on borrowed money to flourish, turning off the spigot of credit puts Joe out of a job.

If Joe has a 401K or IRA, he can look forward to watching his retirement feel farther and farther away as it shrivels in value.

If Joe has a pension, he can watch as his pension fund crashes in value, threatening its solvency -- and perhaps that of his previous employer.

If Joe is retired and on Social Security, he can worry about how a collapsing economy and massive job losses will allow SS to continue taking in enough payroll taxes to pay benefits.

Yes, exactly! It's not being spelled out for Joe Blow. The points you list above aren't that hard to grasp, but no one is out there articulating them. Doesn't seem that hard to spell out.

But what Joe Blow ALSO doesn't understand is how shoring up wall street after the recent shenanigans is going to help out. Seems to him the system is corrupt. Someone needs to also spell out how shoring up wall street is the most straightforward way to help him.

Audrey

 

[audreyh1]

Joe Blow also typically does not understand how cars work, how computers work, how most medications work, how to run a refinery, etc. So what?

Sorry. This is a democracy. Joe Blow has to be sold the solution. The lack of articulation from Govt. is stunning.

I think people really remember the urgency and crisis arguments going into a certain recent umm.... foreign intervention. I think the distrust from that is coming back to bite hard.

Audrey

 

[ziggy29]

Joe Blow also typically does not understand how cars work, how computers work, how most medications work, how to run a refinery, etc. So what?

This is certainly true. But right now there is a lot of disconnect among relatively ordinary people who see this as nothing but a giveaway to Wall Street fat cats at the expense of the "little guy." In other words, a megadose of Washington as usual. I think "we the people" have every reason to be cynical about it, and from both parties, when viewed from a quick glance -- given the track record of Congress and the White House.

And with an election in less than six weeks, many in Congress -- especially in the House, where ALL 435 seats are up and where the vast majority of them are incumbents seeking re-election -- are hearing from "Main Street" and from these Joe Blows *not* to do it.

I believe Audrey's point here (forgive me if I mischaracterize it) is that many of the folks putting pressure on Congress to "just say no" don't seem to realize just how badly everyday folks like them will likely be affected by letting the financial system implode spectacularly. If they understood how likely such an implosion would be to directly and VERY negatively impact them, maybe their populist opposition would thin out.