Fundamental Question, What Happens If There Is No Bailout !

[frayne]

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 ?

 

[frayne]

Bump, guess no one wants to speculate.

 

[al_bundy]

no one knows

best guess is the value of the bonds fall and a lot of banks will fail either because they can't raise new capital or they can't pay the interest on their debt. the credit crunch will also spread to the economy as companies will have a lot of problems issuing short term paper. most companies issue short term debt to finance operations and if they can't issue debt than they risk running out of cash. this will mean a lot of layoffs next year.

since we have the FDIC it will cost a lot more money to make a new RTC to handle all the bank failures. government is going to take all the bad loans onto it's books one way or another

expect the SP500 to hit 500 - 800 before it bottoms

 

[riskadverse]

That's the beauty of this bailout - no one knows. If you're against it and block it, and the economy fails, you won't get re-elected. If you're for it, and the economy fails, well you did your best. It's a rigged game.

 

[al_bundy]

there are also some similarities between today and the 1830's. back then the states borrowed a lot of money from The English Empire and other European countries to finance a lot of big projects like The Eerie Canal. After the central bank's charter ran out and wasn't renewed there was a depression and the states defaulted on the debt for a few decades. Foreign investors stayed out of the US for decades.

If foreign investors get burned than they may dump dollar assets and stop investing here for decades. the dollar will run the risk of losing it's status as a reserve currency. interest rates will skyrocket even for the best credit quality customers. expect a few decades of 15% mortgage rates and deflation, which is a lot worse than inflation

 

[utrecht]

no one knows

best guess is the value of the bonds fall and a lot of banks will fail either because they can't raise new capital or they can't pay the interest on their debt. the credit crunch will also spread to the economy as companies will have a lot of problems issuing short term paper. most companies issue short term debt to finance operations and if they can't issue debt than they risk running out of cash. this will mean a lot of layoffs next year.

since we have the FDIC it will cost a lot more money to make a new RTC to handle all the bank failures. government is going to take all the bad loans onto it's books one way or another

expect the SP500 to hit 500 - 800 before it bottoms

LOL

 

[lazygood4nothinbum]

this is like paying to walk out of a restaurant without checking your bill first. if this was caused by bad mortgages, why can't the government just identify those houses and buy back their debt? what's all this other stuff being added? gratuity? is democracy being held hostage by capitalism?

 

[cantlogin]

LOL

What's so funny?

 

[Art G]

This is what happens when the government gets involved with Wall St. While this is a very unusual and necessary involvement by Government to save the banks, you can now see how many different hands are trying to get their own personal causes added into the legislation and is a great example of why you shouldn't want the Congress and President to be from the same party.
I know my answer is a bit off topic, but I'm foreseeing the future and it ain't pretty.

So, to answer your question, odds are, by the time the bill gets passed, they will have screwed it up to the point that you may not recognize it, and it probably will have to be redone in the near future. JMO.

 

[FinanceDude]

This is what happens when the government gets involved with Wall St. While this is a very unusual and necessary involvement by Government to save the banks, you can now see how many different hands are trying to get their own personal causes added into the legislation and is a great example of why you shouldn't want the Congress and President to be from the same party.
I know my answer is a bit off topic, but I'm foreseeing the future and it ain't pretty.

So, to answer your question, odds are, by the time the bill gets passed, they will have screwed it up to the point that you may not recognize it, and it probably will have to be redone in the near future. JMO.

I gotta agree. The "Bill" that Bush gets to look over will be watered down, have loads of earmarks, probably contain some sneaky taxes,etc. I haven't seen a clean bill out of Congress in forever........

 

[ChrisC]

LOL

Yeah, what's so funny? He's actually saying something similar to what this guy has said all along:
http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html

And there is growing acceptance of the "paradox of deleveraging."

Bundy is on to something.

 

[FinanceDude]

there are also some similarities between today and the 1830's. back then the states borrowed a lot of money from The English Empire and other European countries to finance a lot of big projects like The Eerie Canal. After the central bank's charter ran out and wasn't renewed there was a depression and the states defaulted on the debt for a few decades. Foreign investors stayed out of the US for decades.

If foreign investors get burned than they may dump dollar assets and stop investing here for decades. the dollar will run the risk of losing it's status as a reserve currency. interest rates will skyrocket even for the best credit quality customers. expect a few decades of 15% mortgage rates and deflation, which is a lot worse than inflation

Paulson won't screw the foreign investors, he knows which side his bread is buttered on. I think the foreign investors in AIG screamed bloody murder, and it had an effect.........

 

[Art G]

I gotta agree. The "Bill" that Bush gets to look over will be watered down, have loads of earmarks, probably contain some sneaky taxes,etc. I haven't seen a clean bill out of Congress in forever........

Quit agreeing with me or we're gonna get accused of trying to sell annuities!

 

[al_bundy]

Yeah, what's so funny? He's actually saying something similar to what this guy has said all along:
http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html

And there is growing acceptance of the "paradox of deleveraging."

Bundy is on to something.

i've been reading his stuff for years, nothing really to invest on but nice for background info

one interesting thing is that over the weekend i ran some stock screens. just in case last week was the end of the bear market i wanted to catch the new leaders of the next bull. A lot of the stocks that came up are Chineese companies.

 

[Independent]

I think this is a good question. I haven't seen a convincing argument that tells me we need the bailout.

If some regulated banks fail, the gov't will take them over. The taxpayers could end up with the bad assets of those banks. But why do the same thing for everybody else?

I'll give one example of the types of questions that I've got: We had one money market fund "break the buck" last week. That was viewed as a catastrophe in the making. I don't see why. If I want an insured "money market" rate, I can get it at my local bank. If I'm investing in a MM mutual fund, I get a better rate but I take the chance that I could lose principal. Why should the gov't try to protect me from the results of my own choices? Some people say the gov't needs to intervene to keep people from taking money out of MM mutual funds. If they do that, firms won't be able to sell short term paper, and they won't be able to fund their operations. But investors have to go somewhere with the money they take out of the MM mutual funds. If they deposit it in banks, then banks have more money to lend. If they put it in the stock market, firms can get money by selling stock. If they buy gov't bonds, the people who sold them the gov't bonds have money that could go into banks or the market. Where's the catastrophe?

I can see that these re-adjustments can lead to a recession, but not to "complete meltdown of the economic system". I'd rather live with a recession that squeezes some of the silliness out of our system, then try to prop up the silliness indefinitely.

 

[al_bundy]

MM's breaking the buck is scary because that's where everyone keeps cash in between investments. i sold my and my wife's retirement accounts back in June. 2 weeks ago i was down 1.57% for the year. After Lehman it was 1.63%.

now think of all the non-retirement accounts that have money in MM's because they are sitting out this market or whatever and instead of preserving capital you suddenly lose .5% in a week. or 3% in a week in an investment that is supposed to be safe.

it's a loss of confidence and very bad. this is why there was a mad rush into 3 month t-bills for a few days. no one cares what's in an MM, they don't want to lose money. and no one is going to put it in a bank since they are carrying a lot of bad loans, many are on the verge of failing and the FDIC limit is $100,000

the meltdown comes as debt is downgraded along with banks. they have to raise capital to meet reserve requirements or they will just fail if people pull money out in bank runs.

 

[socca]

It's possible that Goldman Sachs and Morgan Stanley declare bankruptcy (despite their new status as bank holding companies). This is where things were heading last week before Treasury Secretary Paulson and the rest of the Goldman Sachs golden boys panicked and intervened in the market (in order to save their own pensions and portfolios?) What happens after that? The profitable pieces of these banks get sold off, the trash is dumped in the dumpster where it belongs, and life moves on. Optimistically, perhaps we start focusing on the serious systemic economic problems we face, rather than pretending they don't exist by drowning them in a sea of new deficit spending.

Off topic: It's interesting to speculate whether Lehman Brothers would ever have been allowed to fail if Paulson and his brat pack were LB alumni instead of Goldman Sachs alumni. I guess we'll never know.

 

[Art G]

Goldman Sachs isn't going anywhere. The move they made was about getting in on federal subsidizing and covering themselves from being left out when everyone else gets a free pass.
I'm wondering though, who are companies going to go to, to get finance deals done? Who's gonna be the new IPO leader? One of the big perks to being a Goldman client is access to all the IPO's you can muster, now what?

 

[al_bundy]

It's possible that Goldman Sachs and Morgan Stanley declare bankruptcy (despite their new status as bank holding companies). This is where things were heading last week before Treasury Secretary Paulson and the rest of the Goldman Sachs golden boys panicked and intervened in the market (in order to save their own pensions and portfolios?) What happens after that? The profitable pieces of these banks get sold off, the trash is dumped in the dumpster where it belongs, and life moves on. Optimistically, perhaps we start focusing on the serious systemic economic problems we face, rather than pretending they don't exist by drowning them in a sea of new deficit spending.

Off topic: It's interesting to speculate whether Lehman Brothers would ever have been allowed to fail if Paulson and his brat pack were LB alumni instead of Goldman Sachs alumni. I guess we'll never know.

this is the part where you get a recession or depression. after lehman and AIG fail the question is who is next? no one cares and everything is sold off which leads to a wave of ratings downgrades. this of course leads to a credit crunch where very few short term paper is issued. maybe too late this year, but next year a lot of companies will have to issue paper to prepare for the holiday season to buy inventory. if they can't buy product that is a lot of layoffs.

once this happens it's a lot more than a trillion $$$ to support the FDIC and all the social spending that will have to be done

 

[samclem]

MM's breaking the buck is scary because that's where everyone keeps cash in between investments. . .
now think of all the non-retirement accounts that have money in MM's because they are sitting out this market or whatever and instead of preserving capital you suddenly lose .5% in a week. or 3% in a week in an investment that is supposed to be safe.

it's a loss of confidence and very bad.

But you were well aware that the MM fund wasn't absolutely safe, right? Not as safe as an FDIC insured CD, right? Shouldn't we give credit to people for being this smart (or let them get bruised a little so that next time they, and others, are?)

. . . and no one is going to put it in a bank since they are carrying a lot of bad loans, many are on the verge of failing and the FDIC limit is $100,000

$100,000 per registration type at each bank. There are a lot of banks out there, and it is simple to get this protection. People who want it should do it, and the government shouldn't be subsidizing those who want to take more risk (in a MM brokerage account). Government subsidy of risk is precisely what got us into this bad situation.

 

[al_bundy]

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

 

[utrecht]

What's so funny?

Whats funny is the notion that the SP500 is going to fall to 500. We are in a bear market. Its nothing new. Every bear market feels like the end of the world when youre in it. The past few weeks people on here have been pretty overdramatic with their talk of another great depression. The SP500 isnt going to fall another 58% on top of the 25% or so that its already down in the past 12 months or so.

 

[socca]

I also argue (although it's a hard sell) that a recession or even a depression is a good thing if it is what we deserve. Stupidity and greed deserve to be punished. This is especially true if a little suffering now stimulates reforms that avoid a lot of suffering later. Unfortunately, politicians aren't rewarded for bringing short-term pain to their constituents in exchange for long-term good health. This is one of the systemic flaws in our system of government as it exists today, IMO.

 

[al_bundy]

Whats funny is the notion that the SP500 is going to fall to 500. We are in a bear market. Its nothing new. Every bear market feels like the end of the world when youre in it. The past few weeks people on here have been pretty overdramatic with their talk of another great depression. The SP500 isnt going to fall another 58% on top of the 25% or so that its already down in the past 12 months or so.

why not? SP500 already has lost half it's value twice in the last 40 years. in the 1970's the Dow lost half it's value and came very close to doing so again a few years later

last week the fed funds was at 2% and LIBOR was at around 5% which is insane. banks were terrified to lend to each other. the 18th largest company in the world almost failed. it insures a lot of mortgages and it's failure would have resulted in the value of those mortgages rising and the equivelant of a margin call for banks that held these mortgages

the government's insistance on wiping out the existing shareholders caused a stampede out of every financial company. a company like goldman sachs isn't supposed to fall 30% in a week and then recover 20% a few days later

 

[utrecht]

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

I wasnt around the 1st time the Sp500 lost half its value but the last time I was and it was WAYYYYYY overvalued after one of the biggest run-ups we had even seen. The market was nowhere near as overheated when it started dropping this time so I see no reason for it to drop even further than last time.