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-   -   Fundamental Question, What Happens If There Is No Bailout ! (https://www.early-retirement.org/forums/f28/fundamental-question-what-happens-if-there-is-no-bailout-38995.html)

frayne 09-22-2008 08:13 PM

Fundamental Question, What Happens If There Is No Bailout !
 
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 09-23-2008 08:01 AM

Bump, guess no one wants to speculate.

al_bundy 09-23-2008 08:09 AM

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 09-23-2008 08:14 AM

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 09-23-2008 08:26 AM

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 09-23-2008 08:29 AM

Quote:

Originally Posted by al_bundy (Post 719053)
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 09-23-2008 09:11 AM

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 09-23-2008 09:19 AM

Quote:

Originally Posted by utrecht (Post 719064)
LOL


What's so funny?

Art G 09-23-2008 09:26 AM

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 09-23-2008 09:31 AM

Quote:

Originally Posted by Art G (Post 719099)
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........:rolleyes:

ChrisC 09-23-2008 09:33 AM

Quote:

Originally Posted by utrecht (Post 719064)
LOL

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

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

Bundy is on to something.

FinanceDude 09-23-2008 09:36 AM

Quote:

Originally Posted by al_bundy (Post 719061)
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.........:p

Art G 09-23-2008 09:36 AM

Quote:

Originally Posted by FinanceDude (Post 719104)
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........:rolleyes:


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

al_bundy 09-23-2008 09:56 AM

Quote:

Originally Posted by ChrisC (Post 719108)
Yeah, what's so funny? He's actually saying something similar to what this guy has said all along:
https://www.nytimes.com/2008/08/17/ma...ssimist-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 09-23-2008 09:56 AM

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 09-23-2008 10:00 AM

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 09-23-2008 10:06 AM

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 09-23-2008 10:23 AM

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 09-23-2008 10:32 AM

Quote:

Originally Posted by socca (Post 719134)
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 09-23-2008 10:47 AM

Quote:

Originally Posted by al_bundy (Post 719130)
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?)

Quote:

Originally Posted by al_bundy (Post 719130)
. . . 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 09-23-2008 11:11 AM

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 09-23-2008 11:17 AM

Quote:

Originally Posted by cantlogin (Post 719097)
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 09-23-2008 11:40 AM

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 09-23-2008 11:52 AM

Quote:

Originally Posted by utrecht (Post 719164)
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 09-23-2008 11:56 AM

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.

bongo2 09-23-2008 12:05 PM

Quote:

Originally Posted by frayne (Post 718859)
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 09-23-2008 12:14 PM

The next question should be, how safe is SIPC?

FinanceDude 09-23-2008 12:22 PM

Quote:

Originally Posted by Art G (Post 719195)
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 09-23-2008 12:49 PM

Quote:

Originally Posted by al_bundy (Post 719160)
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 09-23-2008 12:53 PM

Quote:

Originally Posted by bongo2 (Post 719189)
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 09-23-2008 12:57 PM

Quote:

Originally Posted by Art G (Post 719099)
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 09-23-2008 02:58 PM

Quote:

Originally Posted by frayne (Post 718859)
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 09-23-2008 03:05 PM

Quote:

Originally Posted by Milton (Post 719218)
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 09-23-2008 03:06 PM

Quote:

Originally Posted by clifp (Post 719265)
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 09-23-2008 03:14 PM

Quote:

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 09-23-2008 03:19 PM

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

HFWR 09-23-2008 03:21 PM

Quote:

Originally Posted by clifp (Post 719269)
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! :p

Quote:

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? ;D

clifp 09-23-2008 03:33 PM

Quote:

Originally Posted by frayne (Post 719270)
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 09-23-2008 03:55 PM

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

bongo2 09-23-2008 04:14 PM

Quote:

Originally Posted by Independent (Post 719216)
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 09-23-2008 04:28 PM

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 09-23-2008 04:31 PM

RISK
 
:rant: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 09-23-2008 04:42 PM

Quote:

Originally Posted by Ultimate Cheapskate (Post 719307)
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 09-23-2008 05:24 PM

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 09-23-2008 05:36 PM

Quote:

Originally Posted by bongo2 (Post 719299)
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 09-23-2008 05:48 PM

Quote:

Originally Posted by Independent (Post 719216)
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 09-23-2008 07:39 PM

Quote:

Originally Posted by Independent (Post 719214)
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 09-23-2008 07:42 PM

Quote:

Originally Posted by sidney (Post 719273)
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 09-23-2008 07:50 PM

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

HFWR 09-23-2008 08:00 PM

Also known as kerplunk, splat, thud...

https://www.early-retirement.org/atta...71dd7a74a8.jpg

Gardnr 09-23-2008 10:05 PM

Quote:

Originally Posted by Independent (Post 719126)
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.

I'm certainly no expert but...

Bank run. There's not enough liquidity to meet the cash demand that would come when "everybody" starts pulling their MM funds out in a panic. The cascading effects would blow things up.

Gardnr 09-23-2008 10:16 PM

Quote:

Originally Posted by clifp (Post 719265)
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.

Yep, and so would most people. Each of us acts in our own interests. I would too. And that's exactly the kind of reaction that if multiplied by the tens (hundreds?) of millions would cause a complete melt down of the economy. If people lose faith in the monetary system and it's instruments then it will fail. Once people start to panic it will spread like wildfire.

ladelfina 09-24-2008 01:13 AM

Quote:

Originally Posted by bongo2 (Post 719299)
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."

"nice"? Hmmm. The deeper question is: how long and far can we run on "faith-based" investing? We're about to find out.

This is a very revealing quote, probably unintentionally so. It gives more importance to magical thinking than to reality. There are real underlying values and mechanisms by which an institution might meet its obligations; "faith" may be necessary but may also not be sufficient.

I can have faith that I won't fly up into the air.. but it is gravity that keeps me on the ground, not faith. Stocks will have value when they produce commensurate earnings and dividends. Mortgage securities will have value when home prices are rising or stable, increasing job losses and increasing health costs and commodity price inflation don't impede ability to repay, and fraud hasn't tainted the well. These are just laws, and believing otherwise, bailout or no bailout, will not change the way the universe works.

Helena 09-24-2008 01:50 AM

Quote:

Originally Posted by riskadverse (Post 719056)

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.


If you vote for the unpopular bailout, you might not get re-elected.

And, they have set this game up just a few weeks before the election.

I hear two famous senators will not be voting :rolleyes:


~

tryan 09-24-2008 07:28 AM

Quote:

I hear two famous senators will not be voting :rolleyes:
yeah, just when we need these people to show some kaunas and take a stand (or at LEAST understand the problem and vote accordingly) ... they RUN and HIDE.

youbet 09-24-2008 08:11 AM

Quote:

Originally Posted by al_bundy (Post 719356)
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.

.

I think that in this case, the Chinese will extend Best Buy the necessary credit to take their merchandise and put it on Best Buy shelves for the USA holiday season. IMO, China really can't afford to stop shipping to us.


Additionally, if USA citizens generally slow their consumpiton of this merchandise, it will be for the better in the long run.

Independent 09-24-2008 08:25 AM

Quote:

Originally Posted by al_bundy (Post 719356)
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.

Quote:

Originally Posted by . . . Yrs to Go (Post 719429)
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.

These are slightly different explanations. The second is closer to my understanding. I thought that companies that issue commercial paper sell it directly to the money market funds. Maybe an investment bank acts as a broker, but that's a profitable function that will be bought by someone if the IB fails because it lost money by trading for its own account. I didn't think that IBs were borrowing money so they could buy commercial paper just to hold it in their own accounts.

Companies like commercial paper because it has a slightly lower interest rate than a commercial bank loan (or a longer term bond). Savers like MM funds because they have slightly higher rates than bank checking/savings accounts. The reason the rates are better is that the MMF doesn't have the reserve requirements of a regulated bank. Both the companies and the savers are taking a risk to get their better deals. IMO, from time to time they have to actually lose some money to remind them there's no free lunch.

If we have a stampede out of MM funds, the money has to go somewhere. It seems to me that it goes to commercial banks. They have a sudden inflow of cash and can now make additional loans to the companies that aren't able to sell their commercial paper. There's some friction involved in the switch and some companies don't get as much money as they wanted. This will lead to a few layoffs, which contributes to a recession. But I don't see "complete melt down of the system". In fact, I see the system being healthier in the long term because everyone gets reminded of some risk/reward fundamentals.

Maybe the problem is that I figure a recession is inevitable following the housing binge. I'm fine with the gov't trying to head off a depression, but a recession seems like a lesser evil than trying to have the gov't bail everyone out of their risky decisions.

Art G 09-24-2008 09:42 AM

and leave it to Congress to gum up the works...

https://www.washingtontimes.com/news/2008/sep/23/student-car-debt-quietly-added/

al_bundy 09-24-2008 11:02 AM

Quote:

Originally Posted by Independent (Post 719607)
These are slightly different explanations. The second is closer to my understanding. I thought that companies that issue commercial paper sell it directly to the money market funds. Maybe an investment bank acts as a broker, but that's a profitable function that will be bought by someone if the IB fails because it lost money by trading for its own account. I didn't think that IBs were borrowing money so they could buy commercial paper just to hold it in their own accounts.

Companies like commercial paper because it has a slightly lower interest rate than a commercial bank loan (or a longer term bond). Savers like MM funds because they have slightly higher rates than bank checking/savings accounts. The reason the rates are better is that the MMF doesn't have the reserve requirements of a regulated bank. Both the companies and the savers are taking a risk to get their better deals. IMO, from time to time they have to actually lose some money to remind them there's no free lunch.

If we have a stampede out of MM funds, the money has to go somewhere. It seems to me that it goes to commercial banks. They have a sudden inflow of cash and can now make additional loans to the companies that aren't able to sell their commercial paper. There's some friction involved in the switch and some companies don't get as much money as they wanted. This will lead to a few layoffs, which contributes to a recession. But I don't see "complete melt down of the system". In fact, I see the system being healthier in the long term because everyone gets reminded of some risk/reward fundamentals.

Maybe the problem is that I figure a recession is inevitable following the housing binge. I'm fine with the gov't trying to head off a depression, but a recession seems like a lesser evil than trying to have the gov't bail everyone out of their risky decisions.

the problem is perceived risk, same thing when worldcom and enron went belly up. the TED spread and all the other indicators went crazy because everyone stopped trusting everyone else because no one trusted the public financial info. everyone went into bunker mode and conserved cash and didn't lend it to anyone.

same thing happened last week. people started pulling money out of MM's because everyone believes it's as safe as cash and the details don't matter. what matters is the effect it has which is no short term lending and the possiblity of MM's going belly up which is even worse. If the Fed allowed the risk part to happen and MMs to go belly up it would have been very bad.

imagine the only people getting credit are only those with 800 or higher FICO's? fortune 500 corporations would have cash problems because everyone relies on short term financing for working capital. there is a formula i learned in finance classes that is used to figure this out, but i can't remember it. you can figure out a company's working capital requirements from it's public investor documents.

if you look at your average fortune 500 company the bonds usually yield around 4%. the way the libor was last week that might double. now imagine if the government allowed things to go on and institutions to keep on failing. at the minimum it could have been a recession like 1980 with 10% unemployment.

the meltdown comes from the fact that everyone is linked to everyone else via credit default swaps. rumor is that the bear stearns bailout was really a JP Morgan Chase bailout because Chase had around $80 trillion of CDS's with bear stearns. once institutions like AIG fail everyone calls in their IOU's via CDS's and forces everyone into bankruptcy as no one can pay up and each BK will cause more BK's down the line.

Then you have the problem with the Federal Reserve stretching it's balance sheet with all the junk they took on over the last year from the banks. this bailout will go forward because it's as much a Federal Reserve bailout as wall street. no one has the money to pay the Fed back for the loans they made over the last year and this is how it's going to work out.

i bet if you add up all the lending facilities over the last year it will add up to around $700 billion. and you can't seriously say we should let the Federal Reserve fail? Last time we got rid of a central bank it turned into a 20 some year depression, a war with mexico, and hatred between the states that later turned into the civil war.

Running_Man 09-24-2008 11:11 AM

Quote:

Originally Posted by al_bundy (Post 719698)
the problem is perceived risk, same thing when worldcom and enron went belly up. the TED spread and all the other indicators went crazy because everyone stopped trusting everyone else because no one trusted the public financial info. everyone went into bunker mode and conserved cash and didn't lend it to anyone.

same thing happened last week. people started pulling money out of MM's because everyone believes it's as safe as cash and the details don't matter. what matters is the effect it has which is no short term lending and the possiblity of MM's going belly up which is even worse. If the Fed allowed the risk part to happen and MMs to go belly up it would have been very bad.

imagine the only people getting credit are only those with 800 or higher FICO's? fortune 500 corporations would have cash problems because everyone relies on short term financing for working capital. there is a formula i learned in finance classes that is used to figure this out, but i can't remember it. you can figure out a company's working capital requirements from it's public investor documents.

if you look at your average fortune 500 company the bonds usually yield around 4%. the way the libor was last week that might double. now imagine if the government allowed things to go on and institutions to keep on failing. at the minimum it could have been a recession like 1980 with 10% unemployment.

the meltdown comes from the fact that everyone is linked to everyone else via credit default swaps. rumor is that the bear stearns bailout was really a JP Morgan Chase bailout because Chase had around $80 trillion of CDS's with bear stearns. once institutions like AIG fail everyone calls in their IOU's via CDS's and forces everyone into bankruptcy as no one can pay up and each BK will cause more BK's down the line.

Then you have the problem with the Federal Reserve stretching it's balance sheet with all the junk they took on over the last year from the banks. this bailout will go forward because it's as much a Federal Reserve bailout as wall street. no one has the money to pay the Fed back for the loans they made over the last year and this is how it's going to work out.

i bet if you add up all the lending facilities over the last year it will add up to around $700 billion. and you can't seriously say we should let the Federal Reserve fail? Last time we got rid of a central bank it turned into a 20 some year depression, a war with mexico, and hatred between the states that later turned into the civil war.

The whole logic is convoluted. Who will bail out the US after it bails out the Fed when the US government continues to prop up an unstable pyramid of debt? The idea that this 700 billion will solve the problem is wholly unknown and unlikely if home price continue to decline. We built a debt pyramid supported by 5 percent of homeowners who had no financial recources to buy the homes they wanted. Transferring the loss to the US government was probably inevitable but by no means a solution, any more than all the Fed actions of the past year.

18 months ago when I set up my signature I noted the problems the housing was called and look where the highway has led to this point. We are literally burning down the house.

al_bundy 09-24-2008 11:26 AM

Our total debt is not that bad compared to GDP and most other countries in the world.

compared to the initial RTC estimates in 1990, $700 billion in 2008 dollars is pocket change. back then the deficit was a lot higher as a percentage of GDP.

RTC wasn't a magical fix either. Back then Citi almost went belly up in 1994 and home prices were flat for most of the decade with a lot of 1987-1990 buyers being upside down until 2000 or so.

the goal is to make any downturn controlled and gradual so that asset prices don't go in crazy directions very fast.

FIREd 09-24-2008 11:58 AM

I think the bailout is unpopular with people because they haven't suffered enough themselves. So far a few fat cats got run over by a bus, big deal! But wait until unemployment explodes, incomes fall, people's 401Ks plummet, retirees start eating cat food, and shanty towns start burgeoning all over, and I bet you that you'll start to see people clamoring for congress' mercy... We will spend that $700B, it's just a matter of time. But the more we wait, the harder it will be to avoid some severe damage to our economy. History shows that in similar crises, inaction or belated action by the government has always resulted in deep and prolonged recessions.

I hope people have been studying how the Scandinavians handled their own credit crisis in the 1990's. It was eerily similar to ours. The root causes were a real estate bubble coupled with loose lending practices which resulted in a financial market crisis... Sounds familiar? At one point, interest rates spiked to 500% in Sweden. Unemployment shot up to almost 20% in Finland. Scandinavian governments intervened swiftly and decidedly to stabilize the markets using a scheme not unlike the one proposed by Paulson. There were massive nationalizations of banks and financial institutions. It is said that, in the end, the Swedish government actually managed to make a profit out of the bailout. But economists generally credit the swift government action for the relatively "quick" recovery of Nordic economies. The government bailout did not have an immediate impact on the economy however. Scandinavian countries still went through 3-5 years of a deep, nasty recession before things started to improve. In Japan, the government waited many years before intervening and I think it is pretty safe to say that Japan has still not recovered from the 1989 crisis. And, after reading about it, I think that the great depression in the US was probably caused by an unwillingness for the government to step in at the onset of the crisis, and then the government's decision to step in much later with sweeping reforms and programs that just made the situation worse.

ladelfina 09-24-2008 01:01 PM

What political brinksmanship disallows a rational-sounding appeal like yours, FIREdreamer, from coming out of Bush's mouth, or Paulson's?? Or from any congressional leader so far?

(I heard Obama answered some questions on the economy and need to find a video link to that.. at least he is out there and not "sequestered")

It appears that the Rs in particular are blocked from saying the "R" word.. much less the "D" word.

That being so.. I'm still not convinced that the ills you describe won't come to pass all the same in the US, though I will study the Scandinavians as you suggest. Don't forget in all this that they have much stronger social safety nets (esp. universal health care) and less income inequality.. Whatever their ills, I wonder whether an extreme dog-eat-dog scenario was ever going to be in the cards (shantytowns and cat food.. tho' I hear the Scandinavians eat some pretty alarming fish products as a matter of course). ;)

socca 09-24-2008 02:19 PM

Quote:

Originally Posted by FIREdreamer (Post 719733)
I hope people have been studying how the Scandinavians handled their own credit crisis in the 1990's. It was eerily similar to ours. ... Scandinavian governments intervened swiftly and decidedly to stabilize the markets using a scheme not unlike the one proposed by Paulson. There were massive nationalizations of banks and financial institutions.

I seriously doubt that the Scandinavian crisis was similar to ours. Do you have a good primary reference from an unbiased source (this does not include Fox News :) )? Also, Paulson is not proposing a massive nationalization of U.S. banks and financial institutions. In Paulson's plan, the U.S. gov't (i.e. the taxpayer) gets no ownership stake in the companies bailed out.

FIREd 09-24-2008 02:26 PM

That's the thing ladelfina, all the ills I described will probably come to pass anyways. There are already reports of people living in tents on the outskirts of many large cities, people are already seeing their 401Ks dwindle, and unemployment is already on the rise. It will probably get worse in the short term no matter what congress does. As I said, the early government intervention in Scandinavia did not prevent a deep recession that ultimately hurt people. But what it did, was to make for a speedier recovery.

FIREd 09-24-2008 02:29 PM

Quote:

Originally Posted by socca (Post 719814)
I seriously doubt that the Scandinavian crisis was similar to ours. Do you have a good primary reference from an unbiased source (this does not include Fox News :) )? Also, Paulson is not proposing a massive nationalization of U.S. banks and financial institutions. In Paulson's plan, the U.S. gov't (i.e. the taxpayer) gets no ownership stake in the companies bailed out.

My original source was Bloomberg. Do your own research. I don't do Fox News. And I said the plan was "not unlike" paulson's, I did not say it was identical.

Oh and by the way is it a coincidence that the Scandinavians are on a "lecture tour" in the US to explain how they handled the crisis back in the 90's? I think not...

OAG 09-24-2008 02:35 PM

I am itching to buy my neighbors $400K Ferrari for $20K (Cash) when he has to sell it to eat post-collapse.https://www.early-retirement.org/foru.../tickedoff.gif

ladelfina 09-24-2008 02:46 PM

Wondering why someone can't come out with an explanation is also Krugman:

Quote:

The two striking things about the Paulson push since last Friday have been (1) demands for complete discretion, with zero accountability and (2) a complete refusal to explain the theory of the case — to explain why this thing is supposed to work, so that we can have an open discussion of whether he’s right.
The trust problem - Paul Krugman - Op-Ed Columnist - New York Times Blog

tmm99 09-24-2008 02:56 PM

Someone posted this link on diehards.org forum...

10/26/98 JAPAN'S BANK BAILOUT: PAINKILLER OR REAL REFORM? (int'l edition)

This is what Japan did in 1998 and it sounds like what US is *thinking* of doing now...

History should not repeat itself if we all know the dire consequences.......?

Independent 09-24-2008 04:14 PM

Quote:

Originally Posted by al_bundy (Post 719698)
the problem is perceived risk, same thing when worldcom and enron went belly up. the TED spread and all the other indicators went crazy because everyone stopped trusting everyone else because no one trusted the public financial info. everyone went into bunker mode and conserved cash and didn't lend it to anyone.

same thing happened last week. people started pulling money out of MM's because everyone believes it's as safe as cash and the details don't matter. what matters is the effect it has which is no short term lending and the possiblity of MM's going belly up which is even worse. If the Fed allowed the risk part to happen and MMs to go belly up it would have been very bad.

imagine the only people getting credit are only those with 800 or higher FICO's? fortune 500 corporations would have cash problems because everyone relies on short term financing for working capital. there is a formula i learned in finance classes that is used to figure this out, but i can't remember it. you can figure out a company's working capital requirements from it's public investor documents.

if you look at your average fortune 500 company the bonds usually yield around 4%. the way the libor was last week that might double. now imagine if the government allowed things to go on and institutions to keep on failing. at the minimum it could have been a recession like 1980 with 10% unemployment.

the meltdown comes from the fact that everyone is linked to everyone else via credit default swaps. rumor is that the bear stearns bailout was really a JP Morgan Chase bailout because Chase had around $80 trillion of CDS's with bear stearns. once institutions like AIG fail everyone calls in their IOU's via CDS's and forces everyone into bankruptcy as no one can pay up and each BK will cause more BK's down the line.

Then you have the problem with the Federal Reserve stretching it's balance sheet with all the junk they took on over the last year from the banks. this bailout will go forward because it's as much a Federal Reserve bailout as wall street. no one has the money to pay the Fed back for the loans they made over the last year and this is how it's going to work out.

i bet if you add up all the lending facilities over the last year it will add up to around $700 billion. and you can't seriously say we should let the Federal Reserve fail? Last time we got rid of a central bank it turned into a 20 some year depression, a war with mexico, and hatred between the states that later turned into the civil war.

(My bold) I don't think that "everyone" relies on short term financing. See this, for example: www.latimes.com/technology/la-fi-microsoft23-2008sep23,0,1847736.story?track=rss You can look at public documents and figure out how much working capital a firm had in the past, and see if the curent amount is high or low relative its history, but I don't think there's a formula that tells you what they "should" have.

I'm picking on this point because it's a good example of choices. Businesses make a choice on how much leverage they are going to use, and how much of the debt will be short term. Firms that use lots of short term debt will show better profits in good times and worse in bad. An occaisional "credit crunch" keeps people from going overboard. The firms that emphasized equity ride out the storm and expand at the expense of those that were heavy with debt. Our root problem may well be that we've had good times for businesses with low interest rates for a long time, so perceptions of "safe" levels of debt have become pretty high.

I understand that when things go bad people get conservative and try to build cash. This effectively shrinks the money supply and the Fed should do something to offset it.

Theoretically, it's possible that so many firms are so highly leveraged that there would be a chain reaction of bankruptcies. That worries me more than Money Market funds. I'm questioning whether we're in that situation. Are most firms really that dependent on that much debt? or are we at a point where some highly leveraged firms are going to fail while the others endure a bump in the road? The problem is that the "experts" who should know those answers seem to be the same people who will profit from the bailout. I'm not sure if we're getting an impartial analysis. I haven't seen a poll of the academic "experts", but I happened to hear one "free market fan" last night who says we shouldn't panic (see Meltzer at: www.pbs.org/newshour/bb/business/july-dec08/bailouttalk_09-23.html

(I'm not worried about the Fed - it owns the printing presses.)

I notice that Lehman seems to be finding buyers for its parts. Merrill and GS are doing painful things that don't involve bankruptcy. I hope we find out soon if most of the pieces of AIG turn out to be sellable.

I can remember the 10% unemployment rate in the 80's. It wasn't a good thing, but it was the cost of squeezing decades of inflationary psychology out of the system. In the long run, it seems to have been worth it. I hope we don't get that high this time (I've got a family with jobs on the line, and the US has more economic inequality now then we did then.), but maybe it's time to squeeze the "it doesn't matter how much you borrow" psychology out of the system.

FIREd 09-24-2008 04:21 PM

Quote:

Originally Posted by tmm99 (Post 719845)
Someone posted this link on diehards.org forum...

10/26/98 JAPAN'S BANK BAILOUT: PAINKILLER OR REAL REFORM? (int'l edition)

This is what Japan did in 1998 and it sounds like what US is *thinking* of doing now...

History should not repeat itself if we all know the dire consequences.......?


Off course, in the case of Japan, the patient had been in the ER for 9 years before they finally decided to give him a "morphine injection".

And I think that Paulson has made it abundantly clear that his bailout plan is just a morphine injection. Real reforms will have to follow. On its own, the bailout plan won't cure the problem. But it might stabilize the financial system enough so that we have time to treat the real, underlying problems. At least that's my understanding.

Gone4Good 09-24-2008 04:27 PM

Quote:

Originally Posted by Independent (Post 719607)
If we have a stampede out of MM funds, the money has to go somewhere. It seems to me that it goes to commercial banks.

So out of the frying pan and into the fire? You take your money out of a MM fund because you think it might fail and put it in a commercial bank that might fail? Sure you have FDIC insurance, but only up to $100K. I don't have a statistic about the composition of MM deposits, but I strongly suspect a very high percentage of total deposits are in accounts that exceed FDIC insurance limits.

Also the "friction" in moving from a predominately market based financing system back to a commercial bank lending model is huge. Right now banks aren't lending. And even if they got a good fraction of the MM withdrawals back in deposits, it would take a long while for them to turn around and lend that money back out.

Sure over the "long-term" we'd adjust but people forget how long the long-term can be . . . we came out of the Great Depression too, over the long-term.

Gone4Good 09-24-2008 04:28 PM

Quote:

Originally Posted by ladelfina (Post 719549)
"nice"? Hmmm. The deeper question is: how long and far can we run on "faith-based" investing? We're about to find out.

It's called "fiat currency" and I'm afraid you're going to have to get used to it.

Gone4Good 09-24-2008 04:35 PM

Quote:

Originally Posted by tmm99 (Post 719845)
Someone posted this link on diehards.org forum...

10/26/98 JAPAN'S BANK BAILOUT: PAINKILLER OR REAL REFORM? (int'l edition)

This is what Japan did in 1998 and it sounds like what US is *thinking* of doing now...

History should not repeat itself if we all know the dire consequences.......?


My understanding of Japan's situation is that many banks continued to hold bad loans at face value (never wrote them down). The banks appeared solvent, but really weren't. They wouldn't die, but couldn't lend and became known as Zombie banks. They plagued Japan for years.

Our banks are very rapidly writing down assets (some suggest too much, others aren't so sure). In either case, Paulson's plan will result in banks selling assets for far below their face value. But once the assets are sold the banks can hopefully move forward as more normalized (non-zombie) institutions.

samclem 09-24-2008 04:35 PM

Quote:

Originally Posted by . . . Yrs to Go (Post 719888)
Sure you have FDIC insurance, but only up to $100K.

I'm not sure why people keep saying this. An individual can have an unlimited amount of money in FDIC-insured accounts, this limit is 100K per registration-type per bank. So, a couple could have $300K in a single bank (his, hers, theirs) and do the same thing at as many banks as necessary.

Just open accounts in multiple banks, it's as easy as that.

Gone4Good 09-24-2008 04:36 PM

Back to the original question "What happens . . . ", we may soon find out. Credit markets are starting to melt again while Congress dithers. Tick-tock, tick-tock.

Helena 09-24-2008 04:47 PM

Quote:

Originally Posted by tryan (Post 719598)

yeah, just when we need these people to show some kaunas and take a stand (or at LEAST understand the problem and vote accordingly) ... they RUN and HIDE.


Now there's talk of canceling the Friday debate. :rolleyes:

Gone4Good 09-24-2008 04:53 PM

Quote:

Originally Posted by samclem (Post 719896)
I'm not sure why people keep saying this. An individual can have an unlimited amount of money in FDIC-insured accounts, this limit is 100K per registration-type per bank. So, a couple could have $300K in a single bank (his, hers, theirs) and do the same thing at as many banks as necessary.

Just open accounts in multiple banks, it's as easy as that.

Yes, although doing this takes some work and not everybody almost no one understands this.

Gone4Good 09-24-2008 04:56 PM

Quote:

Originally Posted by Helena (Post 719903)
Now there's talk of canceling the Friday debate. :rolleyes:

Unacceptable! With only ~40 days before the election the American people should get a chance to evaluate the two men who hope to inherit this mess on Jan 20, 2009. If 2, out of 100 US Senators, can't spare 90 minutes to audition for the Presidency in a national forum then we should find a way to select another two candidates . . . pronto.

tmm99 09-24-2008 05:32 PM

Quote:

Quote:
Originally Posted by Helena https://www.early-retirement.org/sk/f...s/viewpost.gif
Now there's talk of canceling the Friday debate. :rolleyes:

Unacceptable! With only ~40 days before the election the American people should get a chance to evaluate the two men who hope to inherit this mess on Jan 20, 2009. If 2, out of 100 US Senators, can't spare 90 minutes to audition for the Presidency in a national forum then we should find a way to select another two candidates . . . pronto.
McCain wants to postone the debate. Omaba wants to do it. I agree with Obama.

Gone4Good 09-24-2008 05:46 PM

Quote:

Originally Posted by tmm99 (Post 719927)
McCain wants to postone the debate. Omaba wants to do it. I agree with Obama.

Off with his head!

He apparently wants to postpone the Palin-Biden debate scheduled for October 2nd, too. I guess the Governor of Alaska is needed to help negotiate in Washington as well.

HFWR 09-24-2008 07:43 PM

This is a perfect time to have a debate. You wanna go to the show? Well, we've just added "the bailout" to your to-do list... :p

Milton 09-24-2008 07:43 PM

Quote:

Originally Posted by al_bundy (Post 719715)
Our total debt is not that bad compared to GDP and most other countries in the world.

That's a valid point. However, the problem as I see it is that the debt just constantly grows, with little thought being paid to the unarguable fact that perpetual deficits are unsustainable. Reverse compound interest is a fearful thing.

Eventually the piper must be paid. Since it will almost certainly be too expensive to do so with 'real' money, the only plausible way out will be rampant inflation: which is going to hurt a lot of people.

al_bundy 09-24-2008 07:52 PM

if the deficit is the level of gdp growth or less than it's OK

i'll take a national debt over no national debt anyday

audreyh1 09-24-2008 09:32 PM

Quote:

Originally Posted by HFWR (Post 720004)
This is a perfect time to have a debate. You wanna go to the show? Well, we've just added "the bailout" to your to-do list... :p

Terrific point!

Audrey

Art G 09-25-2008 08:03 AM

Quote:

Originally Posted by HFWR (Post 720004)
This is a perfect time to have a debate. You wanna go to the show? Well, we've just added "the bailout" to your to-do list... :p


I look at it as, I'd rather wait until these guys knew what the heck was in the final bill. What good is a debate over what may never happen?
Besides, if they're not back in Congress, won't people be questioning how well they're doing their current job?

Milton 09-25-2008 11:04 AM

Quote:

Originally Posted by al_bundy (Post 720013)
i'll take a national debt over no national debt anyday

Wow.

Well, enjoy!

FinanceDude 09-25-2008 11:09 AM

Quote:

Originally Posted by . . . Yrs to Go (Post 719931)
Off with his head!

He apparently wants to postpone the Palin-Biden debate scheduled for October 2nd, too. I guess the Governor of Alaska is needed to help negotiate in Washington as well.

I guess Joe Biden resigned his Senate seat, I didn't see it in the news, though. Is there any legitimate reason we wouldn't want ALL 100 Senators in Washington DC to work on a bill that might be one of the most important in a half century? Some folks on here sure confuse me........:o

cute fuzzy bunny 09-25-2008 11:11 AM

Quote:

Originally Posted by tmm99 (Post 719927)
McCain wants to postone the debate. Omaba wants to do it. I agree with Obama.

Yeah, but Obama thinks January 20th, 2009 is in 40 days...

Maybe we need someone with a better handle on their calendar.

Zoocat 09-25-2008 11:20 AM

Quote:

Originally Posted by al_bundy (Post 719715)
Our total debt is not that bad compared to GDP and most other countries in the world.

compared to the initial RTC estimates in 1990, $700 billion in 2008 dollars is pocket change. back then the deficit was a lot higher as a percentage of GDP.

RTC wasn't a magical fix either. Back then Citi almost went belly up in 1994 and home prices were flat for most of the decade with a lot of 1987-1990 buyers being upside down until 2000 or so.

the goal is to make any downturn controlled and gradual so that asset prices don't go in crazy directions very fast.


Foreign investors own 25% of our external debt. This is a problem.
From United States public debt - Wikipedia, the free encyclopedia

". . .the U.S. Treasury statistics indicate that, at the end of 2006, foreigners held 44% of federal debt held by the public.[36] About 66% of that 44% was held by the central banks of other countries, in particular the central banks of Japan and China. In total, lenders from Japan and China held 47% of the foreign-owned debt.[37] This exposure to potential financial or political risk should foreign banks stop buying Treasury securities or start selling them heavily was addressed in a recent report issued by the Bank of International Settlements which stated, 'Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency. While unlikely, indeed highly improbable for public sector investors, a sudden rush for the exits cannot be ruled out completely.'"

A sudden rush for the exits. There is the doomsday scenario that Paulson, et al., do not dare to mention for fear that it's already happening.

Zoocat 09-25-2008 11:22 AM

Quote:

Originally Posted by cute fuzzy bunny (Post 720304)
Yeah, but Obama thinks January 20th, 2009 is in 40 days...

Maybe we need someone with a better handle on their calendar.

He was referring to election day, which is actually quite accurate since GW has become less than a lame duck, more like Mr. Zombie.

utrecht 09-25-2008 11:28 AM

Quote:

Originally Posted by tmm99 (Post 719927)
McCain wants to postone the debate. Omaba wants to do it. I agree with Obama.

I agree with McCain. Maybe we should have a debate about the debate?

FIREd 09-25-2008 11:36 AM

Quote:

Originally Posted by Oldbabe (Post 720307)
Foreign investors own 25% of our external debt. This is a problem.
From United States public debt - Wikipedia, the free encyclopedia

". . .the U.S. Treasury statistics indicate that, at the end of 2006, foreigners held 44% of federal debt held by the public.[36] About 66% of that 44% was held by the central banks of other countries, in particular the central banks of Japan and China. In total, lenders from Japan and China held 47% of the foreign-owned debt.[37] This exposure to potential financial or political risk should foreign banks stop buying Treasury securities or start selling them heavily was addressed in a recent report issued by the Bank of International Settlements which stated, 'Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency. While unlikely, indeed highly improbable for public sector investors, a sudden rush for the exits cannot be ruled out completely.'"

A sudden rush for the exits. There is the doomsday scenario that Paulson, et al., do not dare to mention for fear that it's already happening.

I read on Bloomberg last night that the Chinese are calling for a meeting with other Asian central banks to make sure that none of them dumps their treasuries and damage the other's asset values. They have much to lose in a sudden drop in treasury values (Asian central banks hold several trillion dollars in treasuries, don't they?), and they are pretty nervous... The best is for everyone to keep drinking the kool aid and believe in the resilience of the great US of A! Of course they will probably buy fewer treasuries going forward and spread their money around as to minimize their risk... But I think it will be a gradual process.

al_bundy 09-25-2008 11:46 AM

Quote:

Originally Posted by Oldbabe (Post 720307)
Foreign investors own 25% of our external debt. This is a problem.
From United States public debt - Wikipedia, the free encyclopedia

". . .the U.S. Treasury statistics indicate that, at the end of 2006, foreigners held 44% of federal debt held by the public.[36] About 66% of that 44% was held by the central banks of other countries, in particular the central banks of Japan and China. In total, lenders from Japan and China held 47% of the foreign-owned debt.[37] This exposure to potential financial or political risk should foreign banks stop buying Treasury securities or start selling them heavily was addressed in a recent report issued by the Bank of International Settlements which stated, 'Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency. While unlikely, indeed highly improbable for public sector investors, a sudden rush for the exits cannot be ruled out completely.'"

A sudden rush for the exits. There is the doomsday scenario that Paulson, et al., do not dare to mention for fear that it's already happening.

it's not that easy, reason they hold the debt is for their currencies to be pegged to the dollar. if they let their currencies float than it may cause their products to go up in price and hurt their economies.

al_bundy 09-25-2008 11:47 AM

Quote:

Originally Posted by Milton (Post 720301)
Wow.

Well, enjoy!

a lot of non-profits keep their assets in t bills along with MM's using t bills as short term investments. no national debt means no t bills and a lot of problems for the above

Zoocat 09-25-2008 11:49 AM

I agree with both of your replies, FireDreamer and Bundy, but those reasons do not stop the foreign lenders from putting the screws to Paulson, in fact, give them more reason to do so.

Retire Soon 09-25-2008 12:03 PM

Fundamental Agreement in Bailout Reached
 
A fundamental agreement has been reached ahead of High-Level Meeting:



Agreement Reached on Bailout Ahead of High-Level Meeting - WSJ.com

FIREd 09-25-2008 12:04 PM

Quote:

Originally Posted by Oldbabe (Post 720323)
I agree with both of your replies, FireDreamer and Bundy, but those reasons do not stop the foreign lenders from putting the screws to Paulson, in fact, give them more reason to do so.

Oh, I agree with you, the Chinese are probably leaning heavily on Paulson, and I would be too if I had half a trillion dollars in the balance! A chinese official said that they were in contact with the US treasury every couple of days to monitor the situation... I bet you it's a lot more frequent than that! I was just commenting on the "sudden rush for the exit" possibility.

The best scenario would be for Americans to start saving more so that we can finance more of our own debt (It's of course unpopular with people, as we know, but the politicians don't like the idea either because it would dampen GDP growth). America doesn't only need more energy independence, America also needs more financial independence IMO (It doesn't mean we should necessarily strive for no national debt). But I haven't heard a single politician talk about that. Somehow, counting on the Saudis for oil = bad, counting on the Chinese for money = not so bad.

I also think that the latest turn of events has put a massive nail in a few coffins... Lower taxes, national healthcare, 100 years in Iraq, yeah I really don't think so. If foreigners start buying fewer treasuries, I think that it might be the signal that we are getting close to our credit limit.

cute fuzzy bunny 09-25-2008 01:09 PM

Quote:

Originally Posted by Oldbabe (Post 720308)
He was referring to election day, which is actually quite accurate since GW has become less than a lame duck, more like Mr. Zombie.

I was just foolin around, but what he said was "Americans deserve to hear from the man that will be in charge of the mess in approximately 40 days"

The president elect isnt in charge of anything until January 20th.

Zoocat 09-25-2008 01:12 PM

Here's an interesting analysis by a contrarian blogger that I read now and then. His whole essay is interesting but I've only included his conclusion below.

charles hugh smith-Weblog and Essays

"...the threat is the Chinese and Japanese central banks will no longer prop up the U.S. bond markets by buying T-bills and other dollar-denominated debt. Well, as the global recession deepens, they won't have as many dollars anyway, so that decline is inevitable.
And if Congress is spineless enough to pass the bailout, then the dollar falling will wipe out hundreds of billions of value from the $1 trillion+ Chinese and Japanese hoards of T-Bills and other debt. "

Also, another excellent analysis of what "might" happen if there was no bailout is here
https://www.doctorhousingbubble.com/

His conclusion:

It is like we are in Wonderland and doing the Red Queen’s Race:
“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else - if you run very fast for a long time, as we’ve been doing.”
“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”


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