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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)

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."


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