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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)

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.


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