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Old 10-30-2008, 11:34 PM   #1
dharma
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Default What Could Have Happened Without The "Bailout"?

Meltdown—but I have had trouble explaining this to friends and family. Here's a piece of a discussion between two posters on one of the oil boards (the second is replying to the first).

Quote:
"The worst case scenario WITH the bailout is the same as without it. In fact the likelihood of bond default is probably greater with the bailout since it is requiring huge federal borrowing to implement it. The US government is borrowing heavily to pay off someone else's debts and losses."

The above is logical but I believe an incorrect analysis. If most of our major banks begin to quickly fail, the liquidity issues that were seen recently would have been many times worse - actually it could have been orders of magnitude worse. Credit lines would have been lost, loans called, credit cards would have stopped working intermittently. It would be beyond the governments ability to close the institutions, pay the insurance and etc., in a timely manner. At some point, any government would try bailouts when the above scenario began. The later the bailouts begin, the higher the cost. In a scenario where AIG is allowed to fail along with Lehman and Bear Stearns, then over $15 trillion in counterparty risk would have been shifted to JpM causing them to fail within days or weeks which would have shortly taken out MS, GS, Citi, BoA, DeutschBank, and etc.

The fallout from the major banks would have taken most of our intermediate sized banks. If the government waited until corporate credit lines are gone, loans called and credit cards stopped working, imagine how many people would have gone to the bank to get their cash - causing massive bank runs, taking out a lot of small banks. At some point, the government would have had to declare a banking holiday. The failure of so many banks would not have been allowed and the government at some point was going to step in. The only question was when. The longer they waited, the more messy and expensive it was going to be and the more economic fallout there would be.

In a scenario where the government waits to take action until after most large and medium sized banks have failed, economic activity would have huge drops impacting government revenues. At the same time, massive unemployment would have caused large outlays from the government. Therefore, the budget deficit would grow to perhaps 1 trillion a year or more. This would not be sustainable for very long especially in a world where we just had most major banks fail. No one would lend the US the money to keep going and we would default on our bonds.

"As far as depression goes, I don't see how the bailout will change the odds of that at all. Without the bailout people would have little money but with it they will have money that will buy very little. There is no practical difference in my opinion."

It makes a large difference. The finance industry provides the "lubricant" that keeps our economy going. Complete loss of lubricant causes the motor to freeze up and need to be rebuilt or replaced. Having low oil pressure in the motor is not good but it is something that the economy can live with for a short time and recover once the oil pressure is back to normal - or in our real case once liquidity issues are solved.
Notice he doesn't specify what happens if the US defaults on its bonds. Suddenly your money wouldn't be money any more (not that you'd have very much), the government would freeze up, and unemployment would hit 30-40%. I wonder if we could barter wheat for oil? I wonder if we'd have enough oil reserves to harvest it?
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Old 10-30-2008, 11:52 PM   #2
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Look to Argentina if you want to know what a meltdown looks like.
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Old 10-31-2008, 12:52 AM   #3
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Quote:
Originally Posted by dharma View Post
Meltdown—but I have had trouble explaining this to friends and family. Here's a piece of a discussion between two posters on one of the oil boards (the second is replying to the first).



Notice he doesn't specify what happens if the US defaults on its bonds. Suddenly your money wouldn't be money any more (not that you'd have very much), the government would freeze up, and unemployment would hit 30-40%. I wonder if we could barter wheat for oil? I wonder if we'd have enough oil reserves to harvest it?
I think the flaw in the counter-argument above is it assumes the bailout would have been executed in the manner it was sold (rammed down our throats) to us. To date, there has been significant deviation from what was initially proposed to what has actually been implemented. Mainly the issue of transparency. We still do not know what the balance sheets look like with these banks and their entanglement with CDSs and how much they've leveraged themselves.

If a bank fails you know what the balance sheet looks like and that would at least give you a KNOWN starting point, even if it is bleak. In my mind that gives you a much better reference point moving forward with how to address and solve the problem as opposed to throwing money at it and see what sticks. Furthermore, there is substantial evidence that the bailout money is continuing to fund the very activity that got us into this mess (cronyism and greed) instead of its intended purpose. In fact, the scope of the bailout has spread to damn near everything on the planet except the man on the street.

I still find the statement that the world of CDSs is nebulous and unknown to be ridiculous. If it is a great unknown, how do banks, hedge funds and other "exposed" institutions know whether they owe or are in a position to collect? There HAS to be a paper trail somewhere. Why isn't it being followed and disclosed?

Additionally, there are numerous storm clouds gathering that are influencing how this plays out that the argument doesn't address. Some of these clouds would include falling commodity prices, unemployment increases, decreases in GDPs, turbulent financial markets and the list goes on. I certainly would cede the point that these may have been set in motion by the failure of Lehman's or at least exacerbated by it but now that those factors are in play, it's almost become a nuclear reaction that one is unable to shut down. So to link it back to whether the bailout was right or wrong may indeed be a mute point.

Finally, for Bernanke to take the position that a given bank is too big to fail because he's drawing upon history with the Great Depression to arrive at his conclusion, and therefore the government must step in, doesn't mean he's right and we should blindly follow his lead. The world and its global economy are very different than it was 70 - 80 years ago. If we are going to follow him into what is clearly uncharted territory, then we must absolutely be demanding transparency at all levels or we risk being just as foolish as he may ultimately end up being.
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Old 10-31-2008, 02:54 AM   #4
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Indeed, other actions were quite feasible amd probably suited to accomplish the desired task. Of course, lying and saying everthing is A-OK right up to the crisis makes options much more limited, how convenient that this administrations and the Fed's incompetence means they are FORCED () to hand out trillions to their friends and supporters as the politicos are going out the door. How convenient!

Anyway, instead of turning the good stuff over to connected banks for a pittance, and taking the trash ourelves, merge the failing banks and use them to fill in the lending and holes in the system the rest of the financial system can't take care of. At least SOME of the bailout money would then be get to its purported uses.

USDA sig line.
"Oh, and if the government wanted to "stimulate lending", it could have set up a Federal Bank of The United States with that $700 billion (or a bunch of banks to provide competition) and created $7 trillion in new credit, while allowing all the existing banks who made bad bets to twist on their own rope until dead. They didn't, which tells you immediately that actually improving lending conditions into the real economy was not their intention - the EESA was in fact designed by Paulson and Bernanke to rip you off and by doing so has and will materially prolong the economic misery we are in today." Karl Denneniger
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Old 10-31-2008, 04:43 PM   #5
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This whole mess is about to be revisited, very soon, I fear. Note that AIG has burned through nearly it's entire credit line-with no explanation of where the money went!
What's going to happen when AIG can't get any more taxpayer dollars? That's a key domino that is still in play, and has been tottering for some time... and could knock everybody out, badly...

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Old 10-31-2008, 04:46 PM   #6
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dharma, you seem to be saying you support the bailout then? I'm a bit surprised given your general political leanings.

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Old 10-31-2008, 05:30 PM   #7
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dharma, you seem to be saying you support the bailout then?
I deplore the circumstances that led to the mess, as you know. My attitude about the "bailout" is that certainly starting the war was stupid, but when the enemy is at the gates of the capital, everybody had better pick up a rifle and fight.

Most people don't understand what a complete credit freeze would have meant to this country, and we were there. There were about 36 hours where we were a few short steps from economic (and therefore social) anarchy.

Now the best thing is for the .gov to get the banks back up and functional, get money and credit moving, and then liquidate its equity interests and bow out. I sincerely doubt that will happen, especially given the polls. The "elite" IB's and hedgies screwed the pooch, and we will all be suffering for it for years, at least.
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Old 10-31-2008, 05:32 PM   #8
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Thanks. That's pretty much where I reluctantly ended up as well, though I confess to having had trust issues with respect to whether or not things really were that dire.

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Old 10-31-2008, 06:11 PM   #9
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There are two months left. Make good use of them.
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Old 10-31-2008, 07:50 PM   #10
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There are two months left. Make good use of them.

Meaning?
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Old 10-31-2008, 07:58 PM   #11
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There are two months left. Make good use of them.

Till New Years?
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Old 10-31-2008, 11:52 PM   #12
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I believe he means two months before the Democrats come to power in terms of their ability to affect taxes, etc. They are sure to make any new tax law retroactive to Jan. 1 (unlawful though that is), and some of their ideas (e.g., Barney Frank's plan to impose a 0.25% tax on financial transactions) are frankly insane.
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Old 11-01-2008, 08:37 AM   #13
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Quote:
Most people don't understand what a complete credit freeze would have meant to this country, and we were there. There were about 36 hours where we were a few short steps from economic (and therefore social) anarchy.
I expect such an event is still inevitable anyway .
The levels of corporate credit are many multiples the mortgage credit value.

That means with rapidly declining corporate earnings there is probably
no bank in America that is going to survive this stool-storm without
government help or ownership.

The only thing they can do is try to keep a few core banks functioning .

They have known it for many months but decided not to alarm the peoples
elected representatives by telling them the truth. Democracy protected
from itself.
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Old 11-01-2008, 09:36 AM   #14
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There is just one play (device) left and even that looks too late. Events are moving quickly, can't be overtly seen, but happening. Complex systems have an opacity and counterintuitive aspect. When in a ship there is no point pumping water from your room to your neighbors in the hope that you will stay dry and it will keep floating. Especially not when you discover you are actually in a sub.
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Old 11-01-2008, 11:15 AM   #15
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Isn't a final play to nationalize it all?
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Old 11-01-2008, 11:24 AM   #16
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Think Bigger.
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Old 11-01-2008, 12:05 PM   #17
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I don't see NWO happening all in one step.

I expect stages........
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Old 11-01-2008, 12:43 PM   #18
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There are just a few holdouts at this time.
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Old 11-01-2008, 01:27 PM   #19
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I deplore the circumstances that led to the mess, as you know. My attitude about the "bailout" is that certainly starting the war was stupid, but when the enemy is at the gates of the capital, everybody had better pick up a rifle and fight.

Most people don't understand what a complete credit freeze would have meant to this country, and we were there. There were about 36 hours where we were a few short steps from economic (and therefore social) anarchy.

Now the best thing is for the .gov to get the banks back up and functional, get money and credit moving, and then liquidate its equity interests and bow out. I sincerely doubt that will happen, especially given the polls. The "elite" IB's and hedgies screwed the pooch, and we will all be suffering for it for years, at least.
The attitudes expressed by financial people are always fascinating. The suggested solutions always dovetail so neatly into a supposedly coincidental enormous benefit for themselves.

So the taxpayers hand over trillions, get everything running again, then "liquidate" and bow out to return to the pretense of these wealthy and powerful entities "standing on their own".

"Liquidate" has a very specific financial meaning and implications. LIQUIDATE means sell fast at low prices. I see already idea that, assuming some kind of return to normalcy, there is going to be enormous pressure to QUICKLY sell back the worthless interests we bought at enormously high prices for good money in a rushed reversed-fire-sale to the same people who created them, so we can QUICKLY get back to NORMAL (i.e. the same situation that brought the crash. But actually it is so they do not have the annoyance of someone looking over their shoulder at their enormous personally self-serving expenditures. And the political embarrasment of undeniable evidence of their subsidy.)

Why not a market price oriented and paced sell back of whatever securities manage to retain some value at a time the gov will make the most profit for the taxpayer? sell back based on PROFIT to the taxpayer, not done fast to ameliorate the embarassed ideology of the con artists.

Like a 3 yo finding fantastic excuses to get into the cookie jar, it never stops from these people.

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Old 11-01-2008, 01:27 PM   #20
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I don't see NWO happening all in one step.

I expect stages........
And this is the first stage. Economic centralization.

It may not be planned, but the central bankers will take advantage none the less.
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Old 11-01-2008, 03:06 PM   #21
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Originally Posted by Fiddlerdave
"Liquidate" has a very specific financial meaning and implications. LIQUIDATE means sell fast at low prices.
Only when talking furniture or other inventoried goods. Otherwise "liquidate" means "sell down to zero", e.g., when talking about bonds or equities, though a "forced" liquidation may indeed involve significant loss. A measured liquidation is indeed what is planned, and the .gov may in fact profit (though the taxpayer won't).

The rest of your post is the usual paranoid cant. Several trillion dollars has been lost by those "financial people" you eternally castigate, including the former chairman of AIG who went from a net worth of $3 billion to zero. Only some smart/lucky guys got out whole, and they made bets that will not be helped by the bailout.
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Old 11-01-2008, 03:10 PM   #22
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3 billion to zero personally?

ZERO?

How can anyone gamble everything?
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Old 11-01-2008, 08:43 PM   #23
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Only when talking furniture or other inventoried goods. Otherwise "liquidate" means "sell down to zero", e.g., when talking about bonds or equities, though a "forced" liquidation may indeed involve significant loss. A measured liquidation is indeed what is planned, and the .gov may in fact profit (though the taxpayer won't).
Oh, there's a nice touch! The taxpayer doesn't benefit if the government gets the money so the bankers may as well have it? As I said, the wealthy never stop trying to take the WHOLE cookie jar. (That is why they are wealthy).

Quote:
The rest of your post is the usual paranoid cant. Several trillion dollars has been lost by those "financial people" you eternally castigate, including the former chairman of AIG who went from a net worth of $3 billion to zero. Only some smart/lucky guys got out whole, and they made bets that will not be helped by the bailout. With the cry already rising for the "government to liquidate get out of the banking business
The wealthy perhaps should look for better poster boys for advertising of the sadness of their situation. Of course, they are hard to find because all the working and recently fired ones are taking home umpteen millions and billions of taxpayer bailout money and its a little hard for the public to dredge up many crocodile tears for them (except from the pots of boiling tar and stink of wet chicken feathers the public is fixing up.)

But the wealthy welfare sluts should really try harder to find a better one than this guy. Still under indictments, if he had been anyone else he would be breaking rocks for the the crimes of con and chicanery he performed at AIG, so much and so severe that he actually was discharged! But as our fine Dharma has pointed out,many of the charges have been dismissed after enormous company-paid legal effort, and we imagine the rest will fall away as either Greenberg or his accusers die of old age.

To paraphrase Dharma, "But his net worth went to ZERO! Hasn't he been punished enough? The poor, poor man!"

Welllll, its a funny world for the financial elite. ZERO is a relative term. Apparently, in this case as far as Dharma is concerned, dropping off the Billionaires list is "ZERO net worth", 7 or 8 hundred's of millions of dollars on hand just don't cut it any more, and his desperate straights are going to be legendary, we are sure. A book of hints for Depressions will be forthcoming, like "How to Eat Breakfast Without an Original Rembrandt Hanging On Every Wall In Your Breakfast Nook".

Of course, Greenberg himself has NOT said that he is broke, just that he lost money on the AIG stock and boy he's upset! And a thought occurs to me that a guy who was tricksy and slick enough to con stockholders and the markets REAL HARD for years, hard enough to be eventually indicted, just MIGHT have done something to cover his butt financially as TSHTF in the past year. He was really close with his board of directors, a man like that just might have a few birdies there singing to him of coming bad weather. so a little protective action like selling his own shares short or some other handy hedging action the billionaires are very familiar with from their trip to billionairville.

The correct statement would be "Greenberg no longer holds 3 billion worth of AIG stock", and stop at the truth. The only thing at ZERO is ANY chance that Greenberg did NOT know AIG was in trouble WELL in advance, and profit magnificently on that, whether himself or by proxy.

Try harder, Dharma. Few are crying for them yet.

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Old 11-01-2008, 09:41 PM   #24
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Quote:
Originally Posted by Fiddlerdave
Oh, there's a nice touch! The taxpayer doesn't benefit if the government gets the money
Because the government is full of darlings like Barney Frank who will spend it on crap.

Quote:
Originally Posted by Fiddlerdave
if he had been anyone else he would be breaking rocks for the the crimes of con and chicanery
Remind me: how many convictions?

Right.

Quote:
Originally Posted by Fiddlerdave
Try harder, Dharma.
You first. A careful reading, or any reading, for that matter, of your cant-filled rant reveals lots of harsh words, lots of allegations . . . and precisely zero facts. If you know Greenberg's net worth, cough it up. If you know how many jobs have been lost on Wall Street (hint: 100K, with another 100K probably yet to go), explain why those folks aren't suffering.

You and Elliott Spitzer, the Hypocrite King, have a lot in common: lots of smoke, very little fire. But feel free to keep blowing! Maybe you'll end up with a bit more credibility.

Maybe not.
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Old 11-01-2008, 09:55 PM   #25
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What would have happened without the bailout is what's going to happen anyhow, just delayed by 6 to 18 months or possibly a little longer, no matter who get's elected come Tuesday.
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