What will Happen Without A Bailout

Let's just go ahead and get it over with. The bailout is the sort of nonsense that a wall street corporate guy does when he wants to save the world. Paulson looks like he's seen a ghost, and with good reason! Beg pardon, he ain't tryin to save the world, just hold the ship together with duct tape.

I'm sick to death of ten diaries against the bailout, though, so I figure, bein' the contrarian suits me fine. No, I won't go on record sayin' I like the durned thing. I just want to say what'll happen if we don't pay it. If we do pay it, we got to worries about China bein' pissed at our inflation. There are risks to being the world's reserve currency.

This isn't "The Great Depression" this will be "The Great Dislocation." Commericial paper is in dire straights right now, and the entire economy runs on it.

So what does this credit crisis mean? It means no paychecks. Most companies don't need to be paid immediately on jobs, because they use commercial paper to take out short term loans, in order to have the money that they know will be coming in. Hospitals don't need to wait for insurance companies. Colleges don't need to wait for the federal or state government to issue money. A supplier doesn't need to wait for its customers to have the money.

If commercial paper goes down, it is likely that most workplaces will not have the funding to pay you. Worse, it's likely that banks -- and by that I mean a lotta them -- will fail at at once, due to Credit Default Swaps (roughly speaking, a circular firing squad). So you might not have your credit cards, or access to a bank.

So there will be a period of time where money is scrambled around. An' that's bad. Consumer spending would tank, and even if everyone got paid later, there's still groceries to be bought.

But there would be bigger problems up ahead, if commercial paper doesn't get fixed. Imagine a company that has to keep 10% of it's capital in the bank, because that much is needed for payroll. That's 10% that can't be invested, can't be spent and then repaid in ten days. It means a slowdown. If you can't spend the money, you can't do as much as you might be able to otherwise.

This is what the bailout is intended to stave off. whether or not it will do so, is a matter of debate. But there's a reason why a lot of progressive economists are endorsing the stupid thing.

Tags: finance (all tags)

Comments

31 Comments

Re: What will Happen Without A Bailout

I don't think anyone has argued that we shouldn't do anything at all.  But if you hate the bailout plan so much, why support it?  What's the harm in asking Congress to do something that makes sense?

by the mollusk 2008-10-03 07:56AM | 0 recs
Bailout could prolong recession by sucking up cash

This makes sense to me:

Bailout Bill to Worsen, Prolong Recession

by architek 2008-10-03 08:16AM | 0 recs
Re: Bailout could prolong recession by sucking up

The cash will quickly leave this negative growth economy for better investment locales. That's what will further depress the economy. Incredibly, horrifically, the bill places no strings on where the banks can invest their free $100s of billions.

by fairleft 2008-10-03 08:23AM | 0 recs
They already lost the money..

If they weren't so well connected, we could just move on, without the taxpayer being asked to BUY these obviously devalued assets AT MANY TIMES THEIR REAL VALUE.

Listen to the NPR radio show in my .sig "The Giant Pool of Money" That will tell you just what the mortgage backed securities are and why so many of them are going bad.

They were bad investments to begin with, made by people who realized that.

by architek 2008-10-03 08:35AM | 0 recs
don't fall for the fuse

the bomb itself is the Credit Default Swaps.

by RisingTide 2008-10-03 09:41AM | 0 recs
Time. basically there are better ideas

but we're being stampeded into this thing by Paulson, who said that his folks have been mulling this for ages.

They wanted it passed two weekends ago, before the markets opened again. And all the Democrats heard what is wrong -- and they all said "oh shit."

Everyone knows that the bill is political poison. They also know that not passing the bill will shortly become political poison, when the aforementioned happen.

Believe it or not, this is Congress doing what is in the interest of the American public -- even if it's not the best thing out there!

by RisingTide 2008-10-03 09:46AM | 0 recs
How does a one rec diary get on rec list?

And bobswern's with 9 recommends, but opposed to the bailout, doesn't?

http://www.mydd.com/story/2008/10/2/1810 6/3653#22

by fairleft 2008-10-03 08:10AM | 0 recs
It was on when I wrote this

or at least one of his was.

this one got reclisted when? ;-)

by RisingTide 2008-10-03 09:32AM | 0 recs
Re: It was on when I wrote this

I don't know, but it was on when I wrote that comment and for a half hour afterwards at least. It may still be 'recommended', whatever that means here.

by fairleft 2008-10-03 09:59AM | 0 recs
My diary has three recommends

that's enough for rec list any day of the week.

it's a measure both of number, and how long the diary stays up.

by RisingTide 2008-10-03 10:49AM | 0 recs
commercial paper is more expensive

It's not FROZEN, it hasn't SEIZED UP, or any of the other sky-is-falling adjectives used to describe the situation. Here are some actual facts culled from a recent sky is falling credit FREEZE article:

. . . The amount of commercial paper--loans of nine months or less used to fund operations for the companies that borrow under them--outstanding fell to $1.7 billion on Sept. 24, a drop of 3.5% from the previous week, according to Federal Reserve data. {Wow, shocking, lending going down 3.5% as Bernanke, Paulson and all media shout that the sky is falling!!!} . . . If companies can't get funding in the commercial paper market, they won't be able to make to take care of basics, such as meeting their payrolls. {Did the fact tell us "can't get" or did it say 'fell 3.5%'?}. . .

Municipalities, too, are having trouble raising money. Cities are usually considered good bets to pay off their debt, but right now even they're having trouble. New York recently had to pay an interest rate of 9% on a $75 million short-term debt issue--up from 1.25% at the beginning of September. Other cities, including Denver, have faced similar situations. {Again, cost of credit is going up in a depressing economy; the scaremongers never find one example of 'NO MONEY AVAILABLE', 'FREEZE', or 'SEIZED UP'}

http://www.businessweek.com/investor/con tent/sep2008/pi20080929_591294.htm?chan= investing_investing+index+page_stocks+%2 Bamp%3B+markets

by fairleft 2008-10-03 08:20AM | 0 recs
"if the bailout doesn't pass"

we can look forward to problems.

I'm by no reason saying that the problems have broken to the surface right now, just that they probably will if the bailout bill doesn't pass.

by RisingTide 2008-10-03 09:33AM | 0 recs
Re: "if the bailout doesn't pass"

The problems are enormous and will surface regardless, and will bankrupt all except the smartest (by staying away from toxic assets) or best connected banks. For example, do credit default swaps, at $55 trillion, seem a bit overvalued to you?

by fairleft 2008-10-03 09:58AM | 0 recs
of course they are... overvalued

I don't think they should have been allowed in the first place!

Paulson and company are doing a fine job of handling bank closures with kid gloves, to avoid the Credit Default Swaps from collapsing.

Roubini was worried about the derivatives, and deservedly so.

Right now is the time to invest in alternative energy.

by RisingTide 2008-10-03 10:01AM | 0 recs
$700 billion on massive public works

energy-efficiency public works

alternative energy public works

rebuilding the 25-30 year neglected public infrastructure public works

Those would have positive economic effects, whereas a criminal and monumental waste to throw money at big banks and let them do any thing they want with it.

by fairleft 2008-10-03 12:19PM | 0 recs
ahh... the entire financial world is collapsing

care to reconsider?

by RisingTide 2008-10-06 05:21AM | 0 recs
more of that lending coming from the FED.

http://www.bloomberg.com/apps/news?pid=2 0601087&sid=azi5ZFVQ4iic
banks don't trust each other anymore.

Kindly check out calculated risk -- it's where smarter people than me hang out!

by RisingTide 2008-10-03 10:09AM | 0 recs
Your diary could likewise be called

What will happen with a bailout.

The Depression is locked in.

by Paul Goodman 2008-10-03 08:58AM | 0 recs
depression or stagflation

the economists are still mud wrestling as to which.

Roubini says global economic depression.

With a bailout, the banks don't go down. Our currency inflates to high heaven -- IF Asia will buy our bonds. If they don't, other bad shit happens. Like no bailout. Man, this is circular isn't it?

by RisingTide 2008-10-03 09:36AM | 0 recs
Re: depression or stagflation

With a bailout the less well connected banks will go down. $700 billion is not nearly enough money to cover all the bad debt. I'm sure Paulson has his favorites and his post-treasury-secretary plans all worked out, and those banks're bidding right now for which one will be the favoritest. This'll be the greatest insider scandal in U.S. history but, of course, no judicial review.

by fairleft 2008-10-03 09:55AM | 0 recs
Is that still in the bill??

The mortgage market is well below 700 billion. If we fix that, we might be able to let the Credit Default Swaps lapse in their own time.

That's the theory anyway... not sure I'd trust the "let's help the market by liquidating fanny mae" crowd.

If Goldman Sachs can lose its status as an investment bank, I think it's fair to say that Paulson is beyond the time where he can play favorites too much.

They're writing the rules to kill the hedge funds, before they take down the entire stock market.

by RisingTide 2008-10-03 10:04AM | 0 recs
Re: Is that still in the bill??

The $700 billion is 14% by some estimates of what's needed for mbs. But even if its more or much more than that, Paulson is given permission to bail out any 'troubled assets'. Which for his favored banks will include credit card debt and CDS.

by fairleft 2008-10-03 01:05PM | 0 recs
All The Smart Economics History Blogs Say NO!

Frankly, the issues involved here are quite complex. But this bank bailout is being recognized as a very classic BAD MOVE by the really smart ones.

The bailout plan could actually trigger something worse than a recession. This will affect YOU quite dramatically! Call your congress critter and demand NO BANK BAILOUT!

Contacting the Congress

by blues 2008-10-03 08:58AM | 0 recs
staving off a stock market crash

is ALWAYS a bad move, instead of fixing the actual problems.

Duh.

But you haven't been shouting since last August, now have you????

Bother to cite some actual sources, pal.

by RisingTide 2008-10-03 09:37AM | 0 recs
I Have Lots Of Sources

They are probably not discernible to the average political blogger. The economic stuff is obscure.

Please notice that since the thing was reported passed at 1:00 PM, the DOW has dropped 300 points.

Maybe next time you will listen to me.

In economics issues, the information is very complex.

The basic problem is that this 850 billion dollars will be borrowed from Asia and the MidEast against taxes expected from ordinary Americans. At interest.

They will try to do this again, by the way. It cannot possibly work. The basic principle is you cannot get blood from a turnip, I guess.

by blues 2008-10-03 10:44AM | 0 recs
where's the pizza party this week?

Do you have your bet in? (ref to fdic taking over yet more banks. people bet on this shit).

Drop me a few links. I read calculated risk as often as I can.

The market is having a hissy fit, and I have no bloomin' idea why. The powers that be were supposed to have a nice shiny rally to say "thank you for free money". Argh!

Why would I bother to listen to the DOW, let alone you? I'm not asking you to cite your sources for my health. I'm asking it because it bolsters your credibility. I know someone who does odd jobs, both for campaigns, the gov't and Wall Street. He's got just as much info as Paulson and company (though different info, naturally).

When you try to get blood from a turnip, you get bankruptcy. Do you really want to see America's credit rating plummet? I certainly don't! Read what Adam Smith has to say about skyrocketing national debt. It's... illuminating.

by RisingTide 2008-10-03 10:53AM | 0 recs
This Pizza Party Will Prove To Be Disturbing

It's seriously ugly, and I am really scared. Here's some links:

Sun Tzu, the Art of War

He who wishes to fight must first count the cost. When you engage in actual fighting, if victory is long in coming, then men's weapons will grow dull and their ardor will be dampened. If you lay siege to a town, you will exhaust your strength. Again, if the campaign is protracted, the resources of the State will not be equal to the strain. Now, when your weapons are dulled, your ardor dampened, your strength exhausted and your treasure spent, other chieftains will spring up to take advantage of your extremity. Then no man, however wise, will be able to avert the consequences that must ensue... In war, then, let your great object be victory, not lengthy campaigns.

I hang out at Elaine's a lot.

by blues 2008-10-03 11:20AM | 0 recs
Re: What will Happen Without A Bailout

Question why give the money to the cos that are failing. Let them fail - if the government needs to step in do so to reimburse everyone's bank balances as well as back existing credit limits with gov't cards. Make the shareholders responsible for reimbursing the government (which will never happen). If a business is going to go belly up b/c a bank is gone with their loan the government takes over the loan at the same interest rate until they can secure another loan with the same interest etc.  I'm not saying the government doesn't get involved- but the method of involvement now just empowers all the individuals who put us into this mess, in a larger fashion while the middle class pays the price.  So nope I don't back the bailout for a second. (And btw not ALL banks are going belly up - there are some institutions which are fine).

by jrsygrl 2008-10-03 09:11AM | 0 recs
there is no transparency

No need to tell whether or not they have Credit Default Swaps.

No need to tell you whether they have significant holdings in Ohio, Arizona or Californai either.

Paulson is a wall street shill, that's why the government isn't taking over the commercial paper market itself.

It's privatize the profits and socialize the risks all over again.

And making the shareholders responsible... eh. a lot of them will wind up being your 401ks.

I'd love to see some clawbacks, myself. but the bill passed, so oh well.

by RisingTide 2008-10-03 09:40AM | 0 recs
Re: there is no transparency

Yes I get the corruption component - which is why I oppose the bill. I believe the bill was proposed primarily due to corruption & that people are simply lining their pockets.  I wish the Democrats had said HELL NO but it passed. It isn't an oh well moment it is an Oh my god this is horrible moment.

by jrsygrl 2008-10-03 12:09PM | 0 recs
it's a damned if you do, damned if you don't

if you ask me.

by RisingTide 2008-10-06 05:22AM | 0 recs

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