An Old-Fashioned Run on a Bank

[Beavah]

Yah, I was proud of the folks in da House yesterday who said "no" to this monstrosity of a bill.

 

At this point, it's really hard to say how much of the market shock is real, and how much is the result of Bush, Paulson, and Bernacke runnin' around last week screaming "the sky is falling! give us money or else!".

 

I hope they recess and go home. Any way yeh cut it, we're goin' to be payin' the price for this inanity, but I'd rather it be us than the boys I see out campin' on weekends. It was a mess our generation made.

 

A massive bailout only postpones the mess, while handin' the Unitary Executive congress's power of the purse. Borrow another 700 billion, on top of da nearly 500 billion we already borrowed this year, on top of an $11 trillion debt, on top of a worldwide banking mess and slowdown, and yeh make da credit of the United States suspect. We're really not much better than one of those subprime borrowers, eh? Already have taken out a loan of $100K per family and now we want more?

 

If we do this deal, by next summer, expect our creditors to be dumpin' dollars and treasuries. No Federal Reserve magic or bailout possible from that, eh?

 

Nah. Better to pay the piper now. Beginning with the nitwits on Wall Street who caused this mess. No bailouts. No parachutes. Consequences.

 

Beavah

 

[packsaddle]

"...the children of the kingdom shall be cast out into outer darkness: there shall be weeping and gnashing of teeth."

Be prepared.

[John-in-KC]

What I wrote my Congresscritters...

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Dear X,

 

As your Constituent, I'm sending a short and simple message to you.

 

You're acting exactly as described by John Adams in the stage play and movie 1776: "Piddling, Twiddling, and Resolving ... not one damn thing are you solving."

 

Right now I do not see the Congress having one creative brain cell in all 535 minds. We need the Congress to do its share.

 

Re-enact Glass-Steagall. Call a bank holiday. Eliminate 3d generation and beyond derivative financial instruments. Provide a backstop to the lack of investor confidence in the American economic system.

 

I'm as conservative a Republican as you'll find, but one problem of de-regulation is people are greedy. It's within the Federal purview to manage greed.

 

Very Truly Yours,

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

 

The one thing I've noticed: There is more than enough blame to go around. Consumers, Bankers, stockbrokers, Congress, regulatory agencies. We're all involved.

[scoutingagain]

As I said earlier the longer this goes the more I'm convinced the government should stay out of it. Other than telling us "This sucker could go down." and we need to avert a financial "crisis." No one in our so called leadership has explained to the American people why this money is needed other than to prevent a "financial meltdown." Whatever that is.

 

If they can't explain it in terms people can understand, they don't deserve it.

 

As far as I can tell we're into this mess because too many people borrowed money they can't pay back from people who apparrently didn't have enough money or sense to be lending it to them in the first place. Now the answer our leaders come up with is to have the government borrow more money to allocate to these fools and spread the risk to the rest of us. Let the stockholders & CEOs take their licks first.

 

Then we can talk about government intervention and if it's needed.

 

SA

[packsaddle]

Eisley might explain this better but the way I understand the concept of 'financial meltdown' is when different institutions can no longer trust the creditworthiness of other institutions (current situation), they don't lend to them (rational decision). BUT, if no one is apparently creditworthy, then the system 'seizes' and everyone rationally decides not to 'oil the economic gears' with loans, and nearly all business comes to a crashing halt - from manufacturing right down to growing wheat. It is an apocalyptic, cataclysmic vision that is potentially real and in the aftermath there will be the real possibility that people will die as a result, indirectly due to inability to purchase services or goods in support of health care I suppose.

 

I add that this vision is something that probably causes orgasm for people like Bin Laden. But I am ready to let these chips fall, finally, if that's what it takes to wake this country up to fiscal responsibility. It is a whole lot more than a dope slap. It might be the end of this country's economic dominion over the planet. But so be it, if that is what the market decides. WE made this Faustian bargain. And the price WILL be paid. Might as well be now.

[Lisabob]

Does it impact us? Oh sure, you bet. Here's a list of just a few ways that this crisis can come home to roost.

 

1) Do you have a 401k or 403b as your main retirement plan? Pour yourself a stiff drink before you check your current portfolio's value and don't plan on retiring anytime soon.

2) Same thing if you've been investing money into a college account that's tied to the market.

3) Want to buy a home? Yes you can still get a mortgage but the terms of credit are much stiffer and people who would otherwise be good bets in normal times will be denied loans because credit it scarce right now and banks are over-reacting.

4) That means vacant properties that could have been sold will continue to sit empty, maybe just down the street from you. Empty houses are bad for the whole neighborhood - more opportunities for vandalism and other crime, unkempt yards lower the property value for other homes in the area too, and local gov'ts aren't collecting property tax on those homes.

5) Some businesses are beginning to report that they can't arrange short term financing to buy inventory. That will lead to empty shelves, loss of customers, laid off workers, and "going out of business" signs in the windows if it continues.

6) Think those laid off workers are just going to find another job? Well I hope so, but living in MI where last month's official unemployment was at nearly 9% (higher in our urban areas, and highest among all 50 states yet again, and projected to go up again this month), I'm not holding my breath. I've had many former students tell me in the last 6 months that even places like Borders, Target, and Starbucks aren't hiring folks with any sort of college degree because they figure (rightly) that those college-educated people will jump ship at the first opportunity for a better job. Great. Not even service industry jobs available for those who thought they were part of the educated middle class.

7) Have a look at the interest rate on your credit cards. It is likely to jump up, if it hasn't already done so. Price the interest rates on new car loans and student loans too.

8) Live in NY state? Were you aware that approximately 20% of NY state's tax revenue comes from the banking and insurance industries? And that NY is projecting a loss of about 40,000 jobs, directly related to this current crisis?

9) Entities like universities often rely on income from investments to fund their operations. Loss of income means cuts to programs, fewer sections of classes being offered (making it even harder to graduate in 4 years), higher tuitions, and job losses.

10) If you have college-bound kids or work with that age group (hey! Scouts!), think they'll make up for the rising cost of college with scholarships? Not necessarily if their endowment funds are tied to the markets. I'm involved with one scholarship fund that got told just this week that we may have to cut the size of our scholarship due to uncertain investment incomes resulting from Wall Street's roller coaster ride.

 

I'm not one bit sympathetic to the investment banking industry, and I agree there's plenty of blame to go around, but even both presidential candidates seemed to finally "get it" the other night when they said that this is not just about "wall street," it is also about "main street." And hey, most of us live on or pretty near to main street. One way or another, bail out (err "rescue" is the new word) or no bail out, this is going to cost us all plenty of money.(This message has been edited by lisabob)

[scoutingagain]

Yea, a credit "freeze". The thing is I don't see a freeze. At least not yet. An aquaintence I know bought a car yesterday. Got approval for a loan to buy a car. A relative bought a house last week. Got approved for a mortgage. Not some way out interest only no downpayment mortgage though, a 20% down, straight fixed rate mortgage on a house they never could have afforded a year ago.

 

As the saying goes if you don't need a loan someone will still loan you money. From what I've read many of the small local banks are doing fine, because they didn't get sucked into the wirlwind of the exotic trades and instruments being bought and sold by the big guys.

 

I'm open to an explanation as to why this fix is needed and I'll probably get a better one here than "This sucker could go down."

 

SA

 

SA

 

 

[evmori]

Want to buy a home? Yes you can still get a mortgage but the terms of credit are much stiffer and people who would otherwise be good bets in normal times will be denied loans because credit it scarce right now and banks are over-reacting.

 

If the driving force behind mortgage lending had been the credit worthiness of the borrower instead of the value and/or equity in the home, we would not be in this predicament!

 

Ed Mori

1 Peter 4:10

[Beavah]

Some businesses are beginning to report that they can't arrange short term financing to buy inventory. That will lead to empty shelves, loss of customers, laid off workers, and "going out of business" signs in the windows if it continues.

 

Yah, OK, this is another pet peeve of mine, eh?

 

Why exactly is a business borrowin' money short term just to maintain inventory??

 

One of the pieces of the "Faustian Bargain" that packsaddle talks about has been the unethical and disgustin' practice of "maximizing shareholder value" in the short run by taking a cyclical industry and leveraging its balance sheet (borrowing a boatload of money) in good times. Wheee! Wheee!!! Stock price goes up, executive stock options soar!

 

Then yeh hit the down cycle for da cyclical industry, and the company has no reserves, has to borrow just to keep inventory, is over-leveraged, and is faced with sellin' assets at a discount and cuttin' jobs right when da job market for folks is weakest. Good companies can go under with da practice. O' course, the execs and board members who are smart all "parachuted" out long before their choices came home to roost destroyin' the livelihood of a lot of workers.

 

And to be fair, unions practice da same idiocy, eh? Pushin' for lush contracts in good times, only to guarantee their members massive layoffs when da cycle turns.

 

Lunacy.

 

Let 'em go under. But make directors who approve that kind of leveragin' personally liable for up to 10 years, with a "homestead" type exemption of $1M.

 

We're goin' to be takin' the hit on this no matter what, eh? Better it be the bankers who caused the mess who get sunk than the U.S. Federal Reserve and Treasury. All together, between the two, they're contemplatin' between 2 and 3 trillion dollars of exposure - up to SIX Iraq wars.

 

If you had loaned someone half of your available money, and they pay interest but never repay the principal and just keep borrowin' more money, and then in one year they borrowed another 20% while also tryin' to inflate their currency to avoid havin' to pay you real interest, what would you do? Would you keep loanin' 'em money? How about if your business was weak? Wouldn't you sell your riskiest asset - da loans you made to them?

 

This bailout will stem the problem in the short term, maybe. But it only guarantees worse pain in the long term, when we are forced to make a huge jump in interest rates to protect the dollar and finance our debt. THAT really will be a depression.

 

Better to pay the piper now than get run over by da entire band in the comin' years. Unless you're an unethical, socialist pseudo-republican fool of an executive who just wants to get out of Dodge and leave the problem to the next guy.

 

Beavah

 

[Lisabob]

Beavah, Ed, and others - I'm not saying it is good or even smart, I'm just saying that's what appears to be happening. To claim that this whole mess won't, or isn't, negatively impacting "ordinary people" is to hide one's head in the sand.

[John-in-KC]

"Better to pay the piper now than get run over by da entire band in the comin' years. Unless you're an unethical, socialist pseudo-republican fool of an executive who just wants to get out of Dodge and leave the problem to the next guy."

 

Beavah,

 

Tell us how you really feel!

 

John

[Beavah]

I'm open to an explanation as to why this fix is needed and I'll probably get a better one here than "This sucker could go down."

 

Effect so far is limited to commercial paper, SA. Commercial paper or "money market" is very short term debt issued mostly by banks, but also some big companies. A bank sells a big block of promissory notes, usually to a "money market fund", that pay relatively low interest on maturity. They get the cash to make other loans at higher interest. Kinda like a line of credit, except they do it cheaper than a line of credit by just rotatin' through these promissory notes.

 

Problem is, they're addicted to that short-term credit, eh? Product of not keepin' big enough reserves, and playin' around with these darn derivative things particularly after repeal of Glass-Steagall. So if they're takin' a hit on the rest of their portfolio and depletin' their reserves, and some banks are failin', who wants to buy their short-term promissory notes? Nobody. Folks who've been dumb enough to do so have seen their money-market funds "break the buck" and go bust on what should be a "safe" investment in the last two weeks. Bunch of ordinary folk, too, who just had money market funds in investment accounts.

 

So da banks can't sell their promissory notes for short-term capital, and therefore they have less money to lend and still less reserves. Run on da bank panicville.

 

Thing is, the real issue is transparency, eh? Yeh need to see a bank's balance sheet to be able to tell da good ones from the fools. If yeh can do that, then yeh know who it's safe to accept a promissory note from, and who it isn't. Bingo, no more problem. We made it illegal to do that of course, so that "big players" didn't have an advantage over retail investors by gettin' information earlier, and gettin' better information from da raw books instead of management's official quarterly statements.

 

No need to dump cash on everybody, just need to open da books and let the weak ones die. Of course, that'll accelerate the collapse of the bad ones, eh? Might add to the panic in the short term.

 

Beavah

 

[packsaddle]

scoutingagain, I agree with Lisabob's assessment. This is no joke. It will have serious impacts throughout every aspect of our lives. (Lisabob, my 401k is worth about 60% of what it was worth two weeks ago) The thing is, not too long ago "This sucker could go down" was the kind of nonsense that satisfied a majority of this country as a substitute for reasoned thought. I am a bit surprised to see the sudden disdain for this level of analysis and insight on the part of our commander-in-chief. Some respect for the office, please. Go back and review this old thread: http://www.scouter.com/forums/viewThread.asp?threadID=7047#id_161344

To answer your question, the absence of the flow of capital is what will cause a 'freeze' as you put it, in aspects of the economy way beyond credit. Payrolls will not be paid, inventory not replaced, everyone will pull in whatever shards of cash they have left, if there is any. Those who are desperate may turn to crime. We will begin to 'wink' at police misconduct the same way we've winked at the loss of 'habeas corpus' from the patriot act. Then we'll begin to suspect each other and perhaps turn on each other. To paraphrase Shaw, squalor and filth will become the foundation of society, soothed by drunkeness and mastered by the policeman's baton, except for those places and people where and on whom the ruling elite choose to slake their lusts. OGE, see if you can ferret that one out. Paints a pretty picture, though, no?

Edited part: I guess Beavah types a lot faster than I do. But I am in agreement with him on this. We might get spanked. We might get spanked HARD. We earned it.

(This message has been edited by packsaddle)

[ScoutMomSD]

I admit I am scared ...less. At our age, we have figured we could retire in 10 or so years.

 

Our home is worth 24% less than at the height of the market, luckily we still have a lot of equity as we purchased new about 10 years ago.

 

We have always been savers. We have always contributed the maximum to whatever plans we each had. Now it seems like the mattress would have been a better option. I am too depressed to even check our funds, but I would hazard a guess that our net worth is about half what it was two years ago.

 

My daughter will be starting college in 6 years.

 

What is going to have to give?

[packsaddle]

ScoutMomSD, you're right...I checked. It's depressing. Almost as bad as Nixon felt when he lost to Pat Brown, dark, depressing brown. So what's going to give? Heck if I know. We just bought a house 4 years ago. Paid for about 50% so we're good..as long as we make payments. One child of ours is out and just hired into a major corporation that I think (hope) is bulletproof. Our other is half-way through college. At $42K per year for college, we're feeling pinched. Plus the mortgage on our other still-unsold home. Retirement? I'm laughing with maniacal laughter. You've GOT to be kidding! (pardon my poor grammar) On the other hand, there's always the LOTTO or MegaMillions or what's that other thing, the Powerball. Unstuff your mattress and bet it all on red 23. You know that stuff in the mattress is going to lose value as fast as they print the stuff, right? Now THAT would be the way to hurt the rich right along with everyone else. Just monetarize the entire debt...really quickly before foreign countries can buy stuff with our worthless currency. THAT would be spectacular.