Is this the answer if the bailout doesn't happen....
Sep 30th 2008, 12:58 am
#1
Lost in BE Cyberspace
Thread Starter
Joined: Oct 2003
Posts: 22,105
Is this the answer if the bailout doesn't happen....
What would be the fallout should the bailout not succeed? Is it really all doom and gloom? Or is bankruptcy the answer?
http://www.cnn.com/2008/POLITICS/09/...out/index.html
http://www.cnn.com/2008/POLITICS/09/...out/index.html
Sep 30th 2008, 1:08 am
#2
Bloody Yank
Joined: Oct 2005
Location: USA! USA!
Posts: 4,186
Re: Is this the answer if the bailout doesn't happen....
That piece is simply so wrong on so many levels, it's hard to know where to start. Leave it to libertarians to let their ideology blind them to realities that are parked right in front of their faces.
Sep 30th 2008, 2:19 am
#3
Lost in BE Cyberspace
Joined: Jun 2008
Location: San Francisco Bay Area
Posts: 10,678
Re: Is this the answer if the bailout doesn't happen....
If every failure occurred like WaMu and Wachovia, then I would basically agree with the article.
However, two things must occur for that to occur.
The second problem is like trying to catch a falling arrow. The Fed was extremely lucky during the WaMu and Wachovia insolvency catching them before they were totally valueless.
If a bank gets too far into insolvency before filing bankruptdy, the assets become too toxic where no one will purchase the bank. This occured with IndyMac as well as Northern Rock and B&B in the UK. Now those banks are being run by the governments.
The final problem is that if too many banks or insurances companies goes into bankruptsy, their debts are erased. Much of the debt is owned by other banks which can then cause those banks to go into insolvency. Eventually so many banks will fail and so much capital wiped out that the whole financial system can fail and the financial system is set back 50 years. The country will then revert from a first world country to a third world country.
However, two things must occur for that to occur.
- A buyer must be ready to take on the failing institution.
- The institution must be made insolvent just as it is entering insolvency.
The second problem is like trying to catch a falling arrow. The Fed was extremely lucky during the WaMu and Wachovia insolvency catching them before they were totally valueless.
If a bank gets too far into insolvency before filing bankruptdy, the assets become too toxic where no one will purchase the bank. This occured with IndyMac as well as Northern Rock and B&B in the UK. Now those banks are being run by the governments.
The final problem is that if too many banks or insurances companies goes into bankruptsy, their debts are erased. Much of the debt is owned by other banks which can then cause those banks to go into insolvency. Eventually so many banks will fail and so much capital wiped out that the whole financial system can fail and the financial system is set back 50 years. The country will then revert from a first world country to a third world country.
Sep 30th 2008, 2:30 am
#4
Bloody Yank
Joined: Oct 2005
Location: USA! USA!
Posts: 4,186
Re: Is this the answer if the bailout doesn't happen....
At least the article does a good job of showing why libertarians should never be elected. Absolutely no grasp of reality whatsoever.
The guy lives in a Fantasyland if he believe that these institutions would go through Chapter 11 reorganization in the absence of the bailout.
The credit markets are stalled, there would be no way for the private sector to buy these assets. (Note to bonehead economist: If there was, they would have already been doing it!) When they don't sell, these institutions go into Chapter 7 liquidation. The death spiral would further freeze up credit and lower the value of the assets.
Bernanke studied the causes of the Great Depression, so he has seen this playbook before. What I just described is essentially what happened after 1929, so it is not only possible but we already have a textbook example on record of the sort of disaster that the author is advocating.
If everyone had big gigantic checkbooks and could get into bidding wars over the assets, the author would have a point. But since the opposite is true, he's dead wrong.
The guy lives in a Fantasyland if he believe that these institutions would go through Chapter 11 reorganization in the absence of the bailout.
The credit markets are stalled, there would be no way for the private sector to buy these assets. (Note to bonehead economist: If there was, they would have already been doing it!) When they don't sell, these institutions go into Chapter 7 liquidation. The death spiral would further freeze up credit and lower the value of the assets.
Bernanke studied the causes of the Great Depression, so he has seen this playbook before. What I just described is essentially what happened after 1929, so it is not only possible but we already have a textbook example on record of the sort of disaster that the author is advocating.
If everyone had big gigantic checkbooks and could get into bidding wars over the assets, the author would have a point. But since the opposite is true, he's dead wrong.
