Bail faster! ...and rocket fuel to get away.

[aciel]

If you're anything like me, you probably have no clue what's going on with this bail-out thing. Many of you probably don't care.

But you should. Remember the Great Depression? That will be us.

Comments

[cowsandmilk]

a couple things

[aciel]

It's not about recovery of the 700b. It's about supporting a failed business model.

[cowsandmilk]

Except it isn't. What's causing the action is things like companies not being able to find commercial paper. There are thousands of successful, profitable companies that rely on commercial paper to maintain inventory and perform product transitions. This is the reason why a stock market collapse is expected without the bailout. If (successful) companies cannot buy their inventory for the holiday season, that will be a catastrophe and wreak havoc on many companies that have good business models.

Economists don't disagree with the need for a bailout, they disagree with Paulson's 3-page proposal, and to a varying degree with what's currently being proposed by Congress. Giving Paulson the ability to buy the securities at a premium price is the wrong strategy. Giving Paulson the ability to inject capital in a well-regulated manner for preferred shares with instruction for gradual buyback of those shares is much more in-line with prevailing economic theory.

[aciel]

Not being able to find paper? Where does THAT come from?

[cowsandmilk]

I guess I should clarify what commercial paper is. They're loans that last less than 270 days at a lower interest rate than what one would get through a bank's line of credit. Usually they don't last 270 days though and are instead used to finance day-to-day ups and downs in product inventory. If you're a computer manufacturer, they're what you use to buy a whole buttload of chips each week and you pay it back when you've sold the computers. These loans are frequently 3-4 days in length. A different portion of the market are big box stores that increase their inventory of goods during seasons of high demand. These loans are typically around 2 months.

These are packed into money market funds, which are considered the second safest investments. When Lehman Brothers failed, it caused an important fund to "Break the Buck"., which has only happened to 3 funds in 37 years. Institutional investors left these funds as they all panicked that they wouldn't get their money back