For anyone unclear on what is happening right now from About.com
Why the Bailout Is Necessary
Tuesday September 23, 2008
Congress is now debating whether the taxpayer should pay $700 billion to bail out investment banks who purchased mortgage-backed securities that are in danger of defaulting. The bailout was triggered by an event last week that shows just how close the global economy was (is?) to a catastrophic meltdown.
Last Wednesday, a record $140 billion was pulled out of money-market accounts, usually considered the safest of investments. That's because investors were moving the funds to U.S. Treasuries, causing yields to drop to zero. In other words, investors were so panicked that they no longer cared if they got any return on their investment...they just didn't want to lose capital.
As described in Thursday's Wall Street Journal:
Huddled in his office Wednesday with top advisers, Treasury Secretary Henry Paulson watched his financial-data terminal with alarm as one market after another began go haywire. Investors were fleeing money-market mutual funds, long considered ultra-safe. The market froze for the short-term loans that banks rely on to fund their day-to-day business. Without such mechanisms, the economy would grind to a halt. Companies would be unable to fund their daily operations. Soon, consumers would panic.
What caused this unprecedented run on supposedly safe money markets? On Tuesday, the once-$62.6 billion Reserve Primary Fund, a money-market fund, saw its value fall below $1 a share because of its investments in Lehman's short-term debt. Money-market funds, which yield a bit more than basic cash accounts by buying safe, short-term debt instruments, strive to keep their share prices at exactly $1 -- and "breaking the buck" isn't supposed to happen. Money-market funds are where corporate treasurers put rainy-day funds, where sovereign wealth funds park their excess dollars and where Mom-and-Pop investors stash savings. Now, money-market funds were selling what they could and hoarding cash to meet what they thought might be extraordinary levels of redemptions from investors, said one commercial trading desk head.
Banks were also hoarding cash, too panicked to lend to each other or purchase any assets, for fear of taking on bad debt. Normally, financial institutions have about $2 billion on hand at any given time. By Thursday of last week, they had an unprecedented $190 billion, to prepare for further redemptions. In other words, the economy was on the precipice of a full-scale run on the banks - and not by worried depositors as in the 1930's, but by corporate investors.
Through Wednesday, money-market fund investors -- including institutional investors such as corporate treasurers, pension funds and sovereign wealth funds -- pulled out a record $144.5 billion, according to AMG Data Services. The industry had $7.1 billion in redemptions the week before. Without these funds' participation, the $1.7 trillion commercial-paper market, which finances automakers' lending arms or banks credit-card units, faced higher costs. The commercial-paper market shrank by $52.1 billion in the week ended Wednesday, according to data from the Federal Reserve, the largest weekly decline since December. Without commercial paper, "factories would have to shut down, people would lose their jobs and there would be an effect on the real economy," says Paul Schott Stevens, president of the Investment Company Institute mutual-fund trade group.
Treasury Secretary Henry Paulson conferred with Federal Reserve Chairman Ben Bernanke, who agreed that the problem was beyond the scope of monetary policy. The Federal government is the only entity large enough to step in and stop the madness. Let's hope it is enough. Otherwise, as Paulson was overheard to comment, "Heaven help us all." (Source: WSJ, Shock Forces Paulson's Hand, September 20, 2008)Congress Adding Needed Oversight to Bailout Plan
Tuesday September 23, 2008
Congressman Barney Frank, Chairman of the Housing Financial Service Committee, is working with lawmakers to create some much-needed oversights to the $700 billion bailout proposed by U.S. Treasury Secretary Henry Paulson. Frank's understanding of what caused the banking crisis, what will happen if nothing is done, and what alternatives need to be included will help shepherd a solution through Congress. The additional measures include:
http://useconomy.about.com/b/2008/09/23/why-the-bailout-is-necessary.htm
The Federal government is spending hundreds of billions of dollars to guarantee or buy-back subprime mortgage-backed securities in the financial markets to avoid a complete collapse. Here's a chronology of the steps the government took to avoid the crisis, and why it happened anyway.
Why the Bailout is necessary:
Widespread panic in the financial markets continues to threaten overnight lending, needed to keep businesses running. The problem is beyond what monetary policy can do...which means the $700 billion bailout may be the only solution.
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That said, I'm not an economist and I'm not going to pretend like I have some insight on what exactly *should* be done. I just know it's a lot more complicated than a lot of people would like to believe.
There is the anarchist in me that would really like to see the government do nothing, the economy collapse, everyone lose their jobs, and have the country gripped in mass hysteria and panic while I sit back and eat popcorn from the safety of my well stocked, wall armed home.
And what happens if we don't pass the bailout and/or just let these people fail?
Simple.
A Depression.
If the banks fail, the money disappears, you get locked out of the banks, the banks go under and you have no money..the FDIC can insure 52 billion at the moment, but that would be a fraction of what some banks, like Citi, would be in deposits.
Mutual Funds would collapse.
401K's would collapse.
Pensions would collapse.
Tax revenue would drop.
Unemployment would spike.
We would default on our National Debt.
If that is, the situation is as bad as they claim it is. Perhaps they are scaring us into letting them give 700 billion to their buddies, I don't know..
But if you study historical economics, you will see the Great Depression was caused by a culmination of several things..
Restriction of Credit, liquidation of banking assets, equity collapsing, wealthy investors fleeing the markets in droves to save as much net worth as possible.
Of course, the 1929 market crash was a sudden event, the current markets automatically shut down is a certain percentage is lost .. meaning all assets are frozen for a "cool down" period. After the 1929 collapse, it was mostly uphill from there (stock wise)..
Tuesday September 23, 2008
Congress is now debating whether the taxpayer should pay $700 billion to bail out investment banks who purchased mortgage-backed securities that are in danger of defaulting. The bailout was triggered by an event last week that shows just how close the global economy was (is?) to a catastrophic meltdown.
Last Wednesday, a record $140 billion was pulled out of money-market accounts, usually considered the safest of investments. That's because investors were moving the funds to U.S. Treasuries, causing yields to drop to zero. In other words, investors were so panicked that they no longer cared if they got any return on their investment...they just didn't want to lose capital.
As described in Thursday's Wall Street Journal:
Huddled in his office Wednesday with top advisers, Treasury Secretary Henry Paulson watched his financial-data terminal with alarm as one market after another began go haywire. Investors were fleeing money-market mutual funds, long considered ultra-safe. The market froze for the short-term loans that banks rely on to fund their day-to-day business. Without such mechanisms, the economy would grind to a halt. Companies would be unable to fund their daily operations. Soon, consumers would panic.
What caused this unprecedented run on supposedly safe money markets? On Tuesday, the once-$62.6 billion Reserve Primary Fund, a money-market fund, saw its value fall below $1 a share because of its investments in Lehman's short-term debt. Money-market funds, which yield a bit more than basic cash accounts by buying safe, short-term debt instruments, strive to keep their share prices at exactly $1 -- and "breaking the buck" isn't supposed to happen. Money-market funds are where corporate treasurers put rainy-day funds, where sovereign wealth funds park their excess dollars and where Mom-and-Pop investors stash savings. Now, money-market funds were selling what they could and hoarding cash to meet what they thought might be extraordinary levels of redemptions from investors, said one commercial trading desk head.
Banks were also hoarding cash, too panicked to lend to each other or purchase any assets, for fear of taking on bad debt. Normally, financial institutions have about $2 billion on hand at any given time. By Thursday of last week, they had an unprecedented $190 billion, to prepare for further redemptions. In other words, the economy was on the precipice of a full-scale run on the banks - and not by worried depositors as in the 1930's, but by corporate investors.
Through Wednesday, money-market fund investors -- including institutional investors such as corporate treasurers, pension funds and sovereign wealth funds -- pulled out a record $144.5 billion, according to AMG Data Services. The industry had $7.1 billion in redemptions the week before. Without these funds' participation, the $1.7 trillion commercial-paper market, which finances automakers' lending arms or banks credit-card units, faced higher costs. The commercial-paper market shrank by $52.1 billion in the week ended Wednesday, according to data from the Federal Reserve, the largest weekly decline since December. Without commercial paper, "factories would have to shut down, people would lose their jobs and there would be an effect on the real economy," says Paul Schott Stevens, president of the Investment Company Institute mutual-fund trade group.
Treasury Secretary Henry Paulson conferred with Federal Reserve Chairman Ben Bernanke, who agreed that the problem was beyond the scope of monetary policy. The Federal government is the only entity large enough to step in and stop the madness. Let's hope it is enough. Otherwise, as Paulson was overheard to comment, "Heaven help us all." (Source: WSJ, Shock Forces Paulson's Hand, September 20, 2008)Congress Adding Needed Oversight to Bailout Plan
Tuesday September 23, 2008
Congressman Barney Frank, Chairman of the Housing Financial Service Committee, is working with lawmakers to create some much-needed oversights to the $700 billion bailout proposed by U.S. Treasury Secretary Henry Paulson. Frank's understanding of what caused the banking crisis, what will happen if nothing is done, and what alternatives need to be included will help shepherd a solution through Congress. The additional measures include:
- Aid for homeowners trying to avoid foreclosure.
- An oversight structure that will review Treasury's purchase and sale of mortgages.
- A government equity stake in companies that receive bailout assistance.
- Limits on executive compensation of rescued firms.
http://useconomy.about.com/b/2008/09/23/why-the-bailout-is-necessary.htm
The Federal government is spending hundreds of billions of dollars to guarantee or buy-back subprime mortgage-backed securities in the financial markets to avoid a complete collapse. Here's a chronology of the steps the government took to avoid the crisis, and why it happened anyway.
Why the Bailout is necessary:
Widespread panic in the financial markets continues to threaten overnight lending, needed to keep businesses running. The problem is beyond what monetary policy can do...which means the $700 billion bailout may be the only solution.
-------------------------------------------------------------------------------------------------------------------------------------------------------
That said, I'm not an economist and I'm not going to pretend like I have some insight on what exactly *should* be done. I just know it's a lot more complicated than a lot of people would like to believe.
There is the anarchist in me that would really like to see the government do nothing, the economy collapse, everyone lose their jobs, and have the country gripped in mass hysteria and panic while I sit back and eat popcorn from the safety of my well stocked, wall armed home.
And what happens if we don't pass the bailout and/or just let these people fail?
Simple.
A Depression.
If the banks fail, the money disappears, you get locked out of the banks, the banks go under and you have no money..the FDIC can insure 52 billion at the moment, but that would be a fraction of what some banks, like Citi, would be in deposits.
Mutual Funds would collapse.
401K's would collapse.
Pensions would collapse.
Tax revenue would drop.
Unemployment would spike.
We would default on our National Debt.
If that is, the situation is as bad as they claim it is. Perhaps they are scaring us into letting them give 700 billion to their buddies, I don't know..
But if you study historical economics, you will see the Great Depression was caused by a culmination of several things..
Restriction of Credit, liquidation of banking assets, equity collapsing, wealthy investors fleeing the markets in droves to save as much net worth as possible.
Of course, the 1929 market crash was a sudden event, the current markets automatically shut down is a certain percentage is lost .. meaning all assets are frozen for a "cool down" period. After the 1929 collapse, it was mostly uphill from there (stock wise)..