What if no bailout happens?

[drkitten]

You know how there's money? Well, funny story: it happens that most of what you use in your day-to-day life isn't actually money created by the government, but credits, created by private institutions.

And Free Thinkr adds himself (again) to the ranks of the economically clueless who makes people around him more ignorant.

Please ignore him, Beth.

It's much simpler than that. Money you can't get to is useless, no matter how real it is.

The money that you deposited at your bank isn't at your bank. They either lent it out to someone (who has it now) or they invested it with someone (who has it now), in either case because they need to make money on your deposit both to pay you interest and to keep the lights on in their building.

But if they can't get the money from the people who owe it to them, they can't provide it to you.

I have a bank account in Oxford, England. I could have a billion pounds in it and still not be able to make rent this month, because it takes something like a month to send a letter across the pond and get the bankers to wire money to me.

The bank has an account with Lehman Brothers/AIG. Which means that my billion pounds is "really" in New York, buried under five hundred tons of falling sky. So if/when the bank gets its money, it will give me mine. And in the meantime, no sensible person would accept my debit card.

 

[Francesca R]

Well, it's nice to know not everyone agrees that the economy will veer off a cliff.

Oh it might, and it might not. this time last week there was no plan of a $700 billion bailout and the economy was still running. Now thanks partly to Paulson saying "We really need one" coupled with US lawmakers saying "Well maybe you're not having one", the fear factor is perhaps higher than if neither event had taken place.

Other countries, including the UK, are claiming they don't need a toxic-asset purchase plan funded by the public (yet they are "very supportive" of US taxpayers risking their wealth on it). Equity markets have certainly *not* concluded that it does not matter for other economies though. And, unfortunately for the US, there is an element of free-riderism about Europe's relative nonchalance too.

But I heard on NPR tonight about how Sec. of Treasury Paulson says that if congress doesn't act quickly, the results will be dire. What does that mean in this context? What are the dire results he is predicting will happen without massive intervention? Does he think civilization will break down like in New Orleans after Katrina?

You need to scare the politicians to get them to risk (more of) the public purse, right? Yes there could be "dire results". Or maybe not. Confidence is hard to predict, especially in a panic. Not all panics are self-fulfilling. As for civilisation breaking down, that's pessimistic, although there were a few scuffles in the lines outside branches of IndyMac when it fell over I recall.

 

[Free Thinkr]

And Free Thinkr adds himself (again) to the ranks of the economically clueless who makes people around him more ignorant.

Please ignore him, Beth.

It's much simpler than that. Money you can't get to is useless, no matter how real it is.

But, of course, this ignores the fact that there's only a problem because the money doesn't exist: the same money is owed to two people at the same time.

You'd like to ignore the flaws of our system, evidently because you've been programmed to do so. But they exist despite your refusal to acknowledge them.

 

[dann]

Seems like it would be better to help out the folks who can't manage to pay their mortgages than the firms that lent them the money.
(...)
The problem is, I don't see how bailing out the wall street financial firms is a particularly good solution to the problem.

You are dealing with the kind of economy that does not consider poverty a problem - in a crisis or in a boom. Don't confuse the "bailing out (of) the wall street financial firms" to be an attempt to help homeless people. When the subprime crisis began The Daily Show showed a couple of politicians or financial experts saying that the error was that people who weren't supposed to have a house got one! Theses on work and wealth.

 

[Francesca R]

How's the Marxist candidate for president doing right now? Ought to be scooping up votes!

 

[lomiller]

I am a proponent of the abolition of central banks, sound money, and 100% reserve banking on demand (non-time) deposits. This would serve to eliminate the business (boom-bust) cycle, enable free market interest rates, and enable steady, sustainable economic growth without monetary policy arbitrarily benefiting bankers, real estate owners, or any other special interest.

The problem occurred because a key part of the economy went into deflation (the housing market). Tippit is in favor of permanent deflation in all areas of the economy under the guise of linking the currency in circulation to the amount of gold in existence. Such systematic deflation would mean current conditions would be the norm rather then the exception.

 

[lomiller]

This is the part I don't get. They'll still be receiving my deposits (with which to pay my debit and checking transactions) and they'll still be receiving my loan payments, including interest, so they would continue to be making money. Nor do I understand why they would write off my deposits as bad debts. That doesn't make sense to me. If they would be forced to write off their loans to the wall street firms as bad debts, it makes more sense to me to have the government bailout consist of paying off such debts to other institutions so that they don't, in turn, go bankrupt than to bailout the wall street firms so they can continue operating.

I think it would help to understand very basically how the banking system works. Don’t take my specific examples to seriously; I’m vastly oversimplifying how some of them work to show you their nature.

Banks can’t give out money they don’t have and they have to keep a certain level of reserves. Whatever extra they have above their reserves they can lend out to customers or other banks. When you take out a loan, use your credit card to buy something or when you remove money from your account this depletes a banks reserves. When you pay your credit card bill, pay your loan, deposit money, etc the banks reserves increase.

These are not always constant, though so banks may need to borrow money from other banks when they have to pay out more then they take in, or they can lend out money to other banks when they take in more then they pay out. If a bank has to pay out more then it takes in and can’t borrow that cash from another bank it becomes insolvent and can’t pay the credit card or give depositors their money. This is true even if the bank has a lot of valuable assets.

Another way banks build up their reserves is reselling loans to investors at a lower rate, and pocket the difference as profit. This is where most of the cash they use for loans etc come from. The problem at the moment is that investors are not sure what those loans are worth because they are backed up with collateral that is declining in value. Since they are not sure what the loans are worth, they won’t buy them and the banks are derived of the primary source of cash, and when the cash runs out they can’t give depositors their money or pay merchants for what you purchased on your credit card.

Normally they would deal with this by borrowing money from other banks, but other banks need to be concerned with their own reserves. If banks start to become so concerned with their own reserves they stop lending money to other banks they will all run into trouble eventually and you end up with a failure cascade when each bank failure cause another bank to go under.

It isn’t just banks that get hit with this either. Consider a large company that has a payroll to meet. They don’t always keep cash on hand for this, instead they keep short term investments which they borrow against every two weeks when it comes time to pay their employees. Nor can they expand, buy new equipment or any of the other things a company needs to do. If the banks stop lending they cannot pay their employees regularly even if the company itself is profitable. This means profitable solid companies start to go under simply because they can’t meet their cash flow obligations. This causes the economy to spiral downwards as when laid of workers stop spending. This spiral worsens the housing crisis and puts further pressure back on the banks.

What the bailout is aimed at doing is restoring confidence in the loans the banks have on their books so they can once again start selling them to investors. IMO though, it would have been much better to bail out homeowners 10 months ago and keep the whole problem from happening in the fist place.

 

[dudalb]

How's the Marxist candidate for president doing right now? Ought to be scooping up votes!

After all, he can show how wonderfully Marxism has worked in The Soviet Union............
The whole "Property Is Evil" rant dann posted to is classic. He does not bother to explain what he will replace the idea of private Property with.
dann seems to be a major in the Danish equivilent of English Lit, talk about stereotypes coming true.......

 

[dudalb]

Between the crackpot theories of the Ron Paul worshippers,and the good old fashioned Marxism of dann, this thread has sort of become Economic Kook Central.

 

[Francesca R]

IMO though, it would have been much better to bail out homeowners 10 months ago and keep the whole problem from happening in the fist place.

Propping up the residential property market (if that is what you mean) would have been virtually impossible, and would probably have resulted in a further explosion of home purchases/loans by/to people who could not afford them, because "house prices always go up and the government makes sure of it".

Alternatively, subsidising the net asset value of the decline in house prices since the peak in 2006 would have burned through (completely) considerably more than 700 billion dollars so far--all gone.

So, what else might you mean? There have already been fiscal initiatives passed by your congress and aimed at homeowners, in Q1 2008. (I think between 100 and 200 billion?). That was not enough to prevent the downturn in that market from continuing.

 

[drkitten]

You'd like to ignore the flaws of our system, evidently because you've been programmed to do so.

If by "programmed" you mean "educated," then, yes, you're right.

Which is much better than telling everyone about the (non-existent) flaws in our system, evidently because the voices in your head tell you to.

 

[dudalb]

I think the next few weeks will show that ignorance of economics is even more widespread then ignorance of science.

 

[Free Thinkr]

If by "programmed" you mean "educated," then, yes, you're right.

Which is much better than telling everyone about the (non-existent) flaws in our system, evidently because the voices in your head tell you to.

But, of course, when you responded to what I wrote, you weren't able to point out anything wrong with it: which is why you didn't address it directly. Instead, you chose to brush off anything in any way critical of the status quo, and make a personal attack against me.

That's definitely your best course of action, as the monetary policy you so steadfastly defend is on the brink of sodomizing society.

 

[Free Thinkr]

I think the next few weeks will show that ignorance of economics is even more widespread then ignorance of science.

I think the last year or so has proved that economics, as it's currently known, isn't worth a whole lot (as opposed to legitimate sciences, which yield beneficial results).

 

[drkitten]

But, of course, when you responded to what I wrote, you weren't able to point out anything wrong with it:

No, when I responded to what you wrote, I didn't bother to point out anything wrong with it, because the things that were wrong with it have been amply dealt with in a myriad of other threads -- basically, every time you open your piehole and type gibberish, someone is very quick to hand you your head, which is why you have to keep sneaking into other threads in the hopes of finding a new audience that hasn't learned just how irrational your theories are.

But since you insist:

You wrote:

But, of course, this ignores the fact that there's only a problem because the money doesn't exist: the same money is owed to two people at the same time.

This statement can be easily demonstrated not to be true, and in fact, has been so demonstrated.

The money exists. For every dollar the bank has lent out, it has taken in an a dollar (in fact, more than a dollar) in deposits. The bank could open the book and show you, for example, $100,000,000 in loans and $101,000,000 in deposits, plus $1,000,000 in "reserves." If the bank had the luxury of being able to call in loans on demand and be certain of repayment, and the equally unrealistic luxury of being able to defer paying creditors/depositors until after the loans had been repaid, there would be no problem. I pay the creditors out of reserves while calling in my loans, and when I get the loans back, I continue to pay the creditors with exactly the money I just received.

The problem is not with the existence of the money, but with liquidity; creditors can demand their deposits back faster than borrowers are obliged to repay.

Instead, you chose to brush off anything in any way critical of the status quo, and make a personal attack against me.

That's right, as I wanted to give you a chance to leave quietly, or sit quietly and learn, instead of having to derail yet another thread with a complete and total demonstration of your utter inability to get anything right in economics --- and to prove to yet another audience your absolute and puerile intellectual vacuity.

But you insist on putting up signs saying "Please, drkitten, prove yet again that Free Thinkr has the economic sophistication of a plate of shrimp," and you won't let grownups talk around you.

If you really insist on being whipped back to your kennel every time you post,... well, just continue how you're going.

 

[Francesca R]

But, of course, when you responded to what I wrote, you weren't able to point out anything wrong with it: which is why you didn't address it directly. Instead, you chose to brush off anything in any way critical of the status quo, and make a personal attack against me.

Hmmm, . . . See, my impression is that your non-unique brand of garbage-theory and woo-recommendations in respect of economic policy were all comprehensively circling the toilet in the "more financial pain coming" thread, after you made retreat after retreat from challenges from drkitten and myself and maybe others. Then you were silent for a while, but now you are offering the same kind of detritus after a short break, as if nobody remembers the previous performance-under-scrutiny of your ideas (well, not really yours, those you have adopted).

 

[Free Thinkr]

But since you insist:

You wrote:

But, of course, this ignores the fact that there's only a problem because the money doesn't exist: the same money is owed to two people at the same time.

This statement can be easily demonstrated not to be true, and in fact, has been so demonstrated.

The money exists. For every dollar the bank has lent out, it has taken in an a dollar (in fact, more than a dollar) in deposits.

It took in a dollar, sure. But where did the dollar come from? Oh, that's right, it came from a loan of someone else's money: money that is still checkable by that person. That deposit, in turn, will be loaned out to still another person, and will again end up in a bank. And so on.

You and I both know that the effect of the banking system is to expand the monetary supply. Why try and pretend that's not what's happening?

The problem is not with the existence of the money, but with liquidity; creditors can demand their deposits back faster than borrowers are obliged to repay.

Right. Like I said: two people own the money at once.

Instead, you chose to brush off anything in any way critical of the status quo, and make a personal attack against me.

That's right, as I wanted to give you a chance to leave quietly, or sit quietly and learn, instead of having to derail yet another thread with a complete and total demonstration of your utter inability to get anything right in economics --- and to prove to yet another audience your absolute and puerile intellectual vacuity.

More personal attacks lacking any substance. Par for the dr. kitten course.

But you insist on putting up signs saying "Please, drkitten, prove yet again that Free Thinkr has the economic sophistication of a plate of shrimp," and you won't let grownups talk around you.

If you really insist on being whipped back to your kennel every time you post,... well, just continue how you're going.

I certainly won't be by you. All you'll do is prove that you're the Bill O'Reilly of this board: thinking bluster and insults is a suitable replacement for reasoned argument.

 

[Free Thinkr]

Hmmm, . . . See, my impression is that your non-unique brand of garbage-theory and woo-recommendations in respect of economic policy were all comprehensively circling the toilet in the "more financial pain coming" thread, after you made retreat after retreat from challenges from drkitten and myself and maybe others. Then you were silent for a while, but now you are offering the same kind of detritus after a short break, as if nobody remembers the previous performance-under-scrutiny of your ideas (well, not really yours, those you have adopted).

Hmm. I seemed to remember no one replying to my last posts in that thread, and I was correct. Evidently, you were unable to undertake the effort to verify whether that was the case yourself.

Notice, in particular, dr. kitten's last reply to me in that thread. His entire argument rested on an appeal to authority: namely, authority of the World Bank. Talk about a joke. I suppose I'd bluster a lot if I were in his position too!

 

[lomiller]

Propping up the residential property market (if that is what you mean) would have been virtually impossible, and would probably have resulted in a further explosion of home purchases/loans by/to people who could not afford them, because "house prices always go up and the government makes sure of it".

Alternatively, subsidising the net asset value of the decline in house prices since the peak in 2006 would have burned through (completely) considerably more than 700 billion dollars so far--all gone.

Simply aiding people trying to stay in their homes would have prevented those homes from ever going on the market, which IMO would have prevented, or at least slowed the decline in housing prices that is fueling this whole problem.

While there were certainly some people who were in houses they had no way of affording, the number of people who simply couldn’t afford the balloon payments on their loans was much larger. In many cases these were people who should have been in a much lower interest loan to begin with but were fraudulently steered into vehicles designed for people with far worse credit.

A much more comprehensive government backed program that allowed people to refinance at a rate they could afford would have significantly reduced the number of foreclosures and kept large numbers of houses off the market preventing, or at least slowing housing price decline to a rate that could be dealt with.

So, what else might you mean? There have already been fiscal initiatives passed by your congress and aimed at homeowners, in Q1 2008. (I think between 100 and 200 billion?). That was not enough to prevent the downturn in that market from continuing.

Presumably you mean this bill

http://money.cnn.com/2008/04/02/new...rtisan_draft/index.htm?postversion=2008040322

It was only $15 billion, half of which actually went to home builders effectively subsidizing them to sell even more houses into a declining market driving it down ever further.

 

[drkitten]

Hmm. I seemed to remember no one replying to my last posts in that thread, and I was correct.

Thats because you said nothing worth replying to.

The first two times you post that 2+2 = "a suffusion of yellow," I might bother to reply. When you post the same gibberish that has already been refuted, there's no need to respond directly, because any reader not only knows that you're wrong, but that your reading comprehension is too poor to even recognize when you're wrong.