Crisis in the Financial Markets

[afchic]

What happens now that the bailout plan has failed? Who would like to bet Pelosi sends everyone home in recess because all of this is just to hard to figure out and is going to leave it to the next Congress to deal with???

[nmap]

Originally Posted by afchic

What happens now that the bailout plan has failed? Who would like to bet Pelosi sends everyone home in recess because all of this is just to hard to figure out and is going to leave it to the next Congress to deal with???

I expect a continued bear market. If we get a hard, prolonged crash we might see some good values in late October or November - but I suspect that will be too early. We may have to wait until some time in 2009.

Credit will probably become more difficult to obtain and more expensive, with economic activity declining and some increase in unemployment. Whoever wins the election may face some serious economic challenges.

On the bright side, the way to make money is to accumulate cash and buy when the market presents great values - then hold on for years, or even decades. The current action brings us closer to one of those outstanding buying opportunities.

[Roguish Lawyer]

These guys in the House are idiots. Without this bailout, we are all screwed.

[C-Fro]

From the bits and pieces I heard, They are going to modify the Bail out plan until the yays outweigh the nays. They are going to try to complete this today( In reality I can't fathom this happening). The next possible time to work on the Bail-out plan would be Thursday due to a Jewish Holiday. So I guess it's another matter of the wait and see game.

[Surf n Turf]

Originally Posted by nmap

The problem with describing an outcome is that the economy isn't monolithic.
the top 1% of the households in the U.S. have a net worth of $6 Million or more - I suspect that inflation will be profitable for that segment of the population. So, is inflation "good" or "bad"? I guess I see it as a function of perspective.

Where this all becomes interesting is if some other event further distresses the economy. My personal bias is that it will be energy prices, although Grateful advances some good arguments that such events will be farther in the future (on another thread).

Interesting times.

Originally Posted by nmap

Of course. There are two ways that I can discern out of the current situation. We can buckle down, have an austere national budget, and cut back on both personal and public spending for a decade or so. Or, we can inflate. Since both politicians and the public seem to prefer short term paliatives, I suspect that you're right about inflation.

nmap,
To Quote Baron Nathan Meyer Rothschild,
“Buy when there's blood in the streets, even if the blood is your own."

But what happens if we have sudden hyper-inflation, and those with the means (your 1%) can no longer profit, as their wealth (in what ever form) is deflated substantially.

On your second point, I think that the intervening event(s) that may affect the economy will involve military action – with us as either participants or targets.

SnT

[ZonieDiver]

Originally Posted by Roguish Lawyer

These guys in the House are idiots. Without this bailout, we are all screwed.

With or without a bailout, most of them are idiots! As things have been going, with or without the bailout "we" are probably screwed, too!

I think we will get some kind of bailout, maybe just not this one. I always hate a "rush to judgement". We'll see...

[Monsoon65]

Originally Posted by nmap

On the bright side, the way to make money is to accumulate cash and buy when the market presents great values - then hold on for years, or even decades. The current action brings us closer to one of those outstanding buying opportunities.

When I called my financial dude today about whether to hide my money in the mattress or the back yard, he said the same thing. About six months from now, start buying.

[nmap]

Originally Posted by Broadsword2004

Here is what Captain Capitalism wrote, nmap what do you think? http://captaincapitalism.blogspot.co....html#comments

I think it illustrates the problem nicely. From the article:

"Because punishment will be served. Justice will be done. Revenge will be savored."


From inception, the policy has been called a bailout. But it may be worthwhile to pause a moment and ask who is being "bailed out"? Who gains from the "bail out"? Who loses if it goes into effect, and who loses if it does not? These are not rhetorical questions; rather, they may serve to illuminate the problem.

When a bank is bailed out, the shareholders will lose much, and perhaps all of their investment. Were the shareholders the ones who created the crises? Hardly; they may be guilty of a poor investment choice, but little other than that. The senior executives and the board bear responsibility, but their punishment consists of losing their jobs. The rest of us - the society as a whole - suffers the consequences of reduced availability of credit coupled with reduced business activity. So in pursuit of justice, we have punished ordinary people who seek to find a job or run a business. This does not seem productive or appropriate. Thus, we are not bailing out the purported rich wall street bankers so much as we are attempting to bail out the national and global economy.

The article suggests that the sharp pain of recession will be brief, but salutary, and will impose the discipline of the markets. Perhaps. As we scourge the improvident and the foolish, what price will we pay in terms of future economic activity? We can look to history for an answer. England used to have a debtor's prison, where those who did not pay their bills could be incarcerated until the debt was paid. The U.S. chose not to adopt that model. Why? Could it be that there is more to be gained by writing off the debt and letting the debtor return to economic life? As a thought experiment, should we consider re-instituting the classic approach, and jail those who do not pay their mortgages? How much pain (punishment) should we hand out? What is the optimum level, from the perspective of the country as a whole?

I get the sense that many agree with the quoted sentiment - someone, somewhere, needs to be punished. Someone, somewhere, needs to be flogged. And if that someone happens to be a rich guy that got tripped by his own sly plots, so much the better. This is, however, overly simplistic. The purpose of the bill is not, and never was, to save the rich. Rather, the real cost, whether there is a bailout or not, will be paid by the middle class taxpayer. It becomes a question of how we want to pay. We should choose wisely.

I wonder if a sense of angry moral outrage, such as the article seems to voice, brings us closer to a rational decision. I think it does not.

[Surf n Turf]

Originally Posted by Broadsword2004

nmap, appreciate the information, thanks; BTW, this is sort of a random question, but I figure it relates to the current crises, but does anyone know HOW exactly the Federal Reserve system (like the FDIC) keeps the banking and financial system solvent without going insolvent itself? For example, I know that they have a certain amount of money to work with supposedly, but I've also read the reserves can be whatever they need them to be because they can create money; thing is, if that is the case, how would they print more money without driving up inflation...? How does this work?

Broadsword,
Here are the answers you wanted
http://www.federalreserve.gov/genera...faq/faqfrs.htm

SnT

[Roguish Lawyer]

Originally Posted by nmap

I think it illustrates the problem nicely. From the article:

"Because punishment will be served. Justice will be done. Revenge will be savored."


From inception, the policy has been called a bailout. But it may be worthwhile to pause a moment and ask who is being "bailed out"? Who gains from the "bail out"? Who loses if it goes into effect, and who loses if it does not? These are not rhetorical questions; rather, they may serve to illuminate the problem.

When a bank is bailed out, the shareholders will lose much, and perhaps all of their investment. Were the shareholders the ones who created the crises? Hardly; they may be guilty of a poor investment choice, but little other than that. The senior executives and the board bear responsibility, but their punishment consists of losing their jobs. The rest of us - the society as a whole - suffers the consequences of reduced availability of credit coupled with reduced business activity. So in pursuit of justice, we have punished ordinary people who seek to find a job or run a business. This does not seem productive or appropriate. Thus, we are not bailing out the purported rich wall street bankers so much as we are attempting to bail out the national and global economy.

The article suggests that the sharp pain of recession will be brief, but salutary, and will impose the discipline of the markets. Perhaps. As we scourge the improvident and the foolish, what price will we pay in terms of future economic activity? We can look to history for an answer. England used to have a debtor's prison, where those who did not pay their bills could be incarcerated until the debt was paid. The U.S. chose not to adopt that model. Why? Could it be that there is more to be gained by writing off the debt and letting the debtor return to economic life? As a thought experiment, should we consider re-instituting the classic approach, and jail those who do not pay their mortgages? How much pain (punishment) should we hand out? What is the optimum level, from the perspective of the country as a whole?

I get the sense that many agree with the quoted sentiment - someone, somewhere, needs to be punished. Someone, somewhere, needs to be flogged. And if that someone happens to be a rich guy that got tripped by his own sly plots, so much the better. This is, however, overly simplistic. The purpose of the bill is not, and never was, to save the rich. Rather, the real cost, whether there is a bailout or not, will be paid by the middle class taxpayer. It becomes a question of how we want to pay. We should choose wisely.

I wonder if a sense of angry moral outrage, such as the article seems to voice, brings us closer to a rational decision. I think it does not.

I totally agree. Well put.

[Surf n Turf]

nmap,
An article I thought you might interest you.
I am becoming less inclined to back the “bailout package”

SnT

If he were to rise from the dead today, Marx might be delighted to discover that most economists and financial commentators, including many who claim to favour the free market, agree with him.

At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments.

http://network.nationalpost.com/np/b...-comeback.aspx

[Roguish Lawyer]

This "bailout" is not about saving bankers, it's about saving our economy and the stock market. The loss of market cap yesterday was a hell of a lot more than $700 billion. You think the average joe isn't hurt when his pension/retirement savings are devastated by the market?

[PSM]

If this “bailout” is really a good investment and might even return a profit, then I like Mark Cuban’s idea to bundle the assist in an ETF and let us invest directly and shoulder the risk or reap the benefits. I really doubt that the government will send us dividend checks.

Originally Posted by Mark Cuban

My BailOut Solution - I’m In For At Least $50mm
Sep 26th 2008 11:52AM

As you can tell by the number of the posts on this subject, I think we are in a very serious financial situation in this country. It’s bad for everyone and like many others while I think the Bailout is necessary, I would prefer any solution that doesn’t involve the government. Unfortunately, I don’t think a pure market based solution is possible.

That said, I considered what it would take for me to part with my money to provide liquidity into the banking system.

I will not just write a check to the Treasury. Thats like handing it to Ted Stevens. I’m not going to voluntarily give a year’s supply of crack to the junkies.

Here is what I will invest in:

If Treasury Secretary Paulson were to create an ETF to buy all the assets the bailout was planning to buy, along with all the warrants and shares of stocks in the bailout companies it can get, and then have any receipts generated by those assets, whether by sale, or regular income such as rent or mortgage payments or servicing them, go into the fund, I would buy at least $50,000,000.00 of shares in The Fund.

It would not be difficult to do. Whatever funding that the Treasury Secretary says is necessary for the Bailout would first try to be raised privately from other Funds and individuals by selling them shares in The Fund.

If the amount of shares sold falls short of what the Treasury has defined as being need, the underfunded amount would be funded by the purchase of shares in The Fund by the treasury.

The ETF would initially be valued at the total amount raised and then trade based on its financial results and the trust the American people and international markets have in the job the Fund is doing to monetize the assets. If the fund is making money, the ETF will trade up. If not, not. Either way, the share price and the transparency required of the ETF will make it obvious to taxpayers just how well their taxpayer dollars are performing.

If The Fund is as successful as some think it could be, it could pay dividends. Those dividends will be paid to investors, and to the US Treasury.

In addition, once the assets purchased by the ETF are aggregated and documented, and hopefully the economy has improved, it would be possible to trade out baskets of assets with institutional shareholders. This is a process that will help keep the fund honest in how it manages the assets. If the Fund is not doing a good job of monetizing the assets, Institutional shareholders will look to exchange their shares for baskets of assets in hopes of better monetizing them.

This fund, like every other, would have investment guidelines. The same guidelines that the Treasury would use to work out the assets it would have purchased directly. The fund, like every other, will have analysts and accountants and the same type of people that the Treasury would have hired to work out the assets, except hopefully it would be run more efficiently as a publicly traded fund.

I can’t think of any reason why this wouldn’t work, and why it wouldn’t be a better idea than the current Bailout options that I have heard discussed.

If they need someone to help put it together and/or run it, I’m happy to help.

Tell me what you think.

Link: http://blogmaverick.com/2008/09/26/m...at-least-50mm/

Pat

[Go Devil]

Originally Posted by Roguish Lawyer

This "bailout" is not about saving bankers, it's about saving our economy and the stock market. The loss of market cap yesterday was a hell of a lot more than $700 billion. You think the average joe isn't hurt when his pension/retirement savings are devastated by the market?

I always thought of myself as an average joe, but have never been able to afford to put money away for a rainy day, let alone, retirement. What money I have earned has been invested in tangibles like gas, food, and lodging.

Maybe I have been fooling myself.

I guess I am below average.

[Surf n Turf]

Originally Posted by Roguish Lawyer

This "bailout" is not about saving bankers, it's about saving our economy and the stock market. The loss of market cap yesterday was a hell of a lot more than $700 billion. You think the average joe isn't hurt when his pension/retirement savings are devastated by the market?

Roguish Lawyer,
I have read you posts for the past years, and generally agree with you – But
I disagree with your logic on the “Bailout” plan. --- Not with the outcome, because that is unknown, with or without a bailout, and you may be correct that we need a “bailout” to “shock” the markets, even if the figure of $700 was contrived.
Quote - “In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.
"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."
http://www.forbes.com/businessintheb...23bailout.html

I believe in the following “truths” about investing:
The markets exist within a Yin & Yang universe
You can’t have a Bull market without a Bear Market
You can’t have record Highs without record lows
You can’t have winners without losers
Risk is proportional to reward
There is no free lunch
There is a difference between Investing and Gambling

The current situation was visible some time ago, when the banks started (were forced?) to issue NINJA loans (No Income, No Job or Assets). If investors were nervous, why did they not move to a CD or Money Market account (or multiples thereof) that were insured.
If as nmap has written “There are $ 62 Trillion dollars worth of Credit default swaps (CDS) out - all unregulated. There are about (no one knows for sure) $250 Trillion dollars worth of derivatives.” Do you suggest that we do a bailout of all $312 Trillion, or is the $700 Billion going to work.
If, after all is said and done, we are headed for recession, then I would like to have it without an additional $700 Billion of government debt.
BTW, as I write this, the DOW is up 471 points

SnT