The Liquidity Crises and why a solution is absolutely required - a personal explanation

[grantcart]

In 1985 I went into the furniture business in S.E. Asia. for an Australian company. In 1987 I started my own company with a few thousand dollars and 4 employees. I had developed a reputation in the area and within a few months I had millions of dollars of orders from American manufacturers and IKEA. We were able to become one of IKEA's largest suppliers in sofa's. We were able to get the business in part because we had very good quality control and because our costing was done on an open book basis - we showed them how we calculated all of our costs. Ingmar Komprad (the owner and I K of IKEA) visited our factory, a very rare occurence.

By 1990 Eastern Europe was transitioning from communism and in 1992 the Soviet Union fell. The costs of absorbing East Germany and the huge economic changes in Europe caused a massive interuption in business and interest rates went through the roof (Denmark set their prime at 21%).

People in Europe stopped buying cars and furniture. We had a long term contract and continued to manufacture and ship. I got a cal from IKEA and they wanted me to come to Sweden and they were willing to pay for the trip. Once in Sweden they took me to one of their massive warehouses. It is the size of a football stadium, all of the material is handled by robots and run by 4-5 guys. Outside of the warehouse stood thousands of containers.

The problem was that all of the product that was not selling (like big sofa sets that we made) were inside the warehouse and all of the things that people were willing to buy were sitting in trailers outside. For them it was a product liquidity crises all of their liquidity (in this case access to warehouse space) was tied up in non performing assets. They had decided to start taking out product and destroying it (If they gave it away it wouldn't do any harm to them but it would depress the market further and force other smaller retailers into bancruptcy and that they would not do.) Even as we continued to ship they had no space for the product. The good assets were sitting there and pretty soon their stores would be empty of the product their customers wanted and filled with the product that no one wanted to buy now. (The point of the trip is probably obvious - it was a nice way to explain why they wouldn't be ordering any more product - that and similar cancellations meant that the factory failed)

This is what our entire economy is facing - all of the liquid capital - the paper that is sold - is tied up in non moving assets that they cannot sell even at a discount.


I was able to raise capital for the factory that paid for the land and the buildings.

In order to function we put the land and building up for collateral and borrowed money for our working capital, equipment, inventories, letter of credit etc. You have to borrow to pay for inventory before you make it and then you have to give your customers time to pay you (accounts receivable). While we were able to make a profit from day one the real major challenge of a company, especially a new one is not profit (except for the dot.com industry) but cash flow. You need to borrow for payroll and raw material and then you pay those loans off and then in a couple of weeks you borrow again. It is a part of the daily regular business.

What is happening is that the bottleneck of cash liquidity has become exactly like the inventory liquidity listed up above. The financial banks do not have the liquidity to offer loans to good businesses because they cannot move the bad assets that they have.

Let me make this clear. If this is being reported accurately and the normal day to day loans that good profitable companies get to make payroll and pay for inventories and buy equipment, etc. are frozen and they cannot get them - even for a very short period of time, then hundreds of thousands of good companies with good jobs will fail.




Letting the liquidity of the banks freeze will cause massive huge dislocations and once started will cause domino effects that could reach that of 1929. Anybody who has run a business knows this simple fact - almost no business has enough capital to operate without borrowing from time to time - it would be like saying no one could buy a home if they couldn't pay the whole price at once. Virtually no one would have a home.




I have no idea if the plan that is being negotiated is a good one or not. I seriously doubt that anyone involved in this likes doing it. It is extremely unfortunate that this is called a "bail out" because that seems to indicate that shareholders will retain their value. I do not believe that is the case. It is also not a bail out of 'Wall Street'. It is providing assistance to the part of Wall Street that buys and sells commercial paper. If it provides that assistance and props up shareholders value then it is a "bail out". If it does not result in shareholders regaining value then those share holders are not being bailed out.


If it is done correctly then not one cent of taxpayer's money will be at risk - if the assets do not result in a return of investment then the government can add a recovery tax on the banking industry to make them pay.


I understand that some will be against anything that looks like it is assisting businesses.

It can be understood as simply giving a blood transfusion to the liquidity of the economy. If our elected representatives ensure that there are built in recovery measures then it can be done without risk and like similar type of loan guarantees to Mexico and Chrysler the government can actually gain back revenue. If it was the right thing to do for Mexico, in a similar situation, then why not our own system - if payback guarantees are established.


If a true liquidity crises occurs and the banking system for businesses freezes the result will be massive collapse of businesses and massive unemployment. Having said that I feel completely incompetent to comment on the value of one plan against another and trust Obama and the advisers he has to make sure the best deal for the taxpayers is made key to the plan.

[NMDemDist2]

1. you are exactly correct K&N n/t

[grantcart]

6. especially this sentence lol

I have no idea if the plan that is being negotiated is a good one or not

[depakid]

2. Thank you for the tangible, "real life" explanation

I hope you cross post this on GD and the economy forum.

[grantcart]

17. Multiple forum beatings lol

[depakid]

19. Don't I know it

Sometimes, that's just how it is around here.

[grantcart]

37. well I did post it to the other forums and there were a few hot heads but

actually I think it helped a few people understand the issue a little bit better.

[tandot]

3. Obama has great economic experts on his team.

I trust him more than some of the armchair economists we have on DU.

[depakid]

7. Was the sheeplistic response really necessary?

[tandot]

38. Nevermind

not worth a response

[bleever]

4. This is an excellent explanation

of the circulatory system that is international banking and the credit markets. Without a basic understanding of this, people tend to think it's all about saving the butt of some rich guy far away, and not our own economy.

[Better Today]

5. You lose my willingness to care right about here. . .

"The problem was that all of the product that was not selling (like big sofa sets that we made) were inside the warehouse and all of the things that people were willing to buy were sitting in trailers outside. For them it was a product liquidity crises all of their liquidity (in this case access to warehouse space) was tied up in non performing assets. They had decided to start taking out product and destroying it (If they gave it away it wouldn't do any harm to them but it would depress the market further and force other smaller retailers into bancruptcy and that they would not do.) Even as we continued to ship they had no space for the product. The good assets were sitting there and pretty soon their stores would be empty of the product their customers wanted and filled with the product that no one wanted to buy now. (The point of the trip is probably obvious - it was a nice way to explain why they wouldn't be ordering any more product - that and similar cancellations meant that the factory failed)"

If they were foolish enough to buy too many bad assets and you're factory was foolish enough not to offer a variety of smaller, more desired sofas; then tough tarts, fail. That's what's supposed to happen. I sure don't want to bail you out, or IKEA. You both should have gotten your selves worked out before the whole warehouse was full and your factory was committed or capable of offering only one thing.

[Marsala]

8. You completely missed the point of the analogy

IKEA is the banking system and the OP's furniture company is every business in America! (Well, not every business, but a lot of them.) Are you willing to let them all fail, causing millions to become unemployed?

[Better Today]

41. I get the analogy, and just like the real life its supposed to resemble,

I don't care to support failures brought on by business's careless, foolish, or unethical choices.

[msallied]

48. So you'll throw out the baby with the bathwater.

Got it. :eyes:

[Better Today]

49. Baby? Bathwater? Pull the hook out of your mouth, you've swallowed the Bush admin bait.

[LonelyLRLiberal]

105. I guess you are positive YOU will continue to have a job and be able to borrow money YOU need?

I am angry, too, and suspicious that they are lying to us once again, but assuming the situation is real, I am not mean enough to wish unemployment on anyone (except the bastards who caused this mess).

[John Q. Citizen]

9. Another great depression will show them, eh?

[grantcart]

11. you missed the point . All larger items were not selling whether they were sofas

glasses and forks were selling,

kitchen sets or in other stores refrigerators or cars - regardless if they were big cars or small cars.


The sofas we made were the smallest in the market. IKEAs main market is in small self assembly furniture not large sofa sets but

sofa sets are the largest item that IKEA sells.


They run 40,000 different types of products 99% of them smaller than the smallest sofa.


At that time in Europe virtually all auto sales (big and small cars) and all large pieces of furniture (like sofa)stopped selling.


Did you really think that IKEA which accounts for 30% of the market was failing because they couldn't figure out the right size of the furniture that the customer wanted?


It wasn't my product it was all of their larger items. The warehouses were the sizes of small cities or large stadiums they were filled with items that were larger than what you could carry in your hands. What was sitting in the parking lot were things that you could fit in a sack.


Taking out the sofa reference entirely and making them widgets and the reason that they did not move factor X the explanation remains: We are looking at the fact that healthy profitable businesses cannot get regular day to day loans to, for example, pay salaries because the liquid capital of the system has been soaked up in mortgages that do not move. The reason for the story was not to get you to care about any particular personal or individual situation but to visualize a system that still has functioning parts that cannot get the oxygen they need to breathe because the bad parts are clogging the system.

[amandabeech]

83. I got your analogy the first time.

It does not appear that you understand that the problem here with the bailout is that it is a lot more complex than making sure that ordinary businesses can get their lines of credit. It's tied up with the past three or four bailouts of the same crooks and their kids and parents who get caught up in extremely risky get rich quick schemes that blow up when taken to extremes. We're getting sick of bailing out these creeps, one way or another, every ten years or less.

Moral hazard is a real money issue here now. If we could inject some liquidity to banks that we're too cute by half, like by finding some way of guaranteeing Freddie/Fannie preferred held as capital by lots of local and regional banks, that would be one thing.

What we're talking about here may trickle down to them, and as a lawyer I had some of them as clients in a previous incarnation, but its also going to go to lots of sophisticated investors, here and abroad, who shouldn't be rewarded when their risky investments blow up. We've rewarded them in the past, and guess what? They're ready to feed at the taxpayer trough again. Gee, whoda thunkit, as my Dad used to say.

And by the by, the bailout of Mexico is viewed in many circles here as just another periodic Wall Street bailout. What happened after was that the peso crashed and started the giant sucking sound of jobs going south and cheap (and sometimes deadly) farm products coming north.

I hope that your unsaleable IKEA products were made from wood taken from sustainable S.E. Asian forests and that you have not in any way contributed to the death of the rain forest and the environmental problems that emanate therefrom.

[Moochy]

75. fat cats rationalize bailout

Who knew du had so many struggling fat cats... Coming out of the woodwork, with their grubby top hats in hand....

[lostnotforgotten]

10. I Was Unemployed For Five Long Years - Not One Stinking Politician

(Republican or Democrat) or one stinking bank, or one stinking business was there for me.

You think I give a rat's ass about a bunch of fat cat old white men and their golden parachutes.

Kiss my ass.

I survived for five long years without a job, I can do it again.

As far as fat cat businessmen or politicians go, they just might make a great next meal!

Not no, but hell NO, to these bailouts!

[grantcart]

13. what you did not understand is that if an economic system loses its liquidity

then it will collapse and it will create millions of unemployed workers.



If you read the article then you would have understood that anything that resembles a "bail out" that saves either shareholder equity or executive compensation is not acceptable.


There are two different issues involved: first maintaining system liquidity and the second keeping up share value in the market.



I care about the first and do not care about the second. Keep the healthy companies running as they normally would and the shareholders in the unhealthy companies should lose thier shares. No golden parachutes for either shareholders or executives.


Now answer me this: Why should a good company (whether it has 3 employees or 3,000) that has always done the right thing and has good credit be wiped out and all the employees lose their job simply because the normal kinds of loans that they have always gotten are no longer available, even though they have good credit and good collateral?

[lostnotforgotten]

15. I Got It - I Have An MBA - My Anger At Our Institutions Is So Profound

For what I had to endure that I believe a Cleansing catharsis is the only way forward.

I realize that you will not agree - so be it.

I lived through hell and I am prepared to live through hell again to make these SOB fat cat Republicans and Democrats pay with their economic and possibly corporeal lives.

My anger knows no bounds when it come to this topic.

I am seething with disgust with what the politicians and a placid citizenry have allowed this country to become.

For me this bailout is my Boston Tea Party.

Let the house burn down!

[grantcart]

25. So you do understand that millions of completely innocent workers will also

lose their jobs as well as the completely innocent business owners who have done nothing wrong.


Misery loves company.


And this is different from the predators who run businesses in the ground so that innocent people are hurt while they are robbing their assets how?

Because your angry millions of people should not have a job to go to, hundreds of thousands of families will be smashed because of the loss of dignity and their economic foundation has been ripped away. How many thousand suicides does your anger merit?


This is not throwing a few boxes of tea in the water this is massive human suffering, all for you.


No thanks but go ahead and start a thread Mr. MBA.

[Better Today]

43. Yeah, right, we're in such a crisis that the fed is pulling billions out of circulation.

I'm sick of you folks claiming an emergency for all, when its really just an emergency for a few. The banks will have to give credit again sooner or later, that's what they have as income. Assets without income won't work for very long. Get real, get a clue, quit screaming "crisis" and "emergency," you're as bad as the bush admin trying to scare everyone into giving away tax dollars to rich banks.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4103567

[msallied]

40. You need to take your bitter head out of your angry ass.

It isn't just about YOU. Do you get that? If you don't, then to play on the other fucking team where selfishness is rewarded.

[Better Today]

44. You should quit being such a sucker to the Bush Admin BS.

[msallied]

47. It's not just the Bush administration who's saying it, fool.

You keep your head in the sand if it makes you feel better. When banks and financial institutions that have weathered the greatest of American economic storms start folding, then there is a REAL problem. Stop deluding yourself.

[Better Today]

50. Except you ignore all the qualified folks who say its a scam. I don't

[stevenleser]

62. Dont ignore anyone. I am not sold either way...

you can see my question further down thread. I am on record as saying that no matter what we do, we are screwed. There are too many fundamental problems with the economy. I am just not sure whether the bailout would make things slightly better or slightly worse. As in using a bucket to bail out the titanic better.

[Better Today]

42. You speak well and clear. I agree wholeheartedly, having watched

my biz go down the tubes about four years ago and only intermittent jobs since then, barely making ends meet.

[depakid]

16. We realize that you're bitter and don't give a shit

about anyone but yourself.

[lostnotforgotten]

18. Ah Spoken Like Someone That Has No Compassion For All The People Already Hurt

Would not expect anything less from someone that cares only about themselves!

[depakid]

20. Lots of good people with retirement accounts- and lots of good ethical companies

out there that you're obviously prepared to drag down with you.

Hard for anyone to have any "compassion" for that.

[lostnotforgotten]

24. So Bailing Individuals Is Bad - No Compassion - But Compassion For CEOs

Is good.

Screw your compassion!

[Doityourself]

26. Your anger is understandable..but if you desire us to look at others..I ask that

others look at themselves. The politicians and fat cats are not solely to blame for this mess..

Plenty of people, and I know a few of them, wanted to live outside their pay range, yes there were predatory lenders, but there was also was no arm twisting or guns involved in any of the situations that I know of..(I'm talking people that have been foreclosed on, on the brink of foreclosure, or struggling with massive debt). Not medical, not job loss due to jobs being exported, etc.

When I got divorced in 2003, I went home shopping, the real estate agent kept telling me, you can afford more, you can go bigger, and even though I could have and still afforded it, my whole thought process was, what if...?

I think that is a BIG part of this whole problem, people wanted more, they wanted bigger homes, more expensive cars, etc..and didn't stop to think..what if..

So, while we point the fingers at Wall Street, CEOs and politicians, I think there are more than enough fingers to point elsewhere. What happened to personal responsibility and living within one's means.

In the end, you're not bailing out the CEO's, in essence, we are stopping the bleeding and the dominio effect, which will save more than the CEO's, Wall Street and the Banks...because as much as we may not like it...they are the fundamental base of our economic system and economic survival. If they fall, we all fall. Am I happy about it? No. Am I thinking clear enough to get? Yes.

Just my two cents.

[grantcart]

30. You are so self absorbed that you are the only one that cares about yourself

and your own pain

Before I went into the furniture field I worked for the UN and I spent 7 years travelling the refugee camps and the poorest parts of Asia.


I have seen economic collapse of a system. In 1978 I was one of the first Americans to go back into South Vietnam. Are you prepared to see mass numbers of humans picking through garbage to find food for the day? Hospitals that close down in the evening because they don't have light bulbs? Electricity that is only on for a few hours a day?

How about open defecation in the streets because the sewer systems are broken and there is no money to fix them. Economic collapse here would push parts of Asia and Africa back to that. I have seen it and I have lived in it.


You are a totally self absorbed jerk that only wants people to suffer because of your own personal situation.

[BzaDem]

33. YOU are telling OTHERS that they care only about themselves?

Wow. What projection. You are no different than the people you hate. You want everyone to suffer as you had, as do they.

[closeupready]

53. Are you this thread's DLC representative?

Hmm?

[closeupready]

52. Thank you. I was going to try and post something like that, but you did it so much better.

Cheers. :hi:

[kaygore]

12. My objection is to Paulson's plan and the lack of transparency

Also to the fact that it is the exact opposite of what Norway and Sweden did in the same situation.

I do not trust this administration. I do not like the fact that we have not explored other options or that it is now revealed that this plan was already crafted. If they had time to craft it some time ago, why didn't they explore other options? Why didn't they seek bipartisan input.

I appreciate what you have said, but I feel that we need to explore other options and whatever the decision, there must be checks and balances and oversight.

That these guys are claiming that this free fall is a shock and was not expected is a lie. I saw this coming. Without regulations being reinstated, I am not willing to buy up the bad loans. Without some controls on executive pay and bonuses--which reward this risky behavior--I am not willing to spend my money helping these guys out.

We should also have equity in the outcome so we can profit and get some of our money back.

Yes, this is difficult, but if the American people had taken their eyes off of "American Idol" for a few minutes and called a halt to what the Bush administration was doing, they would not be in this mess. The buck stops with us: The voters and those eligible to vote.

[grantcart]

14. One of the things I would like to see done is the nationalization

of the oil fields that exist on public lands and in offshore waters and that they be developed exactly like Norway has done.


In any case I have no opinion about the particulars of any plan this was just an effort to explain the key roll of liquidity


to people that haven't run a business. In my opinion it should be a "transfusion" temporary infusion of liquidity that will be


returned one way or another. I do not car about the arguments regarding keeping up the share prices or peoples 401K.


The stock market is on its own as far as I am concerned. My argument is very very narrow - good businesses should not be


harmed by the bad acts of others. They should continue to get the same kind of short term financing that almost all companies need


to pay for part of their working capital.

[Mme. Defarge]

21. Recommended! n/t

[Median Democrat]

22. Interesting - Non-Political Perspective - Cramer on Mad Money Ripping On Shelby

I happened to be flipping channels, and I don't typically follow Mad Money, though Cramer certainly knows his stuff even if he is a blowhard. Well, in this segment, he is just irate at the GOP's efforts to blow up the deal and grandstand. He reserves most of his ire for Richard Shelby"

Mad Money's Jim Cramer Discussing The Bailout:

http://www.cnbc.com/id/15840232?video=869062106&play=1

http://www.cnbc.com/id/15840232?video=868879113&play=1

[abumbyanyothername]

23. But the problem with the bailout is . . .

<<using your analogy>> We get the government to come in and buy all the warehoused sofas and they will wait until there is less of a sofa glut and then resell.

Meanwhile you keep cranking out sofas to meet your guaranteed contract and the warehouse fills up again.

The US needs to curb its appetite for foreign debt somehow, someway. Energy might be a good place to start. We take delivery on a billion new sofas everyday, just for energy.

The liquidity fix doesn't fix the underlying cause of the problem -- too much US consumer and govt debt, and too much production capacity in the rest of the world (thus they put up with buying debt that they know is more or less worthless).

[grantcart]

27. well don't belabor the analogy

Excess production capacity is regulated by markets. The result can be brutal - I know.


This is not discussing anything beyond the question of liquidity. That problem was caused by one thing only - overleaverage of mortgages and a system of falsifying the true value of income of those applying for mortgages.


It is now simply a question if we should allow those sins to be paid for by every other sector of the economy - all of the millions of businesses that have not done anything wrong.


It is not a solution to other economic problems, some of which you refer to.

[abumbyanyothername]

69. Well let me try again

The reason that banks aren't lending to each other or anyone else is because they feel that perhaps no one in the system is credit worthy any more.

The government can buy all the bad assets it wants if that is true, you still aren't going to get the banks to lend.

Nobody is going to lend until there is optimism about the future. There won't be any optimism until we begin to see some way in which the American economy can grow. The American economy cannot grow because we are not an net exporting nation.

Without going into it further, as you request, the crisis is financial, but the problem is economic.

[Doityourself]

29. Not just that...

"The US needs to curb its appetite for foreign debt somehow, someway. Energy might be a good place to start. We take delivery on a billion new sofas everyday, just for energy."


American consumers also need to curb their appetite...and learn to live within its means and learn to better manage persoanl debt...

[grantcart]

32. those are seperate questions

the very narrow point that I am making;


if the millions of small and large businesses cannot get the normal day to day loans that are part of the normal business cycle they will not make payroll. Not talking about next year - talking about next week.


Now if you think that this is alarmist it is not. You heard about WaMu failing. It wasn't just the largest bank failure in world history - it was the largest bank run in world history. The reason that WaMu was taken over is that in the last two weeks a huge amount ($ 18 Billion??) in deposits was taken out of the bank. It didn't fail because of bad debt (althought it has bad debt and might have failed anyway) it failed because of an old fashioned bank run.

[morillon]

36. And more will happen this week, too.

I'd bet people are doing something similar with Wachovia.

[Better Today]

45. WaMu was bought up in record time, didn't need the fed bailout at all.

[stevenleser]

61. Someone wanted to buy it. No one wanted Lehman.

No one seems to want AIG or several others.

[jeanpalmer]

95. The key here is finding the right solution

One that keeps the system from imploding but doesn't reward bad behavior. Unfortunately, Paulson's plan of throwing $700 billion at the problem without any restrictions rewards bad behavior.

Paulson does't have any credibility on the issue because he was right in the middle of creating the problem. He took $700 million out of Goldman in compensation while they were securitiziing bad paper. That's not a confidence builder. So I don't trust him to do the right thing.

If they wanted to be taken seriously on this bailout, they shouldn't have come to Congress and demanded a blank check on 3 days' notice with legislation scribbled out on a post-it note, without any disclosure of the details of the current situation or an acknowledgement that there was massive fraud and that people will be held accountable, and that the taxpayer will be compensated for his risk taking. The way they've gone about this is a joke. This problem has been developing for more than a year, and there was plenty of time to put a rational plan together that doesnt resemble an armed robbery.

So they have no credibility on their proposal. There's no reason to assume it will work. Most likely it won't. If banks get money, they're not going to lend it to the real estate buyer or developer or the hedge fund operator. They're going to keep the money to build up their balance sheets, and they're going to put it where it's safe -- in US Government securities.

One other thing to keep in mind is the $700 billion is probably a lowball figure. It will probably cost much more than that. I've seen estimates from reputable people as high as $5 trillion. So the $700 billion is probably just the initial installment. Remember how the Iraq war was only going to cost $50. Larry Lindsay got fired for saying it would cost $200 billion.

This bailout plan is pure gimmick and desperation. It's doing something for the sake of doing something. But it has a high price tag. Make them come up with something credible.

[abumbyanyothername]

103. The problem is

That there is nothing credible.

The whole system is based on exponential growth in the finance system. That worked as long as oil and other resources were cheap and readily available and exploitable.

Now, we are approaching hard limits to our lifestyle -- at least based on current technologies. Somebody, likely our next POTUS, is almost certainly going to have to have a very serious talk with the citizens of the United States wherein we are told that our current lifestyle is not sustainable.

Suppose that everyone in the US had only 1/3 car per person (a little more than 1 per family)? Suppose that we were limited to driving 6000 miles per year? Suppose that we only used "our fair share" of the world's resources?

That is not a pretty picture for the US (or any other nation's) stock market.

But that is where we are heading barring some massive technological leap.

Simplify. Preserve. Get Real. Hard times are coming.

[knowledgeispwr]

28. Thank you for explaining why it isn't just "fat cats" at risk

I'm a little dismayed at all the "let the whole thing collapse" attitude I've seen on this board and the number of people who seem to think they won't be affected if we really have a credit crisis.

[grantcart]

31. thank you for your kind comment

let the beatings resume lol

[morillon]

35. Same here.

Even those who have absolutely nothing will be affected by this, because fewer people will be able to afford to give to charities and food banks. More people will become dependent on those charities, as well.

The total collapse of the system isn't a good thing for ANYONE. I wasn't convinced at first that a total collapse was at stake here, but after spending the last week devouring literally every article I could find on the topic, I'm starting to think that it is.

It's not about bailing out fat cats. It's about keeping the wheels of ordinary businesses going. Without that, millions of people will be out of work, possibly even before the election. Paychecks will bounce. Shit just won't work anymore.

[regnaD kciN]

86. As a follow-up to what you're saying...

Even those who have absolutely nothing will be affected by this, because fewer people will be able to afford to give to charities and food banks.

Washington Mutual was one of the biggest philanthropic givers in the Pacific Northwest, including direct money to charities such as homeless shelters as well as "prestige" donations to arts and education. Will Chase continue the tradition? Doubtful. Chase's modus operandi, upon absorbing other banks, is to find places to "economize" (i.e. chop, chop, chop) until the new acquisition starts paying for itself. Even then, Washington Mutual spent the money here because it was home. From Chase's P.O.V., it's just another "market" far from their corporate center or their corporate interest.

Do I wish the bailout could have come along soon enough that Washington Mutual could have survived? Absolutely! And I'll bet there are thousands of lower-income and homeless people here, along with those who assist them, who will be wishing the same thing in the coming months and years. :-(

[DeepModem Mom]

34. K&R

[karynnj]

39. Thanks for the coherent explaation of the mainstreet

affects of the problem. I hope either the media or the politicians will work to explain this. Bush's speech certainly didn't.

[firedupdem]

46. Thank You Grantcart! You made it very easy to understand...

do you mind if I share this with others? I was trying to explain to someone earlier why some sort of bailout has to happen.

[amborin]

51. nonetheless: the bailout as currently proposed, is pure swindle

and unacceptable

at the very least, voters need the swedish version in which citizens get equity shares which they can later collect on

but---i'm to the left of most on these boards, and against economic development for its own sake; we've lost sight of non materialistic values

a total economic collapse might usher in a new era of reflection and diminished materialism; and, it would help the environment and biodiversity

[grantcart]

55. could be - way beyond my pay grade

my very narrow point is that if a liquidity in fact happened would be disastrous.

I will leave it to you and brighter minds than me to figure out the best way to do that.


thank you for your reply.

[lostnotforgotten]

54. Naomi Klein "The Shock Doctrine"

eom

[grantcart]

56. right and yesterday all of the shareholders of the largest retail bank in the

United States - Washington Mutual did not lose all of their investment.


just one question - why do you keep dancing around it - why don't you come out and say it - you not only don't support the democratic party you don't support Obama.

[lostnotforgotten]

57. I Do Support Obama - I Don't Support Plutocrats Like Yourself

That are trying to sell this economic pablum to the rest of us!

[stevenleser]

60. Oh brother. Way to degenerate into demagoguery

I am not sold on the idea of the bailout either, but I am asking questions based on my economic knowledge, I'm not engaging in demagoguery.

[regnaD kciN]

87. "Plutocrats"...???

Oh, brother. Why don't you just call the OP a "malefactor of great wealth?" :eyes:

I think there's a case that can be made that the current bailout plan, as written, shouldn't be accepted. You're not doing much to help that argument, IMHO.

[TrogL]

58. Have you considered running for President?

This is the best explanation I've read of this in years.

Have you considered teaching? There are plenty of economists who could use a refresher. All though know is Strauss an he seems to be taking a bit of a beating. We're not quite in the right circumstances for Keynes to make an effect. Rates are too high to borrow against for infrastructure.

[grantcart]

91. very kind but I couldn't even run a furniture factory lol

[stevenleser]

59. Good explanation. My belief is that we are screwed either way...

If we throw 1.1 Trillion dollars at this ($700 Billion plus the $400 Billion already allocated to bail out AIG and others), financed by new debt, is it not the case that this will increase M3, the largest representation of the money supply? M3 is around 12.5 trillion right now. I have to estimate it because the Fed stopped publishing figures on it 2 years ago.

1.2/12.5=9.6% Won't a 9.6% increase in our money supply cause massive inflation? Since we are at about 6% inflation right now, I would have to guess that this would push us into an inflation level dangerously close to hyperinflation with a stagnant economy, rising unemployment and massive debt.

[jeanpalmer]

63. The problem is

a bailout might not solve the liquidity problem.

Japan tried floodng the banks wth liquidity in the '90's. Instead of using the money to make loans, the banks bought Treasury securities. And the economy remained in recession. Some Japanese believe the same thing will happen in the US if there is a bailout.

So you could throw all that money at the system, and have little effect.

[Marsala]

64. Our problem isn't quite the same, I think

We aren't just flooding the banks with liquidity, we're unclogging them by taking out the source of the block: the toxic paper no one wants. The regular economy, while certainly in a recession now, is not that bad and banks should go back to making loans once the crippling fear of this crisis has passed.

[jeanpalmer]

68. Japan did the same thing

Bought up bad assets. It didn't unclog anything. That's why many people don't want to see this bailout go through. Because there is no certainty it will work as currently laid out.

I have no problem with saving the banking system, as opposed to the investors. But for any bailout, the taxpayer ought to get the same deal a private investor, like Warren Buffet, would get. For taking a $5 billion stake in Goldman, Buffet got 10% of the company, preferential shares that guarantee a 10% dividend, and options to buy $5 billion worth of common stock at below market prices.

If it's good for Buffet, its good for the taxpayer. No reason why the taxpayer should be a chump like Paulson wants him to be. The plan as now discussed merely lets Paulson throw money to Wall Street while the taxpayer gets nothing.

[Imagevision]

65. In any event we will see tomorrow the genius and compromises that were made tonite...

someones' going to bite the bullet. Perhaps the golden parachuters will lose 10% of what they've been getting?

[Trajan]

66. That is fine and dandy .... but it doesnt tell the whole story ....

This story is indicative of the financial ossification that is already occurring, but this is not happening in a vacuum ...

The money used to pay for this debacle is being drawn from our national treasure; the collective tax revenues paid for by families and individuals ..... These funds should be paying for college educations for tens of millions of sons and daughters .... It should be paying to fund new energy technologies and mass transit ... It should be used to rebuild the crumbling infrastructure owned by the commons ...

Those funds will now be diverted ... to who ?

They will be diverted to the very same people who have found the means to avoid taxation .... The very CONSERVATIVE idiots who have reduced their own taxes to near zero, and who have altered the rational regulations attached to the marketplace long ago during the FDR administration, and who have used the American electorate as their own carney midway to gouge and scam consumers in numerous ways ...

And NOW they want to use OUR money to clear up the problems caused by THEIR dogmatic implementation of deregulation ????? .....

I say BULLSHIT ......

I say : "You want that money ? ..... You are going to PAY for it ......

YOU fucked up, and there is no FREE LUNCH in this world .... assholes .....

So: This is what they MUST do before we agree to open the national treasure chest ....

1) Restore the level of taxation that existed prior to the Bush White House, and add a 'kicker' to make sure THEY replenish our national treasure .... They should have NEVER been allowed a free ride .... They have an obligation to make up for that ....

2) Reduce taxation on poor and middle class families ... with increased taxes on the rich offsetting the loss of revenue ....

3) Restore the rational market regulations that existed before this mindless rush into ignominy ....

They gambled with our livelihoods ... and THEY LOST .... It isn't our fault .....

There is a price to pay, and THEY must pay it ... not us ....

The conservative laissez faire economic model is a proven loser .... The jungle is an ugly place indeed ....

They will owe us for this ...... for a long time to come ...

[BlooInBloo]

67. I'm not a smart man... How about just: Because we live in ONE fucking country...

and i AM my brother's keeper.

[ContinentalOp]

70. Here's what I don't get about the "credit crunch"...

So, there are some good loans and some bad loans. The good loans will always be profitable right? Why not provide liquidity (i.e. a "bailout") to any bank who will provide loans to qualified borrowers? Why not let the predatory lenders twist in the wind? Why do we have to let the whole corrupt system get off scott free?

Hell, if the government wants to give me 700 billion dollars I'll gladly start a company tomorrow that can lend money to borrowers with good credit. I don't have a clue about banking but don't you think if I had $700 billion and did some basic credit checks that I could provide some credit to give the economy some "liquidity" and still make a profit?

Why reward the fuckups? Why not set some preconditions and let new players into the market?

[abumbyanyothername]

72. Why reward the fuckups?

Primarily because the government itself is a borrower and (feels it) cannot afford to let its lenders collapse.

[ContinentalOp]

73. That doesn't even make any sense.

If you're the government and you borrow money from a lender who goes bankrupt... you don't have to pay off the debt right?

[abumbyanyothername]

74. No you still owe the debt but

the big issue is that the government (and other parts of the economy) cannot function on a day to day basis without constant infusions of borrowed money.

We need $1 billion of borrowed money PER DAY just for energy. In total we borrow $2 billion PER DAY. About $667 million PER DAY just for Iraq.

If we tell the lenders "FUCK OFF" we're not paying, they will stop lending (but probably not much more). That will be bad enough however. That is the crisis that everyone is panicked about.

We are in no way equipped to deal with a cold turkey shut off of credit, although that is what would be best for us in the long run -- and is probably the only way we will be able to kick the credit habit.

[ContinentalOp]

77. OK, so again:

why not give that money to companies who didn't make risky loans and who didn't invest in risky mortgage backed securities? That way there would still be banks around to lend money but we wouldn't be rewarding the people who caused this crisis.

If we borrow $2 billion per day, then this bailout will only keep the government going for a year? That doesn't make sense though since we borrow most of our money from Japan and China.

[abumbyanyothername]

79. The banks in China and OPEC are the ones we have to pay.

Remember when they said "foreign banks can participate"?

If we don't pay off THESE lenders, then they will refuse to lend us anymore money. And no one else wants to lend us any money at all (in comparison to $2Billion/day).

[ContinentalOp]

81. Really? The mortgage crisis has to do with China?

I know the federal government borrows from China but you're saying all of these failing US banks do as well?

[amandabeech]

85. The Chinese have purchased plenty of this toxic paper.

They hold a bunch of Fannie Mae and Freddie Mac bonds, and well as who knows how much mortgage backed securities.

They bought investments that turned out to be bad deals, and they demand to be bailed out.

The Chinese will not accept risk and seem to think that business deals should only favor them.

[ContinentalOp]

82. But then isn't it in China's interest to keep us up to date on our payments?

Shouldn't THEY be bailing us out?

[abumbyanyothername]

84. Shouldn't they be bailing us out?

They are.

I mean, you don't actually think we're gonna pay anything back if this doesn't work, do you?

[Doityourself]

101. I agree...what is good for us in the long run, would hurt tremendously in the short..

and I do mean tremendous pain. Most Americans living off of credit have no idea just how painful it would be..and yes, a great deal of Americans live off their credit lines and credit in general.

That would dry up in a nanosecond.

[abumbyanyothername]

104. Late edit -- make that 333 million per day for Iraq. nt

[boppers]

71. Why should taxpayers shoulder the risk for your fuckup?

In a broader sense, why should taxpayers fund "bailout" for a broken market?

If the market can be broken, then the market is wrong, and needs to be destroyed.

[RichardRay]

76. What's more important? Punishing the guilty or protecting the innocent?

Grantcart is pretty clear on his priority and I share it. If some of you are more interested in making certain that the guilty don't get away with anything than some of you are in making certain that folks who don't deserve to get hurt don't, then that's your privilege, just as it's mine to believe none of your have any real idea what you're suggesting. (If you did, you wouldn't be suggesting it.)

[ContinentalOp]

78. I don't understand why we can't do both.

Why do we have to bail out the same institutions who got us into this crisis? Surely there are responsible banks out there who didn't go crazy speculating on mortgage backed securities. Why not lend the $700 billion to those banks to "provide liquidity" throughout the system?

Why not say fuck you to some of these mega banks, and pick out some smaller banks that we can reward for their responsibility?

[RichardRay]

80. Because it's all too tightly interconnected.

Trying to figure out which strands to cut and which strands to leave whole is beyond certain calculation. The small banks depend on the big banks and on the credit markets and small investors and account holders are even more tied up in it all. Trying to determine who's 'guilty enough' to deserve punishment would require a degree of wisdom I don't see anyplace on the playing field.

[dailykoff]

88. You gotta be kidding.

Until recently there were laws against usury. There still should be. We should NOT coddle the scum of the predatory scum who have gleefully caused untold sorrow, impoverishment and disruption worldwide.

Sometimes I wonder about you.

[regnaD kciN]

89. What do laws against usury have to do with this particular issue?

OTOH, I do think that another condition (along with equity stakes, an end to the Bush tax cuts for the wealthy, etc.) of this bailout should be a restoration of the bankruptcy laws on the books prior to 2005, and a return to laws against usury. I don't know what the limit should be, but, clearly, rates of 30% or so should not be allowed.

[dailykoff]

90. Suspending them led to the usurers going nuts

and running their corporations into the ground. Big deal. They're still drowning in all the gold teeth they managed to swipe from the open mouths of the gullible public. They'll be sitting pretty whether we bail out their mismanaged loan shark outfits or not.

[eridani]

92. Given your connections with Sweden, why can't we handle this like they did?

http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em

"A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.

But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well."

[eridani]

93. Why $700 billion?

http://hunter.dailykos.com/storyonly/2008/9/26/1001/19511/833/610378

What Is This Money Even For?
by Hunter
Fri Sep 26, 2008 at 07:00:05 AM PDT

What Devilstower said in an earlier post can't be repeated enough. The $700 billion figure isn't an explainable one, given the purported problem at hand of "bad mortgages".

And that's where we get that math problem. 1% of all mortgages -- the amount now in default -- comes out to $111 billion. Triple that, and you've got $333 billion. Let's round that up to $350 billion. So even if we reach the point where three percent of all mortgages are in foreclosure, the total dollars to flat out buy all those mortgages would be half of what the Bush-Paulson- McCain plan calls for.

Then we need to factor in that a purchased mortgage isn't worth zero. After all, these documents come with property attached. Even with home prices falling and some of the homes lying around unsold, it's safe to assume that some portion of these values could be recovered. In the S&L crisis, about 70% of asset value was recovered, but let's say we don't do that well. Let's say we hit 50%. Then the real outlay for taxpayers would be around $175 billion.

Which, frankly, is a number that Wall Street should be able to handle without our help. After all, the top firms on Wall Steet payed out $120 billion in bonuses alone between 2000 and 2006. If they've got that kind of mad money, why do they need us to step in now? And why do they need twice as much as all the mortgages that are even likely to implode?

[Major Hogwash]

94. Well, I have a better idea - give US all that money instead of giving it to Wall Street.

Let's see, they want to give Wall Street $700 BILLION DOLLARS.

There are 300 MILLION citizens in America.

Divide 700,000,000,000 by 300,000,000 and that gives each of us $2333 dollars.

We spend that money to help pay off our mortgages - housing mortgage crisis solved, banking crisis solved.
We spend that money to pay off our credit cards - credit card crunch solved, liquidity crisis for credit companies solved.
We agree to only buy green cars made in America - oil crisis solved, unemployment problem solved.

In other words, WE decide where the 700 billion dollars will be spent, not the government!

As citizens, we are willing to pay off the national debt, as long as we have jobs to do it with.
You can't get blood out of a rock.
The unemployment figure in this country is approaching 10%, no matter if Bush or Johnny Mac ever utter the "R" word - recession.

Giving money to Wall Street because they gambled and bought hot air with it while living like kings is a bad idea.
We don't bail out people who go to Vegas and spend their retirement money playing at the roulette tables, so why should we bail out people who were willing to gamble their money on homes that should never have been built in the first place?

They were selling housing market futures - gambling that the value of a house that wasn't even built yet would be worth more in the future.

Well, that's just like selling car market futures - should they be allowed to sell paper concerning cars that haven't even been built yet, based on the assumption that those cars will be worth more in the future?

The housing market fell because they pumped air into it.
Hot air.
Saying that a house that is worth $250,000 today would be worth $400,000 in 5 years - yet the house hadn't even been built yet!!

So, all those half-built houses are standing there, rotting, falling apart, and we're supposed to foot the bill?

Naw. It's not my fault.

It's Bush's.

[adamuu]

96. Thank you for this post n/t

[Jennicut]

97. Thanks Grancart. I know there are people who want Wall St. to burn to the ground.

I get it. I hate certain parts of government and hate fat cat big business as much as the next person but why can't we debate if this is a good plan or not without some around her yelling at others that they are corporate sellouts. We are the Democrats here, not some cuckoo anarchy. I detest Paulson and Shrub but we are facing a credit crunch for many businesses. What happens when their resources dry up and they cannot afford to hire people or make products anymore? Will we be so angry then? Its a kneejerk reaction to say let it burn down and then when the consequences are faced we have a wrecked economy. We will have to spend billions trying to get the economy back off the ground anyways if that happens.

[Missouri Girl]

98. What strikes me the most is how closely this follows what happened in 1929-1930

I mean has anyone really looked at the chain of events? I did yesterday and it's spooky.

Hoover only wanted a program to prop up farming; his secretary of treasury (Andrew Mellon) said we should let the system cleanse itself. If I am recalling this all correctly. The problem was that Hoover used a bandaid and and Mellon applied a triage analysis to let the sucker die.

Roosevelt came in and pumped huge amounts of money into the system, established the FDIC and went the economy faltered in 1937, he pumped even more money in.

I think what the Paulson plan is the huge infusion of capital that was not considered or used in 1929-1932 by the Hoover administration. If something more drastic had been done, maybe it would have been averted.

I'm sorry folks, I don't like this plan any better than anyone else and a big part of me wants to let it go down. My hubby and I could survive. But, I've got family and kids about to go out into the world on their own. For them, I want to try to save this thing. Sorry, but that is jut the way I feel.

[backscatter712]

99. The crisis generates mixed emotions...

You know the analogy - mixed emotions is seeing your mother-in-law careening over the cliff in your new Porsche.

The mother-in-law in this case is the Wall Street assclowns who created this mess. I really want to see them going over the cliff (seeing that the rest of us have already gone over that cliff.)

The Porsche is our economy - of course, if the liquidity crisis hits full force, we're all screwed.

So I suppose the bailout is necessary to save the Porsche, but we'll never be rid of that mother-in-law, will we?

[npincus]

100. a friend who works for a Wall St. bank told me (last week)

that 2 of her clients, one a hospital and another a sports equip manufacterer, had ZERO liquidity and could not fund their operations. She told me that things were not rosy for her other 13 or so clients. Not my industry, but very scary shit. There is a lack of communication to the general public on what this really means, what is going on, how dire it is and what it will mean to them in terms they can understand. My firend gave me the example of ATMs not being able to give money.

[Doityourself]

102. Yep, You won't be able to get money...Yes..your money under 100 grand is

FDIC insured, but people don't realize it would take a minute to get that money, it's not like you go the ATM and the FDIC will cover it at that very moment, the bank can't!

If the ATM won't dispense money, just know you're gonna have to wait to get it.

[dmr]

106. Thank you! n/t