Saturday, June 24, 2017 7:28

Why we Need the Bailout

Tagged with: , ,
Posted by ep on Wednesday, October 1, 2008, 2:09
This news item was posted in Analysis, Economy, Politics category and has 40 Comments so far.

First I want to recognize Chris for all of the research he put into this post, thank you. I also want to thank LaterSkater for your forwards and and a preemptive thank you for helping me not to assault the English language with my grammar.

I think there are a lot of questions out there centering on why we need a bailout and ‘why can’t we let the market sort all of these things out’? I realize this is an extreme analogy, but that would be similar to letting cancer work itself out. The prime requirement for a capitalist society isn’t having access to every market, low taxes or little regulation. The most important thing in a capitalist society are functioning capital markets and that is what the crisis we are currently facing is about.

There are several reasons why we are currently in this financial crisis and I try to address some of them in an earlier post. The point is we will have plenty of time to assign blame and credit later but for now we need to act. In the future I will make a post detailing how Marx predicted wild market swings would be the impetus to societies becoming communist, something we all want to avoid. Swings like this have largely been avoided throughout our history due to a tradition of government intervention dating back to Alexander Hamilton. The belief that the proposed intervention is an affront to American ideals and traditions is not supported by our history.

Why We Need IT

The reason we need the bailout is because credit markets have “locked up”. What does that mean….

  • Nobody wants to loan anybody any money (1)
  • Businesses need overnight money to make payroll (short term credit/ lines of credit) and they are having trouble getting them now (1)
  • The failure of Lehman has caused banks to be reluctant to lend money to each other (4)
  • The $586 Billion in credit losses has banks scrambling to restore their capital (4)
  • If banks are unwilling to lend to each other — as surging LIBOR rates suggest — they sure aren’t going to lend to consumers or businesses (7)

Without access to credit business will not be able to make payrolls, fund needed projects, purchase raw materials for manufacturing cover their cash flow while they wait for projects to close, etc. Even if companies are able to get access to credit at higher premiums they will need to cut costs just to maintain their performance. This generally manifests itself in the form of massive layoffs, which in turn hurts the economy since the unemployed tend to spend less. Most companies are leveraged (as they should be) and have some level of revolving debt. If this debt is coming due and they need to issue new debt their operating costs just went up. This again leads to less investment and more layoffs.

I think there is a misconception that this crisis is primarily about helping the financial sector, which it is also intended to do. However every capital intensive organization is being affected by this, especially manufacturing, information technology and municipal / state governments. The credit crisis is coming up on a year old, lets look at some specific example of how it is affecting the economy:

Graph of Unemployment Claims

- http://www.capitalspectator.com/092508b.html

Orders of Durable Goods

http://seekingalpha.com/article/97377-the-perfect-storm-even-with-bailout-economy-is-hurting

  • Because of this tightness in the market for tax-free municipal bonds, Kent County, Mich., where Grand Rapids is located, will pay some $750,000 more than it expected in interest on a $15 million, 10-year refinancing bond it sent to market earlier this week, according to county treasurer Kenneth D. Parrish.(11)
  • Matt Fabian, managing director of the research firm Municipal Market Advisors, said the problems extend throughout the municipal bond market, where the borrowing rate for seven-day debt spiked from 1.8 percent to 5.15 percent last week. (11)
  • Louisiana added $14.3 billion to its budget for fiscal 2007 to account for higher borrowing costs (11)
  • For the week through September 20, fresh claims for unemployment benefits jumped sharply to 493,000, the Labor Department reports. (12) The last time initial claims were reaching so close to the 500,000 mark was September 2001. (13)
  • Seasonally adjusted new orders for durable goods slumped 4.5% in August, the biggest percentage drop since January.(14)
  • Home prices fell about 6% in 2007 and are expected to tumble another 15% in 2008, 10% in 2009 and 5% in 2010 (15)
  • The credit markets are seizing up and the uncertainty recently drove up short-term interest rates for municipalities and some rock-solid institutions such as New York’s Metropolitan Museum of Art to 20%.(15)
  • Compared to a year ago Caterpillar will pay about $15.6 million more per year to borrow the same amount (17)
  • Compared to just six weeks ago Caterpillar is going to be paying an additional 150 basis points for a similar debt instrument(16)
  • Caterpillar actually got a great deal because the average premium that A-rated corporate borrowers have been required to pony up has jumped 331 basis points from last year (17)
  • Jumbo Mortgages (loans above $420k) now carry an extra 1.2% interest (18)
  • Credit card offers are down 17% from the same time last year (18)
  • American Express is cutting the credit limit of 10% of their customers (18)
  • Since the summer of 2007, 137 lenders have stopped funding federal loans (18)
  • Thirty three lenders have suspended private student loan programs (18)
  • Student loans made to parents through the Parent PLUS program have plummeted — down 29% in dollar volume year (18)
  • Bank of America is declining to increase lending to McDonald’s franchisees even though the two companies have a long-standing partnership (18)
  • In August, 67% of small-business owners said they’d been affected by the credit crunch (18)

Who Ultimately is Being Affected

  • Investors or anyone who has a 401(k), etc/ Obvious reasons (10)
  • Students looking for student loans and parents looking to get them loans(10)
  • Anybody with Credit Card debit / Most CC rates are based on LIBOR plus a figure. LIBOR has been soaring (10) (18)
  • Anybody looking to buy a car / People are having challenges getting financed unless you have impeccable credit. (10)(18)
  • People looking to buy a house (10)(18)
  • Anybody looking to start a business
  • Anybody running a business who needs money to cover payroll until money comes in
  • People with ARMs that will be adjusting / They are often based on LIBOR which is soaring
  • Homeowners / additional foreclosures will drive down their home values
  • Taxpayers / Higher borrowing costs for local and state government will result in a need to either cut services or raise taxes

Even with the bailout the economy is going to get worse before it gets better. The damage that has been done is probably going to take a couple years to finish working it’s way out.  The next shoe to drop is going to be large dip in consumer spending which should push the economy further down in a recession.  The question do we want to face both problems at once.

I live for comments, feedback and forum posts so please let me know you thoughts on this post. If you think this is a worthwhile post don’t forget to add it your social networking site listed when you click the ‘bookmark’ button.

Thanks,
-ep

Sources
1. The Markets Are Terrified: Should You Be?- http://finance.yahoo.com/tech-ticker/article/79549/The-Markets-Are-Terrified-Should-You-Be?tickers=%5EDJI,%5EGSPC,%5EIXIC,SPY,DIA
2. The Dow’s Worst Days: http://www.forbes.com/2007/02/28/dow-jones-worst-days-biz-cx_daa_0228dow_slide_3.html?thisSpeed=15000
3. Who Really Benefits from the Bailout – Wall Street or Main Street: http://finance.yahoo.com/tech-ticker/article/77810/Who-Really-Benefits-from-the-Bailout—-Wall-Street-or-Main-Street?tickers=%5Edji,%5Egspc,%5Eixic,itw,ir
4. Fed Pumps Further $630 Billion into financial system: http://www.bloomberg.com/apps/news?pid=20601087&sid=a9MTZEgukPLY&refer=home
5. Treasuries Soar as House Rejects $700 Billion bailout http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aDMAlgibsQDw
6. Run on Bank Helped Kill WaMu, But Your Money Is Safe - http://finance.yahoo.com/tech-ticker/article/73415/Run-on-Bank-Helped-Kill-WaMu-But-Your-Money-Is-Safe?tickers=WM,JPM,XLF,WB,%5EDJI,%5EGSPC
7. ‘This Sucker Could Go Down’: Bailout Stalls, Market on Edge - http://finance.yahoo.com/tech-ticker/article/73263/’This-Sucker-Could-Go-Down’-Bailout-Stalls-Market-on-Edge?tickers=RIMM,GE,GT,%5EDJI,%5EGSPC,%5EIXIC,XLF
8. Goodyear to Tap Credit Due to Money-Fund Woes http://online.wsj.com/article/SB122234656358675027.html
9. Citigroup to acquire Wachovia banking operations- http://www.reuters.com/article/marketsNews/idINN2946959920080929?rpc=44&pageNumber=2&virtualBrandChannel=0&sp=true
10. Who wins, who loses under proposed bailout plan?- http://biz.yahoo.com/ap/080929/rescue_winners_losers.html?.&.pf=banking-budgeting
11. Credit crunch makes cities’ borrowing more costly http://biz.yahoo.com/ap/080926/financial_meltdown_public_finance.html
12. US Dept. of Labor: http://www.dol.gov/opa/media/press/eta/ui/current.htm
13. The Perfect Storm: Even with Bailout, Economy Is Hurting- http://seekingalpha.com/article/97377-the-perfect-storm-even-with-bailout-economy-is-hurting
14. Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders/ August 2008- http://www.census.gov/indicator/www/m3/adv/pdf/durgd.pdf
15. How Bad Will the Mortgage Crisis Get?http://www.time.com/time/business/article/0,8599,1714725,00.html?iid=sphere-inline-bottom
16. Caterpillar’s Troubling Bond Issue- http://seekingalpha.com/article/96992-caterpillar-s-troubling-bond-issue
17. Caterpillar bond sale illustrates credit crunch- http://money.aol.ca/article/caterpillar-bond-sale-illustrates-credit-crunch/357594/
18. The Credit Crunch: Where Is It Happening? http://www.time.com/time/business/article/0,8599,1845818,00.html?cnn=yes

Bookmark and Share
You can leave a response, or trackback from your own site.

40 Responses to “Why we Need the Bailout”

  1. 1 October, 2008, 2:22

    I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.

    Tim Ramsey

  2. 1 October, 2008, 3:01

    A friend of mine just emailed me one of your articles from a while back. I read that one a few more. Really enjoy your blog. Thanks

  3. 1 October, 2008, 11:13

    Very interesting article. My sis and I were discussing the point of “why a bailout is needed”. Her stance was “when the building is burning, don’t figure out who is to blame; just put out the fire and figure out everything else later.” I didn’t disagree but I will admit that since I’ve gotten rid of credit cards since April 2008 **and** I haven’t had any serious emergencies, I’m cautious about throwing money at what has become very bad spending (and saving) behavior in our culture….myself included. Something needs to be done…definitely. I’m not rich by any means and it wouldn’t take much of a financial emergency before I would consider working at “any” job to keep a roof over my head and put food on the table.

    However, having said that, the only thing that’s changed for me is my spending and saving habits. I’m am a “gadget freak” and could find something to buy everyday & all day at a computer store. So, I’ve recognized that I had to “put up, or shut up” by going to a cash system….yes, I’m a Dave Ramsey (daveramsey.com) follower and for the first time in my 40+ years of living, I’ve saved more money and paid off more personal debt in 5 months than I’ve done in my entire life/professional career.

    So, my long-winded story is a bail-out is great but unless folks change their spending and saving behaviors, history will repeat itself and all the bail-outs in the world won’t fix that. I question what is going to be done on the grander scale to solve the issues involving government spending (banks, etc) to the worker-bees of America.

    QueenGeek
    http://queengeek.me

  4. 5 October, 2008, 13:55

    Hands down, the most insightful, logical and well thought out synopsis of the “Bailout” I have seen.

    Great blog, a must read!

  5. 9 October, 2008, 7:15

    You’ve put together a lot of good info on the Bailout. I agree with you about the problems you’ve cited but I still don’t think that this bailout that was passed is what the problem called for. Instead it was a kneejerk reaction to a long ignored problem (if you can count creating the problem and fueling it’s flames as ignoring it).

    It’s my belief that the bailout will only prop up broken policy and bad business. My concern is that excessive government intervention will only drag the propblem out, much like price controls and other bad policy extended the downturn that was the Great Depression.

    Many people talk about how we have to change how we (us citizens, well and the government) spend money. If the government creates artificial controls and prints money on a whim to discourage us (and business) from doing so, how can we reach that point of better spending? I don’t think we should go cold turkey and just let everything work itself out though.

    Here are some of the things I would have liked to have seen in the reactionary legislation to the current economic crisis… http://blog.mises.org/archives/008677.asp. These suggestions directly affect problems in the banking industry.

    In my opinion though, the most disgusting part of the bailout was the massive amount of pork that was attached the bailout. The government still hasn’t realized that they too need to curb spending on unnecessary programs. Our national debt is outrageous. We just added more than a trillion to that number with this bailout and Fanny/Freddy/AIG. What happens when instead of Lehman’s going bankrupt, the United States does?

  6. 9 October, 2008, 22:27

    When speaking of the bailout are you also speaking of nationalizing the banking system as has been proposed?

  7. 11 October, 2008, 9:32

    I wasn’t trying to pass judgment on the specific bill that was passed in this case, just the reason why needed to do something.

    In a future post I might break down the specific bill.

    Thanks for sharing your thoughts.
    -ep

  8. 19 October, 2008, 16:53

    Greets! Really interesting. keep working! Tnx!

  9. [...] Another Damn Blog » Why we Need the Bailout Tags: adobe systems, hewlett packard co, lull, research analyst [...]

  10. 23 September, 2014, 11:18

    Thank for the good writeup. It in reality used to be a leisure account
    it. Look complex to far brought agreeable from you!
    By the way, how could we keep in touch?

  11. 6 October, 2014, 5:38

    Remarkable thhings here. I am very glad to look your article.
    Thank you so much and I’m having a look forward to touch you.
    Will you kindly drop me a mail?

  12. 21 October, 2014, 12:36

    Hi! I’m Craw. Has anyone heard of bespoke languages tuition? I’ve heard that they provide superb educational services, in addition to French tuition, German tuition, Spanish lessons and 11 Plus lessons. Are they worth thinking about for my son who loves languages and hopes to read Modern Languages at Oxbridge? Are they as good as we’ve heard? Are they national?

  13. 3 January, 2015, 18:45

    This article is in fact a good one it helps new internet
    users, who are wishing for blogging.

  14. 17 February, 2015, 8:05

    Hi there, just was aware of your blog thru Google, and found that it is truly informative. I’m gonna watch out for brussels. I will be grateful if you continue this in future. A lot of people will likely be benefited out of your writing. Cheers!

  15. 12 June, 2015, 14:42

    There is certainly a lot to find out about this topic.
    I love all of the points you’ve made.

  16. 13 June, 2015, 1:57

    This is very fascinating, You’re an excessively skilled blogger. I have joined your rss feed and look ahead to seeking extra of your excellent post. Also, I have shared your website in my social networks

  17. 18 June, 2015, 21:07

    Thank you for this

  18. 12 July, 2015, 5:27

    Pretty component to content. I simply stumbled upon your weblog and in accession capital to assert that I acquire actually loved account your blog posts. Anyway I’ll be subscribing on your feeds and even I fulfillment you get entry to persistently quickly.

  19. 19 July, 2015, 15:09

    Jos jotain ei tunnista sovellu , voimme kestää jonkin aikaa
    selvittää , miksi se ei ole .

  20. 23 July, 2015, 19:53

    I think everything said made a great deal of sense.
    However, think on this, suppose you were to create a killer headline?
    I am not saying your information isn’t good., but suppose
    you added something to maybe grab a person’s attention? I mean Another Damn Blog

  21. 24 August, 2015, 1:03

    There’s no mistaking the appeal and excitement surrounding that great town of lamps within the treat.

  22. 15 September, 2015, 6:29

    Your home is valueble for me. Thanks!…

  23. 30 September, 2015, 23:47

    This ensures that you must not wager article-fail if you don’t include any good cards.

  24. In the place of coping with crowds of people pushing around anyone, you could only concentrate on the
    game and connect to other gamers as well as the dealer only
    around you like.

  25. 19 October, 2015, 22:45

    Thanks for some other wonderful article. The place
    else could anybody get that kind of info in such an ideal method of writing?
    I have a presentation subsequent week, and I’m at the search for such
    information.

  26. Rebuy events are usually precisely the same expense for rebuys as entry, and
    also the same for addons, even though some sites provide selected competitions
    with half price rebuys and add-ons.

  27. 2 December, 2015, 16:49

    Hi, I read your new stuff named “Another Damn Blog » Why we Need the Bailout” on a regular basis.

  28. 14 January, 2016, 7:53

    Football sports activities information and updates portals; TV channels and the print media are incomes excessive earnings from sports activities reporting.
    If you just want to hop into a season with your favorite football
    club and their correct rosters, then that’s what season mode is
    for. DISH Network brings the best Hindi TV straight to your home.

  29. 29 January, 2016, 4:41

    You have observed very interesting details! ps decent internet site.

  30. 19 February, 2016, 11:18

    It’s actually a great and helpful piece of info. I’m satisfied that you shared this useful info with us. Please keep us informed like this. Thanks for sharing.

  31. 8 March, 2016, 23:35

    I know this website presents quality depending articles or reviews
    and other data, is there any other site
    which gives such information in quality?

  32. 6 April, 2016, 16:35

    It doesn’t really matter, people of all ages, that is from a
    very young kid to a grandfather or grandmother, can play these games online.
    All things considered, it is well known that you end up being the
    average of the 10 people surrounding you. Over the
    next few weeks, expect nothing but talk of nominations, red carpets and acceptance speeches across all of the celebrity news columns.

  33. 1 June, 2016, 13:55

    Thank you for sharing this nice post

  34. 2 August, 2016, 16:31

    Good read.

  35. 24 August, 2016, 16:56

    hello!,I like your writing very so much! percentage we be in contact more about your article on AOL? I require an expert on this area to solve my problem. Maybe that’s you! Having a look ahead to look you.

  36. 26 August, 2016, 8:29

    I was reading some of your content on this website and I think this internet site is really informative! Keep putting up.

  37. 12 September, 2016, 9:37

    Hello there, i do believe i found an individual frequented this site hence my spouse and i reached give back a prefer? . I’m attempting to find issues to increase my own site! I assume it has the good enough to employ a few of your reputation strategy notions!

  38. 10 October, 2016, 19:58

    This is the proper weblog for anyone who wants to find out about this topic. You understand a lot its almost exhausting to argue with you (not that I truly would need…HaHa). You undoubtedly put a brand new spin on a topic thats been written about for years. Nice stuff, just nice!

  39. 25 March, 2017, 5:40

    I have already been browsing online in excess of about three hrs these days, yet I never found just about any attention-grabbing content like your own. It can be quite cost adequate personally private tutors. I believe, in the event all website owners as well as people created very good written content when you did, the online world is going to be far more handy than previously.

  40. 22 June, 2017, 12:40

    I am online on the net greater than 3 hours of late, nonetheless Irrrve never located every interesting article including your own property Skype Spanish lessons. It can be gorgeous price sufficient for me. Personally, in case all online marketers and writers manufactured very good material because you would, the online world can be quite a great deal more useful than in the past.

Leave a Reply