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….
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:
Who Ultimately is Being Affected
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.
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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