Steve G.

Help me get it

In Libertarian on October 2, 2008 at 10:06 am

As Wes Benedict can attest, I am an idiot.  I have been trying to get my head around this bailout plan, which I oppose, but since the media narrative from the start has been that it will eventually pass in some form, even if they just keep voting over and over and over until Congress gives in from exhaustion, I have not seen one question adequately considered:

What would actually happen if the government did nothing?

Obviously readers here are libertarians, but a lot of you are well versed in economics, so I thought I’d take this question to you.  What would happen, good and bad, if the banks were simply allowed to fail?

  1. I was typing a long comment and then somehow fumble-fingered it and lost all the text (probably because I didn’t see a popup from Twitterfox or something). If I submitted it and it’s waiting for approval — well, now you know why it cuts off in the middle of a sentence.

  2. Sorry, nothing in the approval or spam queues.

  3. the most sophisticated answer is: it’s not obvious what would happen, there are way too many variables to say. more ch 11 filings would seem likely. more workouts and consolidation.

  4. You’re making the assumption that banks will continue to fail. That isn’t necessarily going to happen.

    By shouting that the sky is falling, Shrub and the den of thieves collectively known as con-gress are giving financial institutions additional excuses to claim that they’re in dire straights and need help.

    Lots of people need help, but who helps the people who are hurt by helping them? This socialist ploy to drive a knife in the heart of what remains of the free market system is criminal.

    Economics is quite simple. You make something. Someone else buys it. They make something, or make something with it, then sell it to someone who sells something else to you. Financial institutions don’t make anything.

    Why is a financial institution required for credit to exist? When I invoice a customer, I am actually giving them a line of credit. They have a certain number of days to pay, but I’ve already done the work. Who needs some stupid idiot sitting in an office in a financial institution to do this?

    The problem, of course, is that someone decides to tighten the credit line they gave and demand payment. Then the person who needs to pay them demands payment from his customers…eventually the circle is closed and the original person finds his debtors chasing him even harder.

    If everyone would just remain calm…

    Ok, that’s impossible.

    Guess I’ll have to raise my rates and tighten up the payment terms I give customers. Oh wait…I forgot…I don’t borrow money so no one is chasing after me. Maybe I’ll make a decent profit this year for a change.

    People need to stop borrowing money they can’t repay. And the criminals need to stop loaning out money to people who have no means of paying. Idiots. Total idiots. And the rest of us suffer for it.

  5. Sorry…said debtors chasing instead of creditors chasing..

    But debtors chase you too, since they usually threaten to hire someone else if you won’t do more work for them and extend them better credit!

  6. Lots of people need help, but who helps the people who are hurt by helping them?

    Domino theory.

  7. IIRC only 20% of the banks failed during the Great Depression.
    If “the banks” fail, given the interconnectedness of the world’s economy, then imagine the seriousness of it. Ron Paul and other anti-fed advocates have long talked about the calamity that would occur when fiat money came crashing down.
    So why do we suddenly doubt that it would be at least as serious as the MSM and the politicians envision? The real question here is “Can a soft landing be engineered or are we doomed to another Great Depression?” If, as some libertarians seem to be saying, “nothing to see here, just the pols trying to scare us in order to get votes and power,” then why should the public listen to Ron Paul and other rational voices that argue for sound money, savings, and fiscal responsibility??

  8. No matter how bad it will be, regime interventions will only make it worse.

    They are putting off the inevitable and adding to the eventual problem.

    Over time, they’ll have to go into hyperinflation that can not be denied or covered up as they chase ever more bailout promises with ever more worthless fiat currency. It will be a self perpetuating process as people lose faith in that currency.

  9. It’s certainly true that only some of the banks failed, and many of those failures were more than a year after the 1929 crash.

    The stock market hasn’t crashed. Credit has crashed.

    The bank failures of the 1930s resulted in the FDIC and the “guarantee” that your money is “insured” for up to $100,000 of fiat script.

    This current crisis — and I agree there’s a crisis — is avertable if businesses in local communities start trusting each other and not trusting the banks. I’m going over to a customer this afternoon that owes me money. I’m not going to ask for the money. I’m going to do more work. I’ll get paid — eventually.

    That’s called credit. That’s all we have…a credit crisis.

    But it is a dominos effect, as all of us have pointed out. Oh well…at least this thread isn’t blaming the LNC. 🙂

  10. Peter Orvetti says:
    “I am an idiot.”

    Wes Benedict says:
    I’m not disagreeing with you, I’m just saying don’t worry about that too much. I learned how to create websites from “The Complete Idiot’s Guide To Creating a Web Page & Blog,” Sixth Edition, and I only made it two-thirds of the way through the book. I guess that makes me two-thirds of an idiot.

    To answer your question, “what would happen if the government did nothing?” Well, the LNC so far has failed to bail out my sticker empire. As Robert Casnoozi would say, we’ll just have to see how this plays out. Quite a few things could happen and some might not.

  11. OK, I’ll bite and peer into my crystal plastic ball (Hey, times are tough!) as make some prognosticated WAGs…

    Whether this bailout of Wall Street and Rape of Main Street happens or not, here’s what is going to happen, IMHO:

    National banks (in the geographic sense) will be reduced to four: Wells Fargo, JPMorgan Chase, Citi, and Bank of America.

    Regional banks will expereince a mix of failures and survivals, depending on their portfolios. We’ve already seen that in places.

    Local banks will have less overall failures because they are much less tied into the mess.

    Credit Unions will thrive.

    Businesses that have sh*tty models that rely on credit will fail.

    There will be some unemployment increase from these situations.

    Credit will crunch. If you have it, keep it but minimally use it. If you don’t, then don’t bother since you’re better off without it.

    Non-bank business customer credit lines will take a small hit but not too badly, because their credit lines are not based on banks or mortgages. In fact, they are ahead of the curve much farther than most banks.

    (I noticed that yesterday–the banks can’t do a debit card swipe to transfer funds from some other checking account to their credit account–but Home Depot can! Go figure!)

    Widget production is not going to restart soon down on Main Street, which is a drag because that’s what the economy really needs.

    (A nationwide water pipeline infrastructure is a helluva start, BTW!).

    Consumers will roll back their spending as much as they can to get by. Prices will drop some as the spending decreases.

    Housing will still glut until the excess overproduction inventory is sold.

    And the American zaibatsu will walk away with our tax money because Congress has few brains and even fewer balls…

    Now, for the followup question for an intellectual exercise:

    what happens if we retire A ) all unsecured debt? B ) all secured debt? and C ) both?

  12. Peter google the blog that this economist has. he mentions a study by the IMF that looks at this issue. The Scandinaivians did nothing during a bank crisis and all turned out well. I’d dig it up but gotta run.

    MHW

    MW
    http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html?pagewanted=1&_r=1&ref=patrick.net

    On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession.

  13. Peter, et al if you go to the url below and about half way down the page to a Sept, 28th entry you’ll find more info aregarding my above comment. Very interesting given that much of this has been in the news for sometime.

    http://www.rgemonitor.com/blog/roubini/

    A recent IMF study of 42 systemic banking crises across the world provides evidence on how different crises were resolved. First of all only in 32 of the 42 cases there was government financial intervention of any sort; in 10 cases systemic banking crises were resolved without any government financial intervention. Of the 32 cases where the government recapitalized the banking system only seven included a program of purchase of bad assets/loans (like the one proposed by the US Treasury). In 25 other cases there was no government purchase of such toxic assets. In 6 cases the government purchased preferred shares; in 4 cases the government purchased common shares; in 11 cases the government purchased subordinated debt; in 12 cases the government injected cash in the banks; in 2 cases credit was extended to the banks; and in 3 cases the government assumed bank liabilities. Even in cases where bad assets were purchased – as in Chile – dividends were suspended and all profits and recoveries had to be used to repurchase the bad assets. Of course in most cases multiple forms of government recapitalization of banks were used.

  14. Wes,

    We don’t have a crystal ball. You’ve never actually asked the LNC to bail you out. Like Wall Street, you’re just screaming that you need help and that we need to help you — of course Wall Street is screaming for Congress to help them not the LNC — and then you complain that we haven’t helped!

    Send me an official request, and I promise as your regional representative that I’ll consider it for at least 3 seconds before telling you that you’re nuts.
    🙂

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