What is going to happen?
economic downturn and perhaps a nice civil war…
-Imp
This is real bad turn for the US and the world. Even Detroit is wanting bailouts. It’s nothing but fullfledged corporate welfare. Until now I was only worried about energy, but combined with this, no accountability in the private sector or government, major disaster is just around the corner, and for the first time in history there will be no refuge anywhere with the US gone. Atlas will finally shrug. China, which had been moving slowly toward capitalism, will just march in and take over. The ironic part is that the socialists will win but not with the cast the western Democrats had envisioned; the only bright spot in this scenario. It could easily be a thousand years before we have the wherewithall and the will to get us back to 1776–if ever.
Who is John Galt?
The only reason “they say” they capitulated on AIG is its tentacles in so many other economies. If that is true i can understand it. They have denied other bailouts. I do hope there won’t be too many more… I thought it was funny when they said the USA taxpayer owns 80% of AIG now… what a bald faced bullshit line. If its true I want my dividend check.
I know many who would argue that the effects of AIG going under wouldn’t be as severe as people have made it out to be…and even if it were, would it really be eternally devastating to the world economy, or would it just be another blip on the radar in the long run?
I just don’t agree with taxpayers’ money going towards bailing out a business that is failing due to shoddy business practices without a single vote. Where does the constitution even begin to allow anything like this?
Article II, section 1.
Kriswest: Very nice, I wouldn’t mind getting a piece of the dividends, myself.
Dorkydood: It would not be eternally devastating, but it would be more than a blip on the radar. Cause and effect would basically turn the whole thing into an unfortunate chain reaction.
First of all, the policyholders in terms of life and auto insurance would go to different companies, in some cases their rates would be higher, in some cases they would be lower. I would have to guess that the life insurance policies would be higher in terms of rates and if anybody has a policy like I do where it builds value and can be cashed out at any time they would lose money if AIG didn’t pay out. Paying higher rates, of course, would result in less individual disposable income, which again would result in less going out to eat and purchase of some non-necessity consumer goods.
However, policyholders may be good for about 20% of AIG’s business. A large portion of their business comes from investment plans as well as investing money themselves. Obviously, AIG is going to have some companies that they are invested in and they would have to liquidate the stock they own for those companies, and in a rapid way, which would temporarily lower the price of those stocks. In addition to that, any companies that AIG currently owes money to would also lose stock value if AIG were to file for Chapter 11 bankruptcy protection, and the stock value would be down relative to the size of the discharge the lendor (s) is forced to give.
On top of that, it may cause general panic in the insurance market when it comes to general stockholders. I’m sure you saw what happened to MorganStanley and Goldman Sachs stock values immediately after Lehman’s bankruptcy filing, it drops consumer confidence.
There are people who will use this short-term lack of confidence to their advantage by, “short-selling,” which is essentially borrowing multiple stocks from another company, selling them in a very short-term fashion, waiting for the value to drop, buying them back, giving them back to the company from whom you borrowed them and keeping the profits. Just recently, the government stepped in and is limiting the ability of buyers and sellers to participate in this.
Anyway, allowing AIG to go bankrupt would not likely have any ramnifications lasting more than a couple years, but it would by no means be a blip on the radar. There is also the possibility that if consumer confidence falls by too great an extent, that a severe recession would take place and the chain reaction would spread further out.
Do I believe the government made the right decision? My answer is both yes and no, yes because I feel that is what needed to be done, but no because I feel the public should have more say in what their tax dollarts go to.
After the government has nationalized enough major companies, who’re they gonna point the finger at from then on? That’s when they take all this underground and we don’t have a clue about how bad things have gotten until we’re knee deep in it everywhere. What do you think’ll happen when the buck doesn’t stop anywhere?
While the government does not have 80% interest in very many major companies, you would be surprised how many the government has some stake in. As an entity, the government has the right to invest in any company that it wishes to and often does.
Besides, when it comes to Freedie Mac, Fannie Mae, and AIG, the government simply did what everyone else was either unable or unwilling to do. If the government was only interested in nationalizing major companies, they would have bailed out Lehman Brothers also.
Pavlov has the right of it.
They are saying it was the prime interest loans that really caused this mess. I can see that. Give poor folks with low paying jobs that they may lose, bad credit, high interest loans on houses, well, thats house of cards waiting to fall. With any luck the Gov’t can set interests lower, lower payments and keep people in their homes now that they have Fred and Fan, do I believe that will happen? No. It would be good for local economies but, I doubt they will.
It is also worth noting that these companies aren’t really being nationalized either. When a company is nationalized, it becomes a part of the public good. That is decidedly not happening here. Instead the citizens are paying the tab and not getting anything in return.
I find it disgusting that the Republicans can find plenty of money to bail out wealthy people when they are in trouble but won’t spend a time to help the poor when they are in trouble.
Follow the discussion on deregulation. The pendulum is swinging back again. Deregulation, for all it’s so-called positives, helped create the bubble built on corporate greed. The concept that competition will keep them honest was the mantra spouted by Reagan and all his acolytes for the last 30 years. (McCain being one of them) Now that the foxes are caught in the spotlight, the chickens are screaming their heads off. Farmer Brown to the rescue! Regulation will take the forefront now and for the forseeable future. There will be plenty of attempts to subvert regulation by corporations in order to continue playing the “let them eat cake” game, but the hen house is aroused, and any politician voting against regulation is doomed. McCain is falling all over himself trying to distance himself from his record. For awhile, it appeared that the republicans might hold onto congressional seats, but the dems are going to use this fiasco to tie the republicans to failed policy. We’ll get through this, but people vote with their eye on depleted 401K’s. Regulation is the new hero to save us from ourselves…
I don’t think that falling stock prices is justification for a bailout of any company by the federal government. I’m not informed enough to know the exact ramifications of nationalizing corporate debt or companies, but it just seems like a bad idea to make the taxpayers responsible. It is the taxpayers who are suffering to begin with due to living outside of their means. They are battling credit card debt, foreclosures, shoddy mortgages, and on top of that, they have to take on more debt that they aren’t even responsible for? It doesn’t resemble a rescue.
Regarding short selling: First of all, a client has to consent to their shares being borrowed from their margin account (unless it’s coming from the brokerage firm’s own account). It is part of the margin agreement for having a brokerage account in most cases. If you don’t want your shares sold short, don’t agree to it. Secondly, most brokerage firms dictate how many shares they are allowing to be short sold. In cases where the stock prices are rapidly falling, usually there aren’t enough shares available to short. Some brokerage firms will restrict short selling on certain stocks, and I believe some exchanges can too. Getting rid of short sales shouldn’t even be an option on the table. It plays an important role in market strategy, and is useful for hedging your investments in a bear market. I do wonder what the impact would be on the hundreds of billions of dollars invested in hedge funds that depend on short selling if it were banned.
Although an AIG bankruptcy might be a catalyst to a severe recession, it certainly wouldn’t be the only factor. There is the credit bubble that extends far beyond mortgages. These large corporations are using money to invest in high-risk subprime debt instruments, and are now suffering the consequences of such risky investments. It just seems federal bailouts of these companies is like putting a band aid on an amputated limb. People will pay the price for lack of regulation, for companies not being held responsible for poor investment choices and business practices, and for living outside of their means. America’s for sale, and unless people quickly educate themselves enough to realize it, I’d say we run the risk of losing everything we’ve worked for.
Companies give out credit at interest rates that are a c-hairs breadth from usuary. The rates are killing people, mortgage interest, high interest on credit cards, car loans, Hospitals charging high interest fees. Utility companies charging high interests. Phone companies… The interest rates on any form of credit strangle the average family. its not the cost that hurts its the interest that they hide in fine print that hurts. Then you got all manner of hidden fees that are just barely legal. If the govt would buy these major corps. and nationalize them, perhaps, we could see the average family get relief.
Kris,
Remember, those high interest rates and fees are what feeds the mutual funds in those 401K’s that is supposed to be part of the people’s retirement funds. Sure, outlandish CEO salaries and golden parachutes are obviously greed, but the American people as a whole have been relying on greed as well. Just what is a “fair” return on an investment dollar? Answer: Every last dime you can get. That isn’t just corporate mentality, that is the American way.
As Pogo observed: “We have met the enemy, and he is us.”
I agree but, those that pay the high interests are not the ones with 401s or any investments other than the house and car. Put the high interests on those that can afford them. Ok that was my socialist side talking i admit it. but really seriously, reverse how people get charged and everyone would be better off. Besides it makes more sense… If you break a person how can they pay you at all? Low income or poor credit give them lower interest, You probably will get your money back then.
Just found this on CNN.com about short selling, and the ban on it:
money.cnn.com/2008/09/19/news/ec … /index.htm
Which I again think is a temporary, inaccurate solution to the problem. Fiat currency, living outside our means, lack of regulation, repeal of the uptick rule, etc., I think are more to blame. But I’m not the expert.
I’m not seeing it.
To your first point, I understand entirely where you are coming from that it is being put on the taxpayers to bail out a company. The thing you want to keep in mind is, if the bailout is for the greater economic good, that affects those very same taxpayers as does a recession or collapse in the economy. What we are alking about is tax dollars that we have already spent versus having to pay more for consumer goods and potentially losing millions to billions of dollars in private, individual investments.
Now the government has created a 50 billion dollar backdrop for the money market which is also a good thing. The majority of your money market users are either the elderly, or people that are very conservative in their investment portfolios. The idea behind the money market is the loss of value is supposed to be all but impossible (A dollar in will get you a dollar out) and very few people that play the money market are concerned with high profits (many money market accounts don’t even keep up with the rate of inflation in terms of returns) they just want to get out no less than what they put in.
To your second point, the government has not gotten rid of short sales, not permanently and not entirely. Due to an emergency they got rid of short sales for 10 days (with a maximum of thirty days) only in 799 different financials companies. Considering that was where all the panic was Wednesday (which created a butterfly effect felt through ther entire market) that was the right thing to do. If you have looked at where the DOW closed today the proof is in the pudding on that one.
Sometimes the government has to step in and nationalize to some extent. Take a look at FDR, the socialist who labeled himself a Democrat, I’m not going to go in depth on this because you probably already know, but his economic policies and practices reeked of Socialism.
To your final point, it is easy to blame the government and the lending companies, but that is generally too easy. Lehamn, for instance, as well as AIG but to a greater extent Lehman are solely responsible for making terrible investment decisions involving hundreds of millions of dollars to as little as one company or country! Now your Fannie Mae, Freddie Mac, and the home lenders are to blame because they lowered their credit standards and gave undeserving people home loans. However, when you are not secure in your job, make little money and have poor credit there is some individual responsibility to be taken for accepting a loan that is beyond one’s means.
The fact of the matter is the lending market was very customer friendly and extending credit to absolutely anybody and everybody, but those who took such loans cannot be overlooked. The safest mortgage is a thrity-year fixed rate loan. Of course it results in more money paid in interest, but your payments and rates will never change and no matter what the market or inflation does your monthly payment will be the same if you don’t default.
I wanted to create a separate post to expand on this a little.
Short selling is by no means, illegal, immoral or anything like that and I have no problems with it in principle. For those familiar with Craps, short selling is kind of akin to being a wrong-way better, it offers better odds but won’t make you the most popular person at the table.
With everything, there are rules and there are exceptions. As a rule, short selling is both a legal and acceptable practice which is used rather frequently, but in this case, it was contributing to unfounded and widespread panic throughout the market. It was not being used to simply capitalize on a degree of panic that was already there, but it, in fact, helped further the panic. That is kind of like betting on someone to throw a seven when you know that they are shooting loaded dice, pretty soon everyone at the table gets the idea.
There had to be a temporary ban on it for the greater good of the economy in this case. For anyone that believes the economy dodged a couple of very serious bullets this week, imagien if this non-stop short selling would have continued and the stock value of say, Goldman Sachs, wnet from over 120.00 all the way down to under 10.00 in the space of a few weeks. That is why even with the government bailouts, many are still getting out of the financial market and being attracted to consumer staples such as Microsoft and Wal-Mart. These are companies with both tangible capital and products. Short selling is a very useful tool and is very important for hedge funds, I do not disagree with that at all, as long as it does not hinder the greater good of the economy.