If the economy collapses...

This phrase ‘economic collapse’ has been thrown about a lot in the last week to conjure up what might happen if the mortgage mess isn’t fixed.

But please tell me, what does that mean? What could really happen? Not a worst case scenario, but a realistic assessment of what might happen if this bailout doesn’t happen.

spoke asks the same question in this thread of mine. That’s a place to watch if you don’t get many responses here. I also link to an opinion of what economic collapse would be, but it’s a worst case scenario by someone whose credentials I know nothing about, so that doesn’t really answer what you ask in your OP. Let’s see if someone else can’t give a better answer.

Thanks. A worst case scenario isn’t very helpful because it doesn’t get at what the reality would probably be.

Last night Cramer said how would you like to go to the ATM and nothing was available.? How about 30 % unemployment. How about no loans being made for any reason.? That is his take. He wants Paulson to get the money and power.

Expect to see emails like this one.

The basic end result of economic downturns is unemployment and underemployment. You can throw numbers around until you’re blue in the face (and as an economics grad I can throw numbers with the best of them) but it’s basically about employment.

The spectre of a major financial collapse is that investment in businesses will dry up, or reverse. If money can’t be borrowed, people can’t start new businesses or expand existing ones. Foreign investors will be wary of doing business in the USA. Jobs will not be created, and businesses that needs loans to get through rough patches will go out of business and more people will lose jobs. The more people who’re out of work, the less productivity you have, the less wealth is being created, and the more OTHER businesses suffer.

A major collapse in the USA would, in the end, cause unemployment to rise. Unemployment during the Depression reached 25% or so, which for a First World nation is almost catastrophic. It’s extremely unlikely that would happen today - frankly, the United States is simply a lot richer than it was then - but much higher unemployment would happen, and even a couple of percent represents a tremendous blow to the economy in general and millions of people in particular.

I think the real answer to this is…no one knows. Like RickJay said, it’s all about employment and credit. What it looks like to me (IANAE) is that there will be a shortage of liquidity…i.e. banks and other lending institutions aren’t going to be very willing to, well, lend. Credit is going to dry up or become VERY expensive. I don’t think we’ll get inflation…I think we’ll get a large amount of deflation. And lots of unemployment. Of course, gonzomax’s ridiculous ‘30%’ is, well, ridiculous…but I could see double digit unemployment easily, which is going to be bad enough. Foreign investment will probably dry up as well.

It could be a perfect storm of problems and issues impacting us all at once. I know he’s busted on about it, but when McCain said our economy is fundamentally sound he was actually right. However…this could undermine all that by, among other things, undermining confidence in the system. Part of the problem with the Great Depression after all was PERCEPTION. Sure, there were fundamental issues and problems…but it was the panic and perception that made a bad situation escalate into disaster. We COULD be on the brink of something similar here…especially if Congress starts in on the fighting and grandstanding over what to do next. If they fuck around long enough I guess we may just find out how bad it could be.

Oh well…civilization is over-rated anyway…


OK, I guess I’m getting a clearer picture.

But I must say, it doesn’t sound that bad. I mean if it’s just double digit unemployment, even at 15%, then the vast majority of people will still have jobs.

So how would this negatively affect most average people?

Is it worse than I’m imagining?

Numbers don’t really convey the problem. Increased unemployment means even more foreclosures, bankruptcies, increased homelessness, hunger, crime, urban decay (or maybe suburban decay, this time around).

Hopefully one of the economic 'doper gurus will wander in.

In the mean time…yes, it’s worse than you apparently imagine. Let me give you an example:

I’m a small business. I am going after a new contract (in this case, say, for the government). I need the resources to put together an RFP that will team my company with several others to win a contract. I draw down on my company assets to put together a killer RFP…and we WIN! WOOHOO! So…now what? I need to hire on the people and do all the preparatory work to get the contract in place and spin up. How can I do that? I have to hire people, provide medical, and all the other things…but where will the funds come from? I can’t start billing the contract until all that stuff is in place…and all that stuff won’t be in place until I can start billing the contract if I have no funds to do it with. Catch 22! Without credit I can’t hire those people and expand my business.

Now…multiply that by every company and business out there. Almost no business can afford to expand in the short term without some kind of credit. How can they build new plants, hire new people, grow their business without the initial capital to do so? Instead most likely businesses are going to cut back, to entrench and burrow in, to hold their assets in. Thing DOT COM bust but multiplied by several times.

So…you’ll wind up with a spiral of unemployment and negative economic growth that will feed on itself. Oh, eventually things will bottom out and credit (read: capital) will be available again to get things moving. But it will be hard times…and that unemployment is going to be VERY hard on Americans who aren’t used to double digit unemployment figures and don’t really have the massive safety net our Euro buddies are used to. Even with what we DO have it’s going to be yet another drain on our limited resources though.


Actually, the more I think about it, the more I think things could get worse than during the Great Depression. At that time, most Americans lived on farms. That meant that even if they couldn’t make money, they could at least grow their own food. How will hungry people feed themselves this time around? I can’t imagine the Food Stamp program working on that scale.

And I can also imagine unemployment getting much worse because so much more of our employment these days is in the service sector. And many of those services are luxuries of a wealthy society.

Also, what happens when you combine a surging homeless population with a large inventory of houses that can’t be sold? I imagine squatting would become common.


I know 15% doesn’t sound like a lot. It’s disastrous. 15% unemployment would be absolutely crushing to American society. Look at it this way; take all your friends and family members with jobs, and imagine if one sixth of them were laid off. That’s one job lost in every third two-income family. It’d be horrible.

It would be essentially impossible for the government to balance its books and meet any of its current obligations, since tax revenues would be slashed. No level of government would be able to maintain its current level of service; towns would look shittier, states would have less moeny for education and police and such, the feds would either rack up debt or have to slash expenditures.

The 85% of people who did have jobs would, in many cases, be underemployed or see thier wages stagnate, since with so much available labour there’d be far more supply for labour than demand. Crime would go up. Homelessness would balloon. Cities would be less livable. The long term costs would be astounding.

The problem is, that your question is a lot like asking “what will happen if a glass breaks…” The answers range from “The wine might spill and ruin a suit” to “A shard might fly into your jugular bleeding you to death.”

A lot depends on how the economy collapses.

Right now, even as we speak, there are brave heroes and adventurers the world over attempting to stem this tide of collapse. They may not look like heroes, but heroes seldom do. They are little bald jewish guys who call themselves names like “Mr. Big Stick Man,” and “The Big Dog from Down South.” They are hedge fund guys, private equity guys, rogue economists, actuaries and mathemeticians, guys with that glint of megalomania, greed and arrogance just a step or two beyond what is healthy shining in their eyes.

These are the kind of guys who might look at a house on fire and say “I bet once this thing cools off you could take a magnet, collect all the nails and sell them for a tidy profit.”

They are thinking and asking themselves questions. What they are thinking is “I bet those CDOs are really cheap, right now.” The questions they are asking themselves are “What are they really worth? Can we do something with them to extract value?” and things like that.

I know. I used to be one of these guys. In a way I still am. The possibilities cause one to salivate. Mr. Big Stick Man is pulling at his ear hair, and considering the fact that there is a once in a life time opportunity to build an instant empire, a fortune beyond his wildest dreams. If he could somehow extract value from these instruments, than one could price them. If you could acquire them below that price, you could get the all, a trillion worth? for what? 12 cents on the dollar? Surely they are worth more than that. How to get the money out?

Mr. Big Stick Man and The Big Dog from the South are penguins on an ice flow, two of millions of penguins. They are all staring into the water and asking themselves if there are fish down there… or just sharks.

Being the first penguin to jump in isn’t the point. Any idiot can do that. Being the first one to jump back out without getting eaten be a shark is just luck. No point there.

But, the first penguin to come back with a belly full of fish…

That’s a rich penguin.

But how to do it? Lot of blood in the water? Lot of fishies. How many sharks? How to avoid them and get the fishies?

“There has to be a way” Thinks Mr. Big Stick Man. The Big Dog from the South is sure of it. They keep staring at the water. Thinking. I know what at least one of them is thinking. “Maybe I really don’t have to know what they’re worth or be able to extract value. Maybe other people just have to think that I know, or that I can. Maybe.”

It’s not that crazy a thought. They traded so well for so long on such assumptions in the past and billions were made. Maybe.

These are the guys that save us. Chances are they leave a pile of corpses and shellack the taxpayer while outmanuevering the Fed and the SEC.

What happens if they never jump? Or if they do and the sharks get them? Well, here’s my view.

The government chokes down what it can, and does such a desultory poor job of it, that now these things are truly anathema. The beleif that they are bad, makes them worse. Real estate values drop. Mortgate rates go through the roof. It’s like Houston in the 1970s. People have houses with $500,000 mortgages that have a market value of $150,000. They load up the Ryder trucks and leave the keys in the door whether they can pay or not. Taxes go up, interest rates go up, inflation goes up. There is no new construction, few jobs, unemployment goes into the 20s and 30s. Those companies with some strength and people with means tighten up, dig deep, and prepare themselves for the long winter. Consumer Confidence drops to all time lows. Homelessness grows. People demand housing, medecine, and food from a government who’s debt is spiraling out of control, and can’t squeeze blood from the dead stone of the economy. Tangible assets represent the only real value, and in the throwaway era of Ikea, Gillette, and Bick, there is little of that.

It’s the great depression. Maybe not as bad. Maybe worse.

Don’t worry though. Somewhere out there, Mr. Big Stick Man is pulling at his ear hair and saying “I wonder if…”

Aren’t these the kind of guys who got us into this shit in the first place?

I think that the main reason the public is so adamently against the bailout package is exactly this.

I posted this question over a week ago and very few people even attempted to answer this question.

The media have been panicy, vet oddly vague as to what would happen if this bill doesn’t happen. Just comments about recessions and rising unemployment, so no real description of what that would be like.

Here’s a nice article in Time Magazine that says the same thing,
"[W]hat we’ve generally seen are either dire—but very vague—warnings, or the general argument that, if credit dries up, that affects loans to businesses and little guys, and people start to lose jobs.

That’s all well and good as far as it goes. But it doesn’t get to the question of degree. Businesses will be hurt—OK. But businesses are hurt in a lot of economic downturns, some of them mild, some of them so catastrophic they threaten our civilization. Which is this? How badly will business be hit? Like in a typical recession? Or like in 1929? …"

So I’ll repeat the question in the OP: What could really happen? Not a worst case scenario, but a realistic assessment of what might happen if this bailout doesn’t happen.

The problem is that the real answer is…no one knows. No one is sure what may happen…just worst case scenarios. Most likely, from what I’ve heard, what will happen is a credit crunch which will further slow down the economy…which will probably mean some pretty hard times for the very people who are opposed to the bailout. Loss of job, limited or more expensive credit, loss of retirement and investment, etc etc.

The bailout would soften the landing (somewhat). In the long run we MIGHT be better off without it…as long as we are willing to pay those short term costs. The problem is, no one really knows how steep those costs are going to be, or how bad it’s going to be, or what secondary (or even tertiary) businesses will be effected. What cascade effect will there be? No one knows at this point.

If we don’t get this bailout then we’ll find out…and I wonders, yes I wonders, if all those folks against it at this point will be singing the same tune afterward. Sort of like the change in tune I’m hearing (compared to years ago) about the whole mortagage financial structure and how it operates…


OK, we need credit. But why in Hell do I still get 3-4 credit card applications/week? Why on earth are banks willing to extend 100’s of 1,000s of $ in unsecured debt?
This is just stupid!

Personal credit is a different matter…and basically it’s lagging behind the problem atm. If things melt down see how many of those credit card apps you get in the future…or read the fine print. Because the penalties are going to go up, as well as the interest rates…and this for folks who DO get them (which will be less than it is now…or was a few months ago).