What will happen if the 'bailout' is not approved?

So…the fighting has started about the proposed ‘bailout’. And it’s coming from both sides…for different reasons. Let’s assume a couple of things (that seem likely to me):

First off, assume this continues to drag on for a while, as both sides get up and speechify and blather on.

Second, assume that in the end nothing is done and no compromise is reached…that essentially the US government decides not to take on those $700 billion in securities.
What will happen?

-XT

I’m just speculating - but I’d see a frozen economy, as no one lends to anyone else. That means a reduction of business expansion, more unemployment, still more defaults and lower housing prices. The Dow would be < 10K in 2 or 3 days after this.

That’s assuming no bailout. Delaying it a bit for better checks might hurt in the short run, but will be good in the long run.

Is there any reputable economist who thinks that some sort of bailout isn’t required - perhaps with different terms?

Well…Ron Paul is saying that HE thinks we shouldn’t bailout anything. That this is the first move (or second or third) in the end game to take us all to socialism.

I don’t know if there are any reputable economists who think that NO bailout is necessary…though I think there is a lot of debate as to the one currently being proposed. Problem is, the longer they screw around the worse things will get in the short term…look how the market tanked today.

-XT

They’re only posturing. Both parties are holding out for the bribe they can take back to their constituents. Personally I hope it doesn’t happen.

Well, since this thread is a what-if thread…what do you think would happen if you get your wish, Stuffy?

-XT

There’s a lot of debate because the one that’s currently proposed has no oversight whatsover. Not congressional, not judicial, none. And it’s worded so as to allow banks that AREN’T failing to be “bailed out”. Which makes it look an awful lot like someone backing a big old truck up to the Treasury and emptying the place out. Gee…where was Paulson CEO again? Where might both Paulson and Bernanke be looking for work in a few months? Just things that make you go “Hmmm”…

Paulson wants to put the money into the banks. I think a bottom up method would be better. Take the mortgages on and redo them through Freddie. Then they make payments and the banks stabilize. That will help the whole system.
Cramer says there are 10,000 foreclosures a day. He is all for the Paulson plan. But Paulson would have complete control ,without governmental oversight,.He would be exempt from the court system, and he could give any amount of money to any institution he wishes to. I do not like it. Why does he need such control and power.
If he believes the American system needs this to be saved, then he should kick in the first 500 mill. He is worth 700 mill from his time at Goldman.

Some institutions will fail, probably spectacularly. They’ll be more defaults; which was going to happen anyway since we’re not at the top of that particular curve yet. They’ll be recession which, I think we’ve been in all but a pedantic definition for the nearly a year. They’ll be some spillover to other industries, most likely insurance but that’s a guess. Eventually things will turn around as they tend to.

I’m really not asking what would be the optimal solution…or even if the current proposed solution is good or bad. That is another debate (and I’m guessing there is a thread out there on this subject already).

To restate…what could or would happen if NO bailout is approved, or if the government decides not to bailout the financial industry at all and simply let the chips fall as they might?

For a bonus, what would happen if they DO eventually approve something, but it takes a month or so before they get around to it? Assume it’s something similar to the currently proposed system with some kind of political compromises and feel good stuff tossed in.

(ETA, this was in response to gonzomax)

-XT

Well, as an economist he’s a good doctor. BTW, I agree with your prediction of deflation in the other thread. Oil prices should tank further as the problem spreads, and businesses will cut prices as much as possible both to keep market share, use up inventory and production capability, and try to increase exports.

I don’t see this getting resolved by Friday, but I bet they come to an agreement over the weekend.Everything seems to get done on Sunday these days. The Monday business section is more interesting than it’s been in years.

I don’t think that will be an issue. The uncertainty would be reduced, and the market should rally. No one expects this crap to get priced and bought for some time. Knowing that it will be should free up some capital.
The only problem would be if a signal was given that the offered price would be too low. I’m not sure what too low means, though.

I’d say some sort of reverse auction would be the way to go here. Who offers their mortgages, of a certain quality level, at the lowest price? I think that might be a way of getting the worst junk out of the system first, and not having to guess at pricing.

I know this is probably a stupid question, but why do taxpayers have to foot the bill on this bailout while the CEOs of the companies who oversaw this mess, most of whom earned > $20 mil/year salaries plus bonuses and whatnot don’t have to pay back a dime?

As for the OP, I think you would see market shrinkage as solvent companies bought up the debt for less than pennies on the dollar. My guess is the economy would take a pretty heavy short term hit.

A lot of the CEOs have lost a bundle as the value of the stock they held went to near zero. Not that I’m crying for them. But even if they paid back everything they’ve gotten in the past few years, it would be in the noise.

I agree with Voyager in that a lot of financial institutions would become less willing, or less able, to borrow and lend money.

I don’t know how much Wall Street (and the Feds) relies on the easy flow of lots of cash from one place to another, but listening to all of the “experts” talk about how financial institutions were making money on selling pieces of loans, insurance on loans, banks borrowing money with loan payments as collateral, and so on (and the Feds quietly collecting taxes on all the transactions), it seems like there was a whole lotta different ways, levels, and layers of people making money on this “giant washing-machine flow of cash”.

Exactly.

-XT

The bailout will pass. But, both parties are doing some political pandering right now. A good chance to get on the news back home. I wouldn’t be surprised to see both McCain and Obama back in the Senate to ‘debate’ the issue.

Honestly, with Chris Dodd & Barney Frank onboard, I was inclined to be OK with it. The gov’t gains assets it can liquidate later; not necessarily a bad deal.

But the scare-mongering that we must act now & that we face the Greatest Financial Disaster in US History? I think that’s utter poppycock. When Congress raised concerns that this plan was hastily slapped together, the admin claimed that they had been working on this for weeks.


http://www.rollcall.com/news/28599-1.html?type=printer_friendly
OK, but without input from the relevant Congressional Committees? That’s, um, can I call you Hillary?

There’s a kind of manipulative threat being used that gives me pause.

Then there’s…well, here’s what I just posted on my blog.

Let’s point out this: It’s not that suddenly every homeowner in the USA has defaulted on his mortgage. There are some repackaged investment packages that won’t pay off quite as much as they were promised because some people have defaulted. Most investors are reasonably diversified, & will be able to ride this out. Some businesses in the investment business are going down due to bad choices; that doesn’t mean the whole economy must follow them. :dubious:

Until I see multiple Wall Street suicides, I vote no.

There’s all this talk of ‘good’ banks being dragged down by ‘bad’ banks, unless we throw money at all of them. I cannot help but wonder what all these putative ‘good’ lenders have been up to in recent years in regard to letting regulators know about the dubious practices of the ‘bad’ lenders.
It boggles the imagination that reputable banks could have been totally clueless as to what was going on; they had to compete with everyone after all.
Yet if they knew about the shenanagins, yet did nothing, do they really deserve to be called ‘good’ corporate citizens?
I think not.

http://news.yahoo.com/s/politico/20080921/pl_politico/13689 Here are some economists who disagree with Paulson. His history at Goldman makes many skeptical. He was a financial looter. Now we trust him with a trillion. That is asking a lot.