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

[mlees]

@spazattak

I really don’t know. I hope not, but I wouldn’t rule it out. What I do know is that every ‘crisis’ that we’ve had in the past 8 years that we absolutely needed congress to act quickly on turned out to be a ploy to get favorable legislation on the president’s desk. And it wouldn’t just be the lobbyists that they’re protecting, but practically every big-money contributor. There are a lot of wealthy people who have an awful lot of money in these investment banks.

They keep bringing up the stock market, 401k’s and pension funds to scare the general public, but those aren’t what’s in danger here… directly anyway. Those aren’t going to be what receive the majority of the benefit here. It especially won’t help these things if the a huge bailout contributes to the dollar going further into the toilet. Long-term the market should weather this. America is still home of innovation and the uber-productive worker. The bottom line is it still just doesn’t add up to me.

Ok. Thanks for the reply. It helps make your other statements more clear for me.

I don’t like having to clean up someone else’s mess (i.e. the lenders who gave a crap-ton of loans to folks who couldn’t afford them), but I don’t want the stock market to take a nose dive either.

(The stock market, as I have observed, operates as much on emotion as it does on the cold hard numbers of supply/production/demand.)

The bail out stinks, and will probably leave a bad aftertaste, but I think that if the large financial lending institutions knee-jerk in the other direction too much, the economy will stagnate badly. Then even more problems pop up.

It’s always the little guy that suffers most, because they have the least financial flexibility to deal with the bad times.

[Sam_Stone]

I’d be one of the last guys around to support a bailout like this. Capitalists need to fail as much as they need to succeed. Failure is an essential part of the equation. I’m disgusted by the $25 billion the automakers just got.

And yet… I think this bailout needs to happen. Banks and other financial institutions are not just everyday businesses we can do without. The entire engine of the market relies on the smooth flow of capital. If that breaks down, we’re not just headed for a mild recession - we’re headed for something closer to a depression. And it will ripple around the world.

Otherwise healthy businesses will be forced to shut down because they don’t have access to capital. Banks will not be able to lend money. All those people who live on credit cards will find they can’t continue borrowing any more. All those net-30 businesses who operate on credit while their receivables come in will find it difficult to continue operating.

The confidence in all these derivative debt instrument will plummet even more. Retirement funds will be savaged.

Highly respected economists of all stripes are saying the same thing. One sober analysis I heard said we could be talking about 30 trillion dollars in damage and a stock market back below 8000, and a contraction so severe that it could take us several decades just to claw back to where we are now.

Maybe the bailout can be improved - I like some aspects of the new Republican plan, which attempts to change the rules to free up more private capital and give greater incentives for capital flow in the market rather than just injecting goverment money (although they would also do that). I’d also like to see the bailout tied to serious reform of the way government meddles in the financial markets now. But even that can’t get done, I thnk you still have to do this.

I’m not an expert in the complexities of high finance, so I have to respect the opinions of people who are. And the vast majority of them seem to be quivering in their boots right now.

This is real, folks. This isn’t a political game. You can’t stick your head in the sand and hope it goes away.

[foolsguinea]

@Squink

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.

“Good banker” is like “benign mafioso.” A relative term at best.

[lee]

@Polerius

What do you mean by “if the banking system seizes up”? If banks lose money because they are holding on to “toxic” assets, will they not have money to finance the project? Or will they not finance it because they will tighten their lending rules? Or other?

Shouldn’t financing your project stand on its own merit, as long as the bank has cash to lend?

That is just it, Banks don’t have the cash to lend even for loans that have low risk for purposes that have a great deal of merit.

This is very simplified, but this is how I understand it.

Normally banks have to hold about $20 for every $100 it has in deposits. Usually this is safe. Their customers simply would never ask for more at one time under normal circumstances. If this is tending not to be the case, the Federal reserve can up the percentage that must be reserved. If for some reason they need more to meet that they can borrow it from the federal reserve. The rates that Greenspan and now the new guy set are the rates used for that type of loan.

If customers get wind of a bank not being able to make more loans, they may be afraid that the bank won’t be able to pay them, so they withdraw their money
and then the bank only has $19 or less for every $100 and is not meeting the federal reserve limit and unless it can borrow the money, the bank fails.

What happened to the money, you might ask. The answer is that too much of it disappeared when people defaulted on loans. The bank may hold the house, but it isn’t worth the money they bought it for, and even if they are now ready to take the loss of selling a house for half the money they paid for it, they can’t unless they find a buyer. Banks don’t want to be landlords nowadays, and as a consequence many of the houses stay unoccupied and then lose all value as they are vandalized. Many have been looted for copper and other metals, some are burned down.

One consequence has been that many banks have had to turn away students who want student loans because the bank is out of money, or as close as they can be to meet reserve limits. It is not that the banks think the students are not good risks, after all these are government backed loans.

Also, since the bank is now out of money, when a person who is a very good risk wants to buy a house, the bank can’t lend then money either.

Aside from a run or general bad banking practices there are practical reasons bank would need a loan. When I worked for a bank, the system that read the checks from other banks broke. Processing checks so the bank could produce the cash letters to take to other banks to get the money the other banks owed for their checks cashed/deposited at this bank is the chief way money flowed in on a daily basis.

We had to get the hardware working and then restore it from backup. Sure we had back ups, but the system was designed so that if you started with new equipment, every backup was basically incremental. The bank knew this and had calculated that they could deal with it and it was unlikely in any case. So, the race was on. We had to restore the system, from day 1 to present, before we could get money flowing into the bank. All the while other bank’s cash letters were coming to us so we had money flowing out.

One limit they had not figured on was the speed of tape. The network guy went out, bought a couple more servers with tape drives that first day and stayed on site restoring backups until that system was restored. He figured out a staging system that helped speed things up, but the hours seemed to drag by. He got it up in time, so that the pres of the bank did not have to go “hat in hand” to the fed, but it was much closer than we liked. Now we would have gotten the loan; that bank had a great credit rating. Many banks now do not.

[gonzomax]

A 20 % holding would keep a financial institution safe. These companies were leveraged at 30 to 1. They kept about 3 percent in case something happened. It did. They risked everything to make short term profits. It was dumb.