I believe the government money is only delaying the inevitable in the case of todays economy. I think that while injecting record breaking amounts of capital we did little to improve or change our financial world. The stimulus is a PR approach to helping our citizens without getting their hands dirty. Without changing regulations and or the way the would be failed companies operate leaves our chances of us seeing a meaningful change on the street slim to none in my eyes. Without the government stimulus we would just be further along the process of correcting the unregulated markets of the "Go-GO" 90's and for the most part unregulated housing market from 2002-2006. I have a hard time convincing myself we did not just throw money at the problem. The tax payer absorption of these losses will result in a less abrupt depression but in the end will prolong the length of the depression. I do not think the government money will affect the depth of the crash. If we let a couple of these juggernauts fall we would have a much higher Unemployment rate today and a current equities market priced lower than the March lows. By injecting the capital from Washington we have created our current rally and hope/expectation that the recession is over and things will proceed as "Usual". I expect to see the bear market return in the next 1-2 months and unemployment will continue to grow. I expect lower lows will still be made and that some of these TARP Banks will still fail like CIT Group the other day. I found the CIT Group loss to be a bigger hit to our economy than most seemed to because of the type of loans they made. The concentration of small business loans they had is particularly damaging for a economy to lose in a time of contraction. As we all know none of those small business owners that lost there loan during the CIT Group Bankruptcy will not see any TARP money. Todays Date-11/3/2009 Current Dow Price-9773 Recorded Unemployment 9.8% I expect to see March Lows broken and unemployment get up to 13-14% in the next 12-18 months. "When others are greedy be fearful, when others are fearful be greedy". We all know who said that but I think it is of the utmost relevance to todays market place. When people think the party is back the market has a unique ability to end the party a little earlier than anticipated. Look to alternative investments if you haven't already. The lost decade in real estate and stocks hopefully will open your eyes to the investment class. To gain good insight as to where we are going as a nation watch the movie Broke-The New American Dream and or read Harry Dent's new book.
Obviously the Iceland case is a prime example of a too big to fail scenario where the recources were absent to recapitalise the banks that had balance sheets several times the countries' GDP. In the era where we live in today, one of international interwinding, banking obligations are those of the people and if that is not acceptable to the comon civilian it will be imposed by the international community. Thus the phrase too big to fail as the cost of allowing these entities to default could potentialy dwarf those of recapitalising these institutions despite them being gargantuan as well. That's not to say someone agreeing on the too big to fail premisse should agree on the route of action chosen since the crisis took shape ofcourse. They could have chosen to nationalise them completely, wiping out shareholders, forcing debtholders to recapitalise them, chopping them up into pieces... The United States allowing these firms to fail would set the clock of globalisation back a hundred years and life as you know it would end right here right now in my view. Whether that would be something good or bad depends on your society vision and personal situation I would think so it's probably different to most people.
Maybe, maybe not. Who knows? They told us what they wanted us to hear and what they thought we would "buy"... we did. Could be the best we could have done was let losers lose and allow winners to pick up the pieces...
That's because the US has a relatively small banking sector VS it's GDP. From Switzerland to the Netherlands to the UK just to name a few were countries who had an exposure to their banking sector so disproportional a failure of them would probably mean these countries to turn bankrupt overnight. 'Let them take their medicine.' Sure, but as I said it would cause pretty substantial dislocations without a doubt.
If so, then a "dislocation" is deserved. Would such dislocation be catastrophic in general or to just a few? Regardless, would it be a deserved and proper "cleansing"? If the government deems you "too big to fail.. and to be backstopped with taxpayer money if necessary", then you are also TOO BIG TO BE ALLOWED TO DO STUPID SHIT ON STUPID LEVERAGE!!
Agreeing on the too big to fail paradigm doesnt mean one should have to agree on the way governments handled this crisis although it doesnt exclude it either ofcourse. Other routes were on the table than those taken who arguably favoured stockholders most. I do believe a bankruptcy chain in international finance would cause major dislocation deservably or not so whether one should root for such a scenario to take place depends on your personal situation and society vision probably.
Ultimately - total control. Sorry for the short answer, but I always struggled to meet those arbitrary minimum word limits for term papers and such in school.
I think it is like being a 300 lb fat guy tethered to a group of mountain climbers. If you fall, your (leveraged) weight is yanking everybody else into the abyss. Of course, you shouldn't let a 300 lb guy tie a rope around you 30,000 ft up a cliff, but that would be like a regulation...
Good post. But hasn't the system already been tested? Lehman and Bear went under. Nearly 200 Banks have gone under. Combined assets were easily over 1 Trillion dollars. Yet, no bank runs. What makes people so sure Bank of America going under would create a wave of unstoppable panic that a flush of 1 Trillion dollars, hasn't already? And even if Bank of America went under, and some bank runs ensued, why would that be such a bad thing? There's lots of solvent smaller and regional banks who's balance sheets are nowhere near as leveraged as the "Big Guys". They'd still be around even if half their customers withdrew or their capital assets were written down by 50%. Wouldn't those former customers naturally seek out better capitalized banks and open accounts with them?