Where will we be now if there's 0 intervention?

Discussion in 'Economics' started by turkeyneck, Oct 5, 2008.

  1. achilles28

    achilles28


    What would happen?

    Most of America's biggest banks/underwriters/insurers would go under. Along with many foreign institutions.

    During the wash-out process - that could last 12 to 18 months - the interbank lending market (aka credit market) would freeze. No offers (lenders), just bids (borrowers).

    This evaporation in interbank lending would start the cascade of failures and serve as the literal "invisible hand" to clean out underwater banks, who are only now made solvent by endless Government credit lines and bailouts.

    The situation right now - underwater banks are way over leveraged in toxic assets that are hemorrhaging payments daily.

    These leverage assets were bought with short-term interbank loans (borrow short, lend long). As the credit markets freeze, creditor banks would refuse to roll-over short term loans, and lending banks, having no one stupid enough to lend to them, would be forced to liquidate their hard assets to meet short-term loan obligations.

    CDO's would be sold for pennies on the dollar and the entire financial community would see waves of banking failures, one after the next.

    During the failures, home prices would drop precipitously. Many creditors - having seized the assets of insolvent banks - would foreclose the actual underlying, non-performing mortgages under their tranches or CDO's, pushing home prices down another 15-20%.

    Home sales would drop off to near zero.

    Consumer and business credit would still be available through US banks not geared retarded in toxic assets.

    Lending rates, however, would get much higher as market uncertainty, bleak conditions and a literal void in competition would push street rates up (save Government intervention).

    After the wave of failures is done and the system has purged - after 12 to 18 months - we'd see a restoration of confidence.

    Banks would lend to other banks again. The international market for securitized debt (mortgage and other) would catch more bids and liquidity would flush back into the system - more mortgages, cheaper loans, more business etc - as insolvent banks are cleaned out, uncertainty falls away, and confidence returns.

    All in all, it would be 18 months of severe recession - worse than the 90's and 80's - likely 70's in severity.

    The entire US financial landscape would be remade.

    What are respectable regional banks now would become the new Citi and Bank of America.

    The Old Banking Guard would be replaced by a new, savvy, risk-averse cadre of Bankers.

    Of course, this will not happen.
     
    #11     Oct 6, 2008
  2. achilles28

    achilles28

    It wouldn't be a depression folks.

    Banks would fail (a lot), the economy would go to shit, then things would rebound and come back strong.

    Same as it always did.

    The depression lasted so long because the FED restricted liquidity (jacked rates) *well after* the crash.

    Thats a entirely other subject, but would not happen.

    We'd be looking at 2 hard years, MAX.

    All this Depression talk is PURE FEAR MONGERING BY WALLSTREET to get the Dumbass Public behind the bill.
     
    #12     Oct 6, 2008
  3. ammo

    ammo

    they may tank oil into the election and the repubs will take credit for saving the economy
     
    #13     Oct 6, 2008