What's the worst that can happen?

[nanvinnie]

i know there are plenty of threads out there regarding the bailouts and what not, but does anyone have some insight as to what would/could happen if we let all the big boys fail? what would be the impact? would it be survivable? beneficial? or just a complete disaster?

[Ugg]

Originally Posted by nanvinnie

i know there are plenty of threads out there regarding the bailouts and what not, but does anyone have some insight as to what would/could happen if we let all the big boys fail? what would be the impact? would it be survivable? beneficial? or just a complete disaster?

Do you read history at all? There is precedent for this and Hoover allowed the biggies to fail, with disastrous results.

[Tomorrow]

Originally Posted by nanvinnie

i know there are plenty of threads out there regarding the bailouts and what not, but does anyone have some insight as to what would/could happen if we let all the big boys fail? what would be the impact? would it be survivable? beneficial? or just a complete disaster?

I can't remember where I read it, but recently I saw that 1 out of 10 jobs in America depends on the auto industry. I smelled a rat at first, then I thought about it - steel mining and production, auto financing, gas stations (fewer cars = fewer people buying gas then coming inside to buy Twinkies and a Big Gulp), parts manufacturers, etc. If the big financial institutions (banks, insurance, etc.) were allowed to fail, the fallout would be nauseating - companies like AIG insure things like people's retirement accounts, among other things. Consider what would happen if you lost your house to a fire, only to learn that State Farm went under last week. Not to mention that getting a loan for anything (consumers buying a car or house, employers making payroll) would be nearly impossible for many.

So what happens if the big boys fail? It would be "survivable" in that it would not directly cause anyone to die, it would be "beneficial" in that companies that weren't able to compete would no longer be allowed to, and it would definitely be a disaster economically.

Unemployment during the Depression reached around 25%. Depending on your metric, it took about 25 or so years for the economy to fully recover (I'm basing it on the Dow Jones index). I'd call that disastrous.

There are some out there who believe that letting the big boys fail would be the best solution, since they believe the recovery would be much quicker, and there would be far, far less debt to pay back to the piper when it's all over; maybe there's some truth to that. Even so, it would be very painful for most of us in the meantime.

[mrkramer]

Originally Posted by Ugg

Do you read history at all? There is precedent for this and Hoover allowed the biggies to fail, with disastrous results.

He didn't try to let them fail, Hoover did plenty to try to prop up the US economy the biggest legislation was the Hawley-Smoot Tariff. His policies may have been ineffective, but he did try to intervene to stop the depression.

[AlexH]

There's an interesting spin I'd like to put on your question. Within your question, you essentially state that we either bail XYZ Company out or let them fail. I think a more interesting, and much more valuable question is whether or not we can actually succeed in propping up a failed company. I don't think it's black and white, I don't think we can just decide to prop up a failed institution without consequences, and I have a hunch that by creating propped up zombie companies, we are creating an even greater economic downturn for the future.

So, I'd like to hear what you guys think. Should we let these big companies fail? Should we attempt to bail them out? Will bailouts work? What are the consequences of bailouts? Finally, how long do we continue to debase our currency?

[SactoGuy18]

Originally Posted by Tomorrow

Unemployment during the Depression reached around 25%. Depending on your metric, it took about 25 or so years for the economy to fully recover (I'm basing it on the Dow Jones index). I'd call that disastrous.

I've actually read reports that if it weren't for the New Deal policies, the US economy would actually have fully recovered by 1937-1938 because natural market forces would have brought about a recovery anyway (people forget that the 1873 and 1907 panics were just as bad as the 1929 crash but the American economy recovered in only a few years afterward).

Of course, it didn't help that the American economy got rudely interrupted by World War II, which caused such a severe distortion in the economy that it's small wonder why the American economy didn't get back to 1929 levels until the early 1950's.

This is why I think VERY radical rethinks of much of the economy works may be in order. Besides the talk of going from income tax to consumption tax as a means of generating revenue for the government, there is now actual talk about replacing the Federal Reserve with the "Third Bank of the United States," operating in a way akin to the Bank of England and also talk about reinstating the provisions of the Glass-Steagall Act to shield banks from the ups and downs of the equities market.

[Desertrat]

An "I have read" comment: There was a very severe post-WW I crash in the U.S. in 1920. The government did nothing. There was a fairly quick recovery after a severe downturn. The natural market processes gave us the Roaring Twenties.

Analysts have written that Hoover's efforts at "pump priming" were limited by law, as a function of the amount of available gold. That's what led to FDR's glomming onto the gold. He devalued the dollar from $20 to $35 per ounce. That allowed further and larger pump priming, as it was called then; now it's "Stimulus Package". Both Hoover and FDR tried the infrastructure construction; Hoover Dam and the TVA as notable examples.

None of that worked to end the depression. The peak unemployment was some 25% around 1933, and in 1939 it was still 17%.

I don't have the specific knowledge and expertise, but what I've read in the last several months leads me to pretty much agree that had we not done the original bailout and not done the ongoing support, we'd have gotten into a very severe downturn, worse than now, but most likely relatively short-lived. More like the 1980 severe recession. Those who failed in making payments would suffer the usual consequences, the marketplace would level out at new, lower levels, and we'd re-start. As it is, about all we're doing is creating incredible levels of national debt and inflating the money supply beyond all rational behavior.

So, now? It looks like we're in for a very long siege of Hard Times. It appears to be worsening. Even-higher consumer price inflation appears to be on the near horizon, and the issue is more of "when" than "whether".

The worst that can happen? A collapse of the dollar. I'm not predicting that, but it would surely be the worst--and some are indeed predicting just that.

'Rat