Tuesday, February 21, 2012

What Would Have Happened If The Banks Were Not Bailed Out?

Dead Wall Street Bull
With the economy in the state it is in, and the actions that our Government has taken to protect the rich, it may be fair to say that capitalism is dead.
Failed businesses are supposed to be allowed to fail and in their failure other entrepreneurs step in and replace them. However, rather than allowing the banks to fail our government was convinced to bail them out, to protect the rich.

What would have happened had the Bailout NOT occurred?

Had the bailout NOT occurred, what would have happened is.... Well we don't know, but theories regarding what would have happened depend on which economist you talk to.

Scenario 1

Top Bailout Recipients
Not all banks would have "collapsed", you get a depression as banks won't be able to give credit since they will have a 'real' approximation of how much money they have to give out.
Mortgage payments would spiral while companies cut back or went bust unable to take loans that are used to cover costs.
In the long term you'd get massively lower spending causing further economic contraction leading to a depression lasting years, similar to that of 1929. The major worry in the event of a depression is that there may be a run on the dollar which would deepen said recession.

Lets Break it down: (paraphrased from: Why the Bank Bailouts Were Necessary, by: James Altucher)

  • Banks would have gone bankrupt. Forget about fault for a second....
    Morgan Stanley (MS) would have definitely gone bankrupt. Then Wachovia. Then Citigroup. Then Goldman Sachs. Then Bank of America (BAC), etc.
Would this have been a good thing or a bad thing? NO! Very bad.
  • Many Fortune 100 companies would have gone bankrupt If the company did not go bankrupt, they would have had to scale back all of their operations drastically. General Electric (GE) is a prime example. They would have lost their access to the commercial paper and short-term financing that they have used to finance their business on a day to day basis for decades. The entire commercial paper market was frozen and would have remained frozen for months, in turn putting companies like GE out of business.
  • Many small businesses (20-1000 employees) would have gone bankrupt.
    Not only are large fortune 100 companies reliant on short term lending, but small businesses are able to operate only because of Short term lending. Many small businesses do not get paid for their work until it is completed, because of this simple fact, they need
  • Millions of people would have lost their insurance. Companies like AIG would have gone out of business, millions of people would have been without adequate healthcare coverage. Not to mention life insurance, property insurance, and other insurances that would have been lost, and obligations that would never have been paid or would have taken years to settle in bankruptcy courts. Sure, AIG’s competitors could have picked up the leftover business. But anyone with an outstanding obligation or a preexisting condition would have been in trouble. Pain would have occurred to tens of millions of people.
  • Unemployment would have instantly gone to 20-25% or much higher. Not this mythical “U6” that everyone keeps talking about but real unemployment, as 50%+ of businesses would have had to close down or drastically scale back.

Scenario 2

Wall Street Drowning Taxpayers
  • Banks would have possibly gone bankrupt.
    Morgan Stanley (MS) would have definitely gone bankrupt. Possibly Wachovia. Then possibly Citigroup. Then possibly Goldman Sachs. Then possibly Bank of America (BAC), etc.
  • FDIC
    The FDIC would have covered the individual accounts from being completely wiped out. Although banks would have failed, middle class Americans would not have lost all of their savings.
  • Credit unions and solvent banks would have stepped up
    With some banks unable to provide the credit businesses need, credit unions and solvent banks would seize the moment and begin lending. The beauty of CAPITALISM is that entrepreneurs are able to CAPITALIZE on OPPORTUNITIES. Many opportunities would have arisen that would have enabled groups of people to collect there money together and start their own bank, like Gateway Bank in Florida.
  • Toxic Assets Would Have Been Liquidated
    Toxic assets, like homes that were underwater, would have been liquidated. Homes that are liquidated would have been sold at a severely discounted rate and bought by families who could afford them. Other liquidated assets would have been sold to various individuals or businesses that could use and afford them at the discounted rates. Supply and demand would have created market prices for the toxic assets, the assets would have become affordable again and the economy would recover.
  • Millions of People Would Be Fine
    Even though we may have experience a year or two of hardship, programs like unemployment security, social security, food stamps, medicaid and medicare would have kept things from getting unbearable. 

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