Fool Blog: No Depression? Really?

While the politicos in D.C. navel gaze and ponder how to win their next election, Rome is burning. You see, the markets don't care about your Senate seat or whether the "fat cats" are going to get bailed out.

What matters right now is that the credit markets are at a standstill. People can't borrow and businesses around the globe that rely on the short-term liquidity of the credit markets are being badly hurt. We won't hear about the brilliant entrepreneur denied her small business loan, but how about McDonald's (NYSE: MCD  ) franchises being denied credit to build new coffee bars, or General Motors (NYSE: GM  ) needing to raise billions just to cover basic operating expenses? Retailers like Home Depot (NYSE: HD  ) are closing stores, and apparel retailers like Macy's (NYSE: M  ) face their toughest holiday season in years. And airlines like Southwest (NYSE: LUV  ) and American Airlines parent AMR (NYSE: AMR  ) are cutting flights.

Sure, you still see advertisements for mortgage loans, but have you tried to get one? A colleague of mine with an excellent credit rating made the attempt and was quoted 11% for a 30-year fixed mortgage with a 20% down payment. That's the equivalent of the "open" sign being left on, but the doors being locked. A survey conducted by The Association for Financial Professionals of many large-company finance executives found that the locked-up credit market has already caused them to stop hiring and to cease capital spending projects.

The media isn't focusing on that so much (and shame on them). They'd rather focus the attention on raw-meat issues like limiting CEO compensation. As if that matters right now.

T-E-D
Fool, meet TED -- Ted Spread, to be specific. The TED Spread is the difference in rates between the interest rate paid on three-month U.S. Treasury Bills (the "T"), widely considered the most secure of all investments, and the three-month Eurodollars (the "ED") contract, represented by the London Interbank Offering Rate, or LIBOR. (Eurodollars are, quite simply, U.S. dollar-denominated deposits held at banks outside of the United States.) 

The spread is a measure of the credit risk that the market perceives in the general U.S. economy. It measures the rate of return the banks are requiring over the risk-free Treasury Bill rate to lend to other banks.

It shows the level of concern banks have that other banks are going to default. It is, if you will, one of the purest measures of the perception that banks are going to fail -- kind of a measure of our economic blood pressure. When the economy is strong, the TED spread is quite low. But when the economy weakens in systemic ways, it can skyrocket as banks choose to sock their assets away in Treasuries rather than take a chance that another bank will default. Call the TED spread an indicator of the risk of an economic heart attack.

Historically, the TED Spread has been around 0.5%. Just prior to the past two recessions, 2001-2002 and 1990-1991, the spread exploded to around 1.25%.

When the Paulson financial recapitalization plan failed to pass the House of Representatives yesterday, the TED spread shot up to an all time high of 3.5%. If the economy were a medical drama, doctors would be running around shouting "Push 500mls of (insert drug name here), stat!"

Keep in mind that the raised TED Spread is a sign of the perception of credit risk. It doesn't mean that the credit market is seizing up. It means that those who are in the best position to know think that the chances of default are much higher, and that they demand compensation from other banks in the form of a much higher interest rate as a result. That is expensive, and it means that some banks might reasonably refuse to cash checks drawn on other banks. If things get much worse, $700 billion will look like a bargain.

Here's a solution for our elected officials: Put a provision in the bill that ups the FDIC insurance limit from $100,000 to $250,000. Restoring customers' confidence in their deposits reduces the risk of withdrawals that sealed the fate of Washington Mutual (NYSE: WM  ) , thus making banks feel more comfortable lending to each other.

That'd pass in a heartbeat, and it'd likely quell the anger of their constituents.

David Forrest does not own shares of any company mentioned. Bill Mann owns shares of McDonald's. The Home Depot is a Motley Fool Inside Value recommendation. The Motley Fool is investors writing for investors.


Read/Post Comments (51) | Recommend This Article (50)

Comments from our Foolish Readers

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  • Report this Comment On September 30, 2008, at 5:55 PM, knighttof3 wrote:

    Well OK, I still don't understand why it's my problem if someone else cannot borrow money because of a banker's perception.

    Hey, solvent banks will always lend money to someone with good credit or a good business plan, else they will go under.

    Said someone, if unable to borrow money from a bank, will start a business in a garage or borrow money from his/her friends. It's called entrepreneurship. Look it up.

    Businesses without enough free cash to sustain short-term activities deserve to go under. The financial tide of cheap money is going out, we'll see who's swimming naked.

    Bottom line: NOT MY PROBLEM.

  • Report this Comment On September 30, 2008, at 6:26 PM, cycle924 wrote:

    NO Bailout, No Bailout, No Bailout. It is that simple. I understand that when you take one Reagan + one Bush + another Bush you get a huge socioeconomic mess that our childrens grandchildren will be paying for...however, this simple economic formula for disaster is of our own making and now they are reaching into our pockets to pay down bad debts, selfish decisionmaking, support white collar crime and oh, yes, reward those lovely "traders" in credit default swaps that were riding the "free" market train over the edge of the cliff. It must stop and this is how to do it. As the saying goes: "the market will correct itself".

  • Report this Comment On September 30, 2008, at 6:37 PM, misterrock wrote:

    Too much credit is what got us into this mess in the first place. Hopefully credit will dry up for a while; we don't NEED it.

    I have three vehicles bought with cash, a small house paid for with cash, I don't have cable or satelite (rabbit-ears work), my internet is slow dial-up, I hold no credit cards, and I'm saving to build a larger house with cash.

    It becomes really easy to live simply when you don't pay a massive amount of interest.

    We can ride this mess out if everybody would just breathe deeply a couple of times and restrain themselves.

  • Report this Comment On September 30, 2008, at 6:44 PM, InveSkeptic wrote:

    BofA refuted the claim about not extending credit to McDonald's. It was a false story (aka: a stark raving lie). McDonald's can still get credit.

    But moreover, I agree with the economist from Harvard in his CNN articel today. He suggested that the credit is being held by these banks because they ANTICIPATE a bailout. If there was for sure no bailout to occur, trust me, they'll start lending again.

    No bailout.

  • Report this Comment On September 30, 2008, at 6:54 PM, knighttof3 wrote:

    Oh and were these banks handing out money to me (an American taxpayer) when the loans were being sold and resold and chopped up into MBSes and CDOs based on MBSes and each time they resold, a "little" bit of money stuck to the bankers' fingers? So why should it be a one-way street?

  • Report this Comment On September 30, 2008, at 7:37 PM, UltraContrarian wrote:

    Knighttof3 - Yes, they were handing out money to you, as represented by the US government. They paid corporate income tax on their income.

  • Report this Comment On September 30, 2008, at 7:54 PM, SubstanceP wrote:

    Agreed Cycle. No bailout. But, uhhh, did you forget there was a Clinton sandwiched between those two Bushies?

  • Report this Comment On September 30, 2008, at 8:00 PM, dennis123456 wrote:

    As a newcomer to the Motley Fool, I am absolutely amazed at the level of vitriol and invective that pervades many of the comments posted regarding this so-called “bailout”. The overriding sentiment seems to be “it isn’t going to effect me so screw everyone else”. Well, that may be true, but I’m not so sure.

    I’m not old enough to remember the Great Depression, but my parents and grandparents were and it wasn’t pretty. It wasn’t only the “high rollers” that lost their investments. Ordinary, hard working people lost their jobs, their savings, and their homes. I have no idea whether or not it’s likely to happen again, but I am not anxious to find out. Misterrock may be smug in his belief that he’s safe, but if his job and his savings evaporate, how is he going to operate his “paid for” vehicles and pay the taxes on his “paid for” home?

    $700 billion is an unimaginably large amount for most of us, but put in the context of the vast sums that our government collects and spends annually, it may not be such a large amount.

    As someone who worked hard and long to support a family of six and obtain an education and was only in later years able to have enough surplus income to scrape together a little for retirement, I can’t afford to gamble on the economy surviving on it’s own. At 61, I don’t have enough time left to pick up the pieces and start over. As it is, I will need to keep working well into my sixties in order to have any hope holding on to my modest home and living in reasonable comfort. So, misterrock and the rest of you, don’t sit there and try to tell me that we can just let everything collapse and we will all come out of it just fine.

  • Report this Comment On September 30, 2008, at 8:43 PM, misterrock wrote:

    dennis- I'm not at all trying to sound smug or cocky, I'm simply saying that living within our means to accomplish our goals is good for character-building.

    I do not want to see anybody's retirement destroyed or savings wiped out and I wish you the best in yours.

  • Report this Comment On September 30, 2008, at 9:14 PM, scottindallas wrote:

    I still don't want any bailout. Loosening credit is not our job and is not needed. This crisis was caused by cheap credit. Trying to fix the credit that these banks are unwilling to offer each other is folly.

    It's like a corpulent man with clogged arteries and bloated heart asking to be sent back to the buffet line. It is wrong! Let the markets work to set values. We saw the market rebound, this is called a business cycle, not an opportunity to kickback to Congressional donors.

    Furthermore, who will buy our debt? China has said they are not interested in buying any more dollars. A bailout could trigger an inflationary cycle only Richard Fisher and other monetary experts are discussing.

    And, our debt can't be escaped by inflation, as the vast majority of our Federal debt obligations are not fixed, they are pegged to inflation. A bailout could ruin the country.

  • Report this Comment On September 30, 2008, at 9:28 PM, TMFBent wrote:

    Agree this is an issue -- and it's a very predictable situation that I have blogged about for months on my caps blog, actually (more as regards the ineffectiveness of Bernanke's rate cuts at fixing mortgage problems) ... but to paint it as as a leading indicator of a depression (or else!), I can't agree with that.

    Sj

  • Report this Comment On September 30, 2008, at 9:36 PM, TMFBent wrote:

    Correction, I've been blogging about the spread between mortgage rates, LIBOR and Fed interest rate cuts, not treasuries per se... it's all a rich tapestry, but I still object to the headline and tone this article takes.

  • Report this Comment On September 30, 2008, at 9:55 PM, dennis123456 wrote:

    Misterrock- I appreciate your comments and I wholeheartedly agree with the notion of living within one's means. But, regardless of who is to blame for this mess and who stands to gain the most from any attempts to fix it, I think that we all stand to lose if nothing is done. It seems to me that those opposed to any government intervention are divided between those who think there is no major problem and those who would "cut off their nose to spite their face".

  • Report this Comment On September 30, 2008, at 10:04 PM, ButtSauce wrote:

    You guys think the arbitrary $700 billion is even going to come close to patching the cracks? Puhlease. A drop in the bucket. Ask the auto industry how the $24 billion we used to bail them worked out a few years back. This is going to do the same thing . $700 billion will just about cover the money the FDIC insured bank accounts and not much else. The media is dreaming if they think this will fix anything. The media, that is, which is owned by the lobbyists and current administration.

  • Report this Comment On September 30, 2008, at 10:08 PM, CMHPeteM wrote:

    1) Sorry, but 30 yr loan at 11% with 20% down still is cheap compared to 1981 when a 30yr loan was 18%+, if you could get one. The alternative was an uncapped ARM starting at 15%. I know that the economics are different now, but still.

    2) There are different kinds of credit and I keep seeing them lumped together as if they are all the same. They are not. Unless you perform all of your transactions in cash, you are using credit. Write a check, or cash one, and you are using the credit between banks.

    3) Whether you use any kind of credit or not, the vast majority of companies with which you do business depend on it. Most auto dealers have a floor plan to finance their stock. Many farmers (most?) borrow the money to buy their seed or feeder livestock. Most retailers have a line of credit they use to manage their cash flow, allowing them to buy inventory and pay employees before they have received payment for from their customers. If credit dries up, it is not just the overextended who will feel the pain.

    4) As I understand it, trust needs to be restored in the financial markets. I don't understand how TARP does that without us taxpayers overpaying for "damaged" assets. Even the suggestions that the government recapitalize the banks could be painful if you, or your mutual funds, have a substantial position in a bank which has its equity diluted by 80%. There has to be a better way.

  • Report this Comment On September 30, 2008, at 10:16 PM, SteveTheInvestor wrote:

    MisterRock:

    You are to be commended for living within your means. Truly you are. It's too bad that more Americans can't seem to do that. Like you, my wife and I are in fairly good shape in regards to debt.

    The problem is that so many have gotten themselves in so deep, that trying to force them to live within their means in the here and now is futility at best. Cutting off their credit would be a direct path to bankruptcy for many, many people. I have little sympathy for those who spent recklessly and piled up unmanageable debt. At the same time, I empathize with those who were forced into debt because of health problems, job loss or what have you.

    Regardless of the reason, forcing that many into bankruptcy would accomplish very little and may cause major problems in the economy.

    Is the bailout the solution? I really don't know. I do know that if we can get the credit markets functioning again, we must follow it up immediately with some major reform in the way credit is issued on both a personal and business level. Clearly there are far too many consumers who have no concept of reality, not to mention the lenders that promote the fantasy world these consumers live in.

    Finally, we must require that all investments be 100% transparent, 100% of the time. No funny accounting. No creative financial tricks.

    Greedy businesses, pathetically out of touch consumers and inept regulators have brought this situation upon us. The first goal should be to fix it however we can. Next, we need to figure out how to stop it from ever happening again.

  • Report this Comment On September 30, 2008, at 10:18 PM, SPQRusa wrote:

    OK - now I'm convinced you are a TOTAL FOOL. Credit markets have seized not because of a lack of liquidity - they have seized-up because risk assessment has been thrown a loop. 11% on 20% down 30-year fixed on 760+ credit is a fantasy rate for FOOLS. A quick survey of rates gets me from 5% to 8%. Your article isn't worth the bits it takes-up on the HDD.

  • Report this Comment On September 30, 2008, at 10:58 PM, JoeAgresti wrote:

    the cds market is worth 44 trillion - isnt it?

  • Report this Comment On October 01, 2008, at 12:12 AM, EScroogeJr wrote:

    No mercy for the banks. Carthage must be destroyed.

  • Report this Comment On October 01, 2008, at 12:21 AM, XMFBogey wrote:

    Hey Seth, I don't know if we're heading into a Depression any more than the next guy, but the consensus amongst people screaming "the heck with them, let 'em all fail!" is that everything will be fine once the dust settles.

    My point of view here is that what's happening in the credit markets is affecting hundreds of millions of people that have no culpability in any of this.

  • Report this Comment On October 01, 2008, at 2:52 AM, bmtfool wrote:

    Im not sure where this anecdotal evidence comes from but in my area you can still get a 30yr mortgage at 6.25 if your score is north of 700, and your income qualifies. I really wonder how much of this crunch is hype since 98% of the financial institutions are in fact still healthly and well capitalized at this point. I dont hear that being advertised as loudly as the crying from wall street that the sky is falling. That being said I dont have a problem with increasing the FDIC limits versus the trillion dollar gamble on bad assets that are magically supposed to gain value, in the case of the bad mortgage debt alot of these mortgages in the hot re markets are 100%+ overvalued, that isn't going to be corrected in the short term. If the folks in congress really believe that they will be worth more in 5 yrs then they probably havent been told the truth about the depth of the problem.

  • Report this Comment On October 01, 2008, at 4:01 AM, upupaepops wrote:

    It's a real crisis.

    It won't correct itself.

    Bailing out Wall Street is not the answer.

    The only reasonable way out is to bail out Main Street. Put enough money in the hands of the little guy to pay the mortgage and buy necessities and the economy will revive.

  • Report this Comment On October 01, 2008, at 4:51 AM, MisterRogers wrote:

    I've always lived well within my means. I paid cash for my car. I paid cash for my condo. I have no debts whatsoever and plenty of (formerly) healthy investments. All this is the result of my own hard work and sacrifice. However, I'm already feeling the crunch big time. My wife can't find a job where we live. We want to move, but for months now, we haven't been able to find a buyer for our condo, even after reducing the price. My present contract employment will end any day now, which will leave me looking for a job in uncertain times. I have enough cash to get by for a few months, but after that, I'll have to start selling investments at a hefty loss just to cover the cost of property taxes and ramen noodles. I had been planning to start my own business the first of next year. I wasn't going to take a business loan; I was going to finance it with my own hard-earned cash. Now, though, I'm not willing to take that risk because I see my pool of potential customers drying up. Honestly, I don't know whether to support the bailout or oppose it. What I do know is that responsible people like my wife and me will be the ones to suffer either way. I try to smile and look at this downturn as a buying opportunity, but without an income, I'll have no discretionary money to buy with. God forbid, if things got so bad that I could hardly afford to pay my utilities, regime fee, homeowner's insurance, and property taxes, the equity I would have at stake would be far more than all these folks who put 0% down on a mortgage they couldn't afford. When the government started talking about bailing out homeowners in 2007, public sentiment was mixed. Talk about bailing out banks, though, and the public is strongly against it. I'm not big on either idea, but I would support the greedy banks before the greedy homeowners. The mice and the fat cats are equally infested with fleas.

  • Report this Comment On October 01, 2008, at 6:07 AM, phillyd100 wrote:

    Like some of you I own everything out right. Big house, cars, and plenty of invested money. For doing things right my lot has decreased some $200,000+ during this past year or so. I can't walk away from a $10,000 down payment and give the banks the house. My stocks are my retirement savings and they're doing 'great' as you're probably aware.

    With all that said this bailout is NOT the answer. The truth is this ... our nation is bankrupt. Our debts FAR OUTSTRIP our assets and our incomes are falling thereby reducing, if not eliminating, our ability to repay the growing interest. It's funny how people who like to make this a Demo vs. Rep problem just don't understand that under EVERY SINGLE PRESIDENT including Bill Clinton our national debt, state debt, and local debt has increased.

    What we need is less debt not more. We need more equity not less. We do not have the public or political will to spend less. We do not - seemingly - have the public will to 'suffer' and go through the necessary 'pain' that will take 10-20 years in order to give our children a better country. The ONLY OTHER CHOICE is the inflate the money supply. When that gets out of control no one will buy our TBills and that my friends is the end of the game. Either massive cutbacks of government spending INSTANTLY (causing a depression since so much of our economy is generated by our Gov't) OR the Dollar is no longer our money supply since we'll be forced to accept the terms of Europe and other nations to cancel our debt IF WE GET OFF THE DOLLAR - basically the rest of the world will buy our JUNK (dollar) for pennies.

    It's not pretty but in my mind it's a sure thing. Our national, state, city, personal debt is over 300 trillion. Our assests are under 40 trillion.

  • Report this Comment On October 01, 2008, at 7:34 AM, macrophyllum wrote:

    Please, if you think this bailout is a BAD IDEA like so many other American's, call or email your Senator today and tell them that if they don't "VOTE NO" you will not support them for reelection.

    You can quickly find your Senator's email address here, http://www.senate.gov/general/contact_information/senators_c...

    I've emailed both of my Senator's this morning, please do your part and contact yours. We can't let this mess of a package pass. Remember, they work for us!

  • Report this Comment On October 01, 2008, at 7:54 AM, Stonewashed wrote:

    McDonald's isn't in the business of selling hamburgers. It is in the real estate business. Those who buy the franchises are simply glorified managers.

    Furthermore, I have to laugh when the biggest proponents of "the free market" pooh, pooh, Joe Main Street as enemies of it and make condescending remarks about "all that populist thinking", meanwhile the biggest welfare recipients of them all are these mega corporations.

    Tell you what, how about I take my own pension money and have other options besides Mr. Bank or Mr. Wall Street. I wonder if I took my own pension money, bought a mortgage of my own, make a few payments on it, default on it, and not only take the tax write off, but own the real estate free and clear. Then I will go to the government and ask them to buy my toxic mortgage and have the tax payers pay for it too.

    Wal Street can kiss my backside. Those who sold this poison got out of it long ago, and are sitting on the sidelines with the cash waiting to buy it back.

  • Report this Comment On October 01, 2008, at 8:14 AM, stoutjw22 wrote:

    Agani with the "end of the world as we know it" talk. PLEASE tell me what is actually going to happen don't give me b.s. about someone who could only get an 11% loan, I KNOW THIS IS A LIE. I work for a solvent bank and we are doing more loans than we ever have. Also, I am refinancing and just locked in at 5.5% not 11%. The only credit that is freezing up is at the big banks that need to go under anyway because they are inefficient and have bad management. All the small and midsize banks are thriving in this environment becuase houses are starting to become affordable again. That is when you should buy a house WHEN YOU CAN AFFORD IT. If The Fool thinks everyone deserves to own a house they have been reading to much socialist propaganda and there next article will be entitled "hiel Hitler". I have heard enough about 1929, it is just like the word change that we hear so much from government today. there is no backing for any of the retoricf coming form the Fool, politions or anyone in the media.

  • Report this Comment On October 01, 2008, at 8:17 AM, Skysclear wrote:

    Why is there NO mention in the plan to us

    ..anything that would make us WANT this Plan?

    Are they Ignorant of WHAT got us here?

    If they KNEW.. they would give us at least REFORM!

    Reform in the Way of a Promise that the Naked Shorting will be Closely Monitored AND the Reg. Sho. Would be adhered to !

    Where are the Promises that those GUILTY of Treasonous GREED.. Will Be Prosecuted?

    Where is the Understanding on their part of

    the Investors Bottom Lines in Constant Decline

    due to the LOSS of the Up Tic Rule?

    Why Are they NOT at least MENTIONING ANY of the above?

    Simply throwing out..a 'Plan'.. with nothing but MORE Spending.. and NO Regulation and Reform

    is NOT showing me or YOU.. ANY Chance that this will never happen again!

  • Report this Comment On October 01, 2008, at 9:02 AM, RaulChapin wrote:

    Banks are not willing to lend to each other thus checks can not be cashed... that is just due to a flawed system.

    In Guatemala (just a tiny little 3rd world country for those who never heard of it) ANY check drawn on a bank other than the one receiving it has a 3 days waiting period, time in which the receiving bank gets money from the issuing bank, if the money does not arrive, the money does not get to the recipient. ZERO problem.

    If you are in a rush to get your cash, you go to the issuing bank and cash your check there, if they have no cash to give you

    The FDIC equivalent will protect the money of the depossitor issuing the check and name a bank to pay all checks from failed bank, the FDIC equivalent would then liquidate the banks assets and pay itself with that, if there is any money left it goes to shareholders.

    Banks have to pay an insurance on all deposits which goes to the FDIC equivalent and stays untouched to be used when banks fail... and by the way, we are used to having at least two accounts because guess what... banks DO fail... there is nothing and noone fail proof... thinking a bank is too big to fail si plain hubris.

    Sure it would take time to implement this in the USA... but already two weeks have gone by in looking at the be all and end all of solutions... the easy way, save me now, i promise i will change... how about CHANGE NOW we will then save you.

  • Report this Comment On October 01, 2008, at 9:15 AM, RaulChapin wrote:

    I dont know what i am talking about because i did not live through the great depression? Well I lived for the two years of financial craze after the 3rd and 8th largest banks of Guatemala failed within two months of each other. The ATMs stop working for two months and you had to ask around to see which bank office was actually cashing checks.

    Guess what... Guatemala still exists, and the problem got solved.. was it hard... horribly hard, a friend of mine lost close to a million dollars, because stupidly enough she had placed a huge part of her savings into one bank only... and it failed.

    But solutions do exist, for example, we knew at one point or another the crisis would end, so I had no cash to pay my morning breakfasts... the guy selling them to me extended credit, and when i did get to cash a check i paid... insta credit market.

    One company does not have money to pay another... company B knows company A is a good payer in a tough market, company B can either demand its money now, or accept to relax the terms and extend their A/R for a month. If it demands its money now it has two risks, that company A is going to go belly up, and take MUCH longer than the month to pay or that company A will pay and then look for another provider... I own a restaurant amongst other things... and when the dairy company demanded we pay or else... we paid and inmediately switched to another company.

    Payrole can not be met... if i know my company is solvent and decent... guess what? i rather lend the company I WORK FOR 1 month of my salary or 1.5 months than lend it to X banker that can not fail... unheard of.... well who heard of more than 3 huge banks going belly up in the USA... special times special solutions. I can not eat if i have no paycheck for 1.5 months... that is just fear mongering, my cc's will not be all cancelled at the same time, i should have some savings and in the worst case scenario, if no body is buying... the grocery store guy WILL give me credit (expensive but will) because if he does not sell his stuff... it goes rotten....

  • Report this Comment On October 01, 2008, at 9:22 AM, RaulChapin wrote:

    People and organizations with HUGE ammounts of money are used to getting returns.... getting a negative yield from treassury "NO-RISK" notes can only be done for a little time... after a while they need to put their money in riskier investments, because they need higher returns... OF COURSE if they think they only have to have it in their pocket for a couple of weeks till papa government throws money to save the market... they will hold it... it is called BLUFFING and you can do it when you have all the chips... but if you do it all the time, some one will start calling your Bluff...

    Negative yield? yes, it is lower than inflation thus negative.

    "NO-RISK" all of those who "Remember" the great depression, check out how the dollar went from being exchangeable for X ammount of gold to being changeable for nearly half. Guess what, a lot of those dollars were not in America and a lot of those investors realized that even the all mighty buck possed a risk. Further more this 700B "Investment" will at least in the short term mean inflation, that is a GUARANTEED loss on those treassury bills... as the underlying dollar value of them gets eroded even if you receive the same nominal ammount that you put in, that ammount is worth less than before... thus your risk.

  • Report this Comment On October 01, 2008, at 9:34 AM, canonian wrote:

    MisterRogers,

    If we lose it all and do not have a way to pay our property taxes, utilities, etc.. No one will bother to come kick you out, for what? Who is going to buy your property, some other fool without a job or about to lose their job.

    If there is a complete fall out there simply won't be anyone around to kick you out of your home or cut the wires to your electricity. However I guess the power plants could shutdown due to no employees.

    If will be a fight to survive and defend your property, obtain food, water, power etc..

    The bailout will delay the inevitable, and make it worse for future generations when it can not be avoided.

    Back to the wild wild west.

  • Report this Comment On October 01, 2008, at 9:41 AM, RaulChapin wrote:

    Did you know that some cancer patients DO NOT TAKE chemoterapy even if their doctor says It is the ONLY cure.

    The doctor can not force them to take it and they decide that the "Probable" benefits of it are not woth the CERTAIN negative effects.

    Just imagine if the all knowing doctors were allowed to prescribe anything and everything they consider necessary and you were forced to accept and pay for it??!!

    (I give this example, because no one in their right mind will say taking no action to "Save your Life" is a painless or easy decission, and taking no medicine is by no means the easy way out)

    It is similar with the bailout. People might not think it is going to save them, so they rather take the probable financial hell from the failure of the system alone, than to both be in 700B more debt and stuck with having the probability of the failure of the financial system.

    IF you only see one option, you have not looked hard enough... plain and simple.

    Oh, by the way, my foreing dollars keep steadily going into the S&P and like me i am sure a lot of people will pour all they can in it on these bargain times... if the S&P500 halves by next year... i shall be in pigs heaven.

    Of course America is not too big to fail, but I am 100% convinced that Americans will prevail with or without the existing financial system.

  • Report this Comment On October 01, 2008, at 9:55 AM, RaulChapin wrote:

    Think outside the box! there are other solutions. Example: You are old and have kids and a decimated 401K.

    Sell your 401K to your kids in exchange for them paying for your expenses... they will have another 25years to wait and your investment WILL grow in that time or so has the Fool been saying for the past 9 or so years.

    There are no jobs for you? How about move your very qualified self south for a while. Americans are still welcome in most of the world. Did you know that teaching english in a foreing country can pay for a decent living? Sure... you will have to be with all "Those" people... but you get used to us. Your kids will not get used to it?? they will, it is easier to live in a different country, than to have no food... ask any inmigrant!!

    You have a BA or more? You can certainly teach in a Foreign University.

    You can not sell your house? If it has less value than your morgage, get rid of it (IE Default... it is in fashion after all), you can always buy again when the mess is over.

    If you have paid it in full and are willing to move south, rent it for the value of the property tax.

    Rich people with summer homes in the 3rd world, pay people a little ammount a month to live in their houses... the house stays safe and the poor guy has an income.

    Anyway... I think the bailout will eventually happen, just the way the Irak invation happened even with a lot of people against it... but at least the illusion that people have a say in what its done is quite refreshing.

  • Report this Comment On October 01, 2008, at 10:25 AM, poach wrote:

    What's there to prevent banks from deliberately delaying lending in the hopes of a government handout?

    What's there to prevent big banks from colluding with each other to deliberately delay credit in the hopes of forcing Congress to bail them out and taking their toxic assets of their books?

    What's there to prevent big banks and speculators from colluding and shorting the market to create a sense of panic - bail us out or else!

    As a banker, you don' t have to be dishonest, you could just be opportunistic - the government has shown its hand in its panic and everybody who stands to benefit will play dead when somebody is willing to give them a freebie.

    The worst happens when everyone panics and starts believing that this is the only way out.

    I still believe that we should not screw the tax payer.

    There are other solutions to this mess, without such an expensive bail out.

    1. Suspend Mark to Market for 2 years

    2. Suspend Capital Gains tax for 3 to 5 years.

    3. Increase FDIC coverage to 250,000

    4. Create a market for illiquid securities by creating an exchange where market makers have to quote two way spreads.

    5. Start the reverse auction process with the limited funds at the Fed's disposal - if its a success you stand a chance of raising more money later.

    Poach

  • Report this Comment On October 01, 2008, at 11:14 AM, HemOncDoc wrote:

    Who would be loaning GM any money at this point? The fact that GM can not get a loan is a good thing. I wouldn't loan money to GM either. There are several institutions in the US that are absolutely on the brink of failure. As an investor, I would like to believe that I have a more than realistic change at getting a return on my investmet and GM does not fit that particular thesis. McDonald's sells hamburgers, they don't need to get into the cofffe bar business to thrive.

    I understand the credit markets are tight, but these 2 examples are not very reflective of companies that are being "hurt" by the credit mess.

  • Report this Comment On October 01, 2008, at 11:26 AM, HKendrick wrote:

    "McDonald's sells hamburgers, they don't need to get into the cofffe bar business to thrive."

    Well, as a McD's shareholder, I'd like to see them get into the coffee business. But anyway, the "fact" in the article regarding McDonald's being unable to obtain credit is a bit of an overstatement. To wit, http://www.businessweek.com/ap/financialnews/D93CP9CG0.htm

  • Report this Comment On October 01, 2008, at 11:31 AM, MisterRogers wrote:

    Canonian, when I posted earlier, I was undecided about the bailout, but after reading up all day, I am decidedly against it. It's hard to fathom just how much $700 billion is, but even 10% of that amount is too much of our money for the government to throw into this mess.

  • Report this Comment On October 01, 2008, at 11:38 AM, Seattleguy527 wrote:

    'Depression,' huh? So I guess we should all take our money out of the market and cancel our subscriptions immediately? Interesting choice of words there.

    I also find it highly ironic that according to the Fool the apocalypse is bearing down us, yet I'm getting sales pitches in my e-mail for 'Motley Fool PRO!' How am I going to afford that subscription if I'm living in a cardboard box?

    Lastly, I work in the mortgage industry and I can tell you that the average rate on a 30-year fixed for a prime borrower is a little over 6% right now. Interest rates are still near all-time lows. Your colleague was getting taken for a ride.

  • Report this Comment On October 01, 2008, at 11:46 AM, wilddiscus wrote:

    I'd Like to add my comments here..Not an expert by any means..not rich either...just your average guy with a home, mortgage ,and mnthly bills to deal with...

    My problem with the bailout isn't the Gov stepping and doing something to alleviate the issues..its the methods they would use and the way they are rushing into it ..Our Gov debates for months on end on simple issues.. in a wink of an eye they settle on a $700 billion bailout plan for a complex industry wide problem.

    The part of the plan that sits worse of all with me is The federal Gov. wants to buy the banks bad Mortgages ? That makes no sense to me...If it was a bad mortgage in the banks hands...its not going to become a good mortgage in the feds hands...They don't exactly have a track record of fiscal responsibility! Its just throwing good money after bad... Sure it takes the burden off the banks.. but it just moves it to another location... The tax payers of this country... If you give the Feds a $700 Billion dollar blank check for this......It solves none of the reasons it happened....its a bandaid that you get the bill for later.

    Sorry, but I don't think this has been thought out well and see it as knee jerk reactions by wall street, the feds and financial sector lobbyists.

  • Report this Comment On October 01, 2008, at 12:45 PM, teryflwr4u wrote:

    I agree with many that the $700 billion will only be a beginning if the bail out is passed. I feel the bail out should be given to "main street" as well as to Wall Street. Let's have the lenders go back to their loans that are in jeopardy and see if they can work with the borrower to either lower the principal amount or give them a better interest rate. As for Wall Street, the government should be getting ownership in each bank that accepts money in the bail out. We can all agree that Americans need to learn how to live within their means and learn to save. We have one of the lowest per capita savings rate of any industrialized nation. Many of the people who are now in trouble with their mortgages knew they couldn't afford a house when they bought it. Then they sucked the equity out of it when prices increased, thereby increasing their debt. If they can work with their lender on better terms, great, if not, then they need to become renters again.

  • Report this Comment On October 01, 2008, at 1:05 PM, donovan5757 wrote:

    I am also not an expert and I have seen my 401 k drop by almost 50% over the last 2 weeks. When I first listened to and read about Paulson's/ Bushes proposal, I thought to myself how can anyone in the congress be so gullible to give this man/ administration that kind of money with no oversight? Nice try Paulson. The all I heard from the experts including the Fool how we had to bite the bullet and live with the deal. I am sorry this is just BS, nobody and I mean nobody with any sense would make a deal like the Paulson deal, but again our representatives and the experts just about did. It seems to me if we have all this experts why can not we write a deal which would protect the American tax payer. It seems to me if we could by all these assets for pennies on the dollar and be able to improve of maintain these assets until the market stabilizes we should be able to have a huge windfall, and maybe we could pay down the debt a little, and pay back the tax payer. I know nobody likes the government to act like a business, and actually make a profit, but with this kind of bailout we should be able to keep the taxpayers in mind. What we will end up doing is buying all this bad debt and selling it to all the cronies who have connections in the government for pennies on our tax dollar and they will make a huge profit. Shame on our government. We need to throw all the bums out. And if anything needs to go in this bailout bill it should be that the people who created this mess should be held accountable. They should have their houses foreclosed, their property seized, and spend jail time if their is any sort of fraud involved. Do you think our government will do anything to make these people pay for their actions? FAT CHANCE

  • Report this Comment On October 01, 2008, at 2:10 PM, KJMClark wrote:

    "The media isn't focusing on that so much (and shame on them). They'd rather focus the attention on raw-meat issues like limiting CEO compensation. As if that matters right now."

    See, but that shows you're missing the point. Income and asset inequality is the heart of the problem. The big problem fixed in the Great Depression was income inequality. The evening out of income and prospects gave us decades of prosperity, which have been eroded away since the Reagan era. The lower income 80% of us have been borrowing like mad to try to live an average life. All of that borrowing is now collapsing, and this won't be resolved until the income disparities are reduced and people learn to live on their incomes again. It will take years, and much more than $700 billion to fix this problem. The rich will not give up their largesse without a fight.

  • Report this Comment On October 01, 2008, at 4:56 PM, misterrock wrote:

    THE GOVERNMENT SHOULD NOT BE IN THE BUSINESS OF MAKING PROFITS IN THE PRIVATE SECTOR!! That is government OWNERSHIP of the private sector!! That is one of the things about this bailout that scares the hell out of me! The Government creates the laws that directly affect business. How long would it be before we would be labeled unpatriotic for competing against the government in the business world and forced to turn over all business to the Government? I realize that is an over-dramatization, but I hope you see my point. Besides, we the tax payer will NEVER see a return on our "equity stake". The profits from this will be used for the creation of more "nanny-state" BS programs that will only become more expensive and suffocating.

  • Report this Comment On October 01, 2008, at 8:40 PM, YVT wrote:

    A fact we all know: Only the bottom 5% of the bottom MBA classes of the world end up (Aw shucks) on Wall Street! Walll Street is every business student's fall back, never their first choice.

    . . . . .

    Bzzz...Wrong!

    We all know it's not the bottom of the MBA class or the non-MBA'ers who end up on Wall Street. We all know that it's the TOP, the creme de la creme, of the nation's TOP business schools. People who know all the numbers all the time; people with photographic memory; people whose life is business.

    We all know the U.S. business schools are the worst in the world and that's why Saudi princes end up there...oh wait...

    Bzzz...Wrong again! (I hate being wrong)

    When those people say they don't know what's going on, we then hire public, non-MBA, employees to figure it out.....

    Um, I'm not sure that sounds right...

    When those people say they don't know what's going on, even those who INVENTED the complex trade instruments, we believe them right away!

    Um...

    Maybe some of us begin conducting the following internal dialog: These are not morons. These are not "C" students. These are not "B" students. These are probably not your typical "A" student. Many are likely the genius "A" students; the ones always on top of the studies and who came up with some of the theories and programs.

    So when they do something, do we think maybe they're like the precocious child who played with the hornet's nest and now comes to the parent for ointment?

    Or do we maybe think this is yet another derivative instrument...that maybe these people are better chess players than they would like us to believe, that they took all the honey already, have a pretty good idea what will happen when they admit all the "honey" left is actually sand, and have already set themselves up for the aftermath of the 3-page paper presentation and possibly even the Congressional-rejection scenario.

    Maybe these ones ran up gold a few months ago, shorted it, and now were positioned to see it run up again. Maybe there're other angles a non-genius, non-MBA, non-top-business-school-graduate like me hasn't thought of...

    Maybe...the playground has expanded and we just haven't noticed the bullies yet.

  • Report this Comment On October 02, 2008, at 5:01 PM, Elerra wrote:

    Those individuals that shouts NO BAILOUT! OR Bush and Reagans equal economic mess. This reasoning displays are extreme degree of ignorance and quite frankly illiteracy to the issue. THIS BAILOUT IS ABOUT YOU. For the record, this is NOT free money to those companies. We are geeting SOMETHING from them that at some point we may be able to sell for profit. If you are soooo against any BAILOUT...what do we do when we put millions to billions of dollars into medicaid, and welfare????NOW THAT'S BAILOUT! Are we getting something in return? NOPE. We spend MORE money in that bailout. Capitalism is not problem (reagan economics), it's the greed of the people in it. And no, it's NOT just politicians. It's part in ALL of us. For example, why use a credit card? Can you honestly tell me that YOU WILL DIE if you don't have one? Nope probably not. But we have them. It's that human nature greed.

  • Report this Comment On October 02, 2008, at 5:05 PM, Elerra wrote:

    Keep in mind, we also bailed out the savings and loans fiasco. In the end, the government made money on that. So before you judge this one, keep in mind that everyone will get affecting specially the mom and pops business. This is NOT a one person issue or a wall street issue. It affects all of us.

  • Report this Comment On October 02, 2008, at 7:25 PM, notstressin wrote:

    You may enjoy reading "An Unexpected Tale" www.financialtales.com

  • Report this Comment On October 06, 2008, at 4:19 AM, kleinlawoffices wrote:

    500mls is half a Liter! You push half of any drug and your patient's arm will pop off!

  • Report this Comment On October 07, 2008, at 4:04 PM, segesta wrote:

    I just got five calls within five hours from mortgage banks contacting me via the Tree that Lends-dot-com. All the rates were around 6% for a 30 year fixed mortgage.

    So maybe someone who needs billions can't borrow billions. But a regular joe who wants to refinance can get the money they need.

  • Report this Comment On October 10, 2008, at 1:32 AM, denniswolz wrote:

    10/01/08

    Do you want to make a difference?

    If you do, read the following and send it to at least 8 people. Also send a copy to anyone in Government that you know and let them know what you are going to do on Nov 4th. Within a few days everyone will have read the following and hopefully buckle down and have faith that within a few years you and I will be better off than the rich greedy bastards that now run your government and businesses. Bring main street back to life!

    What is going on now is very good for Main Street.

    Oil came down again today. Corn, Cattle, Soybeans, everything except gold is down today. This has to happen, now or next week or next month.

    Until Commodities match wages we are simply living in a false economy and it cannot continue forever. No way, now how. In the last 10 years wages have hardly risen for the 95% of the working public, adjusted for the devalued dollar wages actually fell. Commodities have risen as much as 10 times in that period (oil from $10 to $150). Wages pay for everything and commodities make up everything, gas, oatmeal, eggs, houses, you name it, what you buy is a commodity. Their price has to be relative to wages or you have to buy less.

    Our government, your banker, your talking heads on the TV and radio talked you into buying a house you couldn’t afford, a car you couldn’t afford, a student loan that you couldn’t afford, a credit card you couldn’t pay down, all to line their greedy pockets. This money was given to you even though it didn’t really exist so that you could drive up commodity prices and line their pockets. It might have made you feel good but it is destroying our way of life.

    Given all this oil needs to be somewhere between $30 and $50 per barrel. In fact if we could get oil to $40 the other commodities will be back to where they were before all of this funny money started flowing 10 years ago.

    How do we get oil prices down? Demand is going to do it sooner or later because the global economy will shrink until that point. We could speed up this drop in price and pump the reserve dry if you had to. Conserve, conserve, conserve, drive only when you have to. Once we get it down the government can keep oil down by buying and selling in the market with the vengeance of a greedy commodities broker who gets rich on the back of others. Another way is to strengthen the dollar, the higher the dollar the lower oil goes. Quit spending on stupid things until you balance the budget.

    Once main street can afford to buy gas and shop for groceries, then and only then will the markets start to function again. Then we can start to talk about fixing the system again. Stocks used to be in the form of certificates, you actually owned a share. If you bought a barrel of oil you took it with you, you actually owned something, you didn’t just trade it to drive the price up or down. When this is all over we need to establish laws that control greed and dishonesty, not laws that line the rich and powerful.

    Get rid of the IRS and go to value added. A rich fat cat buying a 10 million dollar home would pay 1 million dollars in tax to the government at 10 percent. You and I would have to pay the government 30 dollars if we bought a lawnmower for $300, 10 cents for a loaf of bread. A 10 percent tax would more than finance any government worth its salt, do away with the rest. The state would collect the money just like it does the sales tax every month and send it to Washington. Congress could make this happen overnight, but they will not because most of the money will come from the 10 percent at the top who are your congressmen and bankers and greedy CEO’s, your voice will never be heard on this matter.

    Have your government pass a law to cut all government employees by 33%. The waste in our government is criminal, criminal, criminal. By reducing government by a third you would actually speed it up and get out of deficit spending (balance the budget and spend real money again).

    Take interest rates to +-1%. Banks giving you money at 7 or 8 percent when you get less than 1 percent on your savings only builds more and more banks. Banks and your government do not have to be rich fat cats. Banks could lend money at 1 percent over their cost and still get by. The government could lend to the banks at zero, therefore interest rates at 1 percent.

    The cost of money causes inflation. High interest rates are simply passed on to the consumer in the form of price increases thus causing inflation and higher prices. Control the supply of money and you control inflation. Control the deflation of the dollar and you control inflation.

    Lower interest rates and save mortgage holders, a zero principal mortgage would owe how much every month at a zero interest rate, zero. Even the person that is over their head with a $500,000 mortgage would owe less than $900 per month at 2% interest. This would fix most foreclosures and be enough to pay for any work the banker is doing on your behalf. It will not pay his 10 million per year salary but who cares.

    The best way to fix this mess is to form a new Independent party and get rid of Republicans and Democrats. But we don’t have time to do this right now. The next best way to let our government know we are serious about a fix is to remove anyone in office on November 4th. Forget your political allegiance, anyone in government has to understand that we want change. Having all new faces in all units of government from the county rep to the state rep to the federal rep will send a message heard around the world.

    My vote in November is to vote anyone in out, it is a shame that Bush isn’t up for reelection so that I could take him out also. By the way I will be glad to be president, write me in as your candidate for president. I will do the job for free.

    Send this to anyone in government you know and wish them good luck in finding a job come January

    Thanks for your attention to this matter.

    Dennis

    Send me an email and let me know what you think – denniswolz@att.net

    If you send this on mark your email at 512. Whatever number is on your copy times it by 8 and replace that number. This will let everyone know how many people have read and passed it on. We can make a difference.

    8

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