I just hear this morning that if AIG's life insurance customers decide to cash out their policies for whatever reason (need money in down times, or are afraid they will lose it ) if there is a run on the AIG funds they will be short about 19 TRILLION Dollars !!!

What has happened to the economy and market in the past 2 years is nowhere near as bad as it can be, and will be, if the global financial system collapses. Should that happen, we will be looking back at 1Q09 as the "good times".

The 1930s are a roadmap to what the govt (not just ours, but all global govts) are pulling out all the stops to avoid. What happened then? Banking system and financial markets collapsed. Domestic economy collapsed, unemployment exceeded 25%, GDP declined nearly -30% in three years. Global trade collapsed and economies in other countries suffered even worse than ours. Economic collapse created multiple "failed states". In 1930s this led to the rise of totalitarianism (Nazi Germany etc) and ultimately to WWII. This time, some failed states may have nuclear weapons, others will have tens of millions of jihadists, some will have both.

Try to "get it". This is not about bailing out some companies. This is not about sparing Americans from a severe recession. This is about preventing an outcome that would threaten the survival of the USA.

To prevent this outcome, a $1.5TR deficit is cheap. A $5.0TR deficit would be cheap. Remember that, if GDP plunges to depression levels, govt tax revenues will plunge and we will end up with multi-trillion-dollar deficits anyway.

I recommend that people read history to understand that what feels "crapped out" by the benign standards of the past 30 years is nowhere near as bad as things can be. Then stop being such a whiner.

To be clear, I am not predicting the apocalyptic outcome. I think it will be avoided, primarily because the world's governments know history and realize the need to support the economy and financial system at all costs, even if some of their citizens and even many of their congressmen do not. But if anyone thinks the job can be done without spending cubic dollars, sorry.

I'll be the red-beard!

At what point are we throwing good money after bad? Seriously. Some things simply can't be sustained, no matter how hard the govt tries to prop them up. The American automakers and many housing markets quickly come to mind.

We had a boom, now the govt is trying to stop the bust. Something makes me think they're simply postponing the inevitable, and that the other shoe hanging over our heads keeps getting bigger and bigger.

But the banks are constricting lending and savings, such as 401Ks, are losing over 50% of their value across the board.

For many, the financial market has already collapsed. If the govt stopped propping up companies like AIG, it seems it would make no difference to an increasing number of people.

I'll be the bald head with the grey beard!!!

I'll be the drunk guy!

Total consumer credit is declining at appx -3%/yr rate (MOM rate annualized) The decline started in 3Q and accelerated in 4Q.

http://www.federalreserve.gov/releases/g19/Current/

The vast majority of consumer credit is extended by banks and things that look like banks (credit unions, finance companies, S&Ls, etc).

If the majority of banks in US and Europe were to fail, and assuming the securitized loan market didn't massively expand to fill the gap, consumer credit would decline at a much faster rate, as credit supply and credit demand both would be slammed. What rate, I don't know, say -30%/yr maybe?

I think increasing the rate of consumer credit contraction by 10X would make a heck of a difference.

Not to forget, the FDIC's deposit insurance funds are $18BN vs appx $4.5TR of insured deposits. If there are massive bank failures, the FDIC does not have enough cash on hand to immediately return all depositors' money. The money would be returned eventually, but through huge govt borrowing or simply printing money. I think that outcome would also make a heck of a difference (and not a good one).

http://online.barrons.com/article/SB123596345498106681.html

And consider also business credit. Small and mid-sized companies are dependent on banks for credit. Only the largest companies can issue bonds into the markets. Similar risk there.

So, I don't agree. The current decline is very painful, but is far from "as bad as it can get". Avoiding the "as bad as it can get" scenario will make a hell of a big difference, for everyone.

Why do so many people think it doesn't make any difference if the govt continues to support the financial system? Why do so many people focus only on the cost of providing that support, and ignore the much larger cost of not providing it? Why do so many people think things today are as bad as they can get? The data I'm citing is not secret. A 1 minute Google pulls it up. The 1930s history I'm looking at is not secret. Every one of us should have learned it in high school.

Well, one answer I suppose is that there are countless talking heads, bloggers, and populist politicians pushing the "who cares, let it all fail, don't spend any money" message. Those people should know better. They are irresponsible and idiotic.

Yup you're right. No whining about losing, up til now, half of ones life savings. You are taught your whole life to save money, be responsible. Get a piggy bank, get a savings account, invest in a 401K. Then when some college educated idiots blow it all from being greedy we need to suck it up. Each of us fork out another whatever amount is in vogue to bail out the same idiots that lost it in the first place. Bail out?? Spas, retreats, bonuses, naming ballparks?? That's great :rolleyes:
Thank God you weren't around in 1773. I can hear it now talking to the 'guys'. "Try to get it, stop your whining"! We'd all be eating bangers and mashed.
I get it, I get it loud and clear.

Not trying to belittle your loss. Anger that pressures govt to demand accountability and appropriate behaviour by banks etc, that makes sense, I think current govt gets it. Saying that we shouldn't be spending to support the economy - that is what I think makes no sense.

401Ks should be investment, not savings

I understand why they are doing these things, but it's very frustrating for a Middle American.
Nobody is sending my company a check to help us survive.
Nobody is offering to pay my mortgage down now that the value has decreased.
Nobody is offering to help rebuild my childs college fund.

Yes, but YOU are paying for those for others

Yes I agree. How about along with the money these people are held accountable? A corrective action plan? What are you doing so this doesn't happen again? Not from the government. From the AIG's of the world. When I have a corrective action plan you get your check.

I'm not sure I agree with that. Isn't middle America told to use a 401K as savings, as your retirement fund since companies don't offer pensions anymore? You can't take it out, (without massive penalties), until you retire right? Isn't that saving? Yes you are investing in a 401K but you are also using it as a life savings.

Savings is your rainy day fund, which should not be at risk

Investment is money at risk, with no plan to use anytime soon.

Since the 401K is not readily available money, you cannot pull money out of it without penalty. It should not be used as your savings vehicle. It is a good use for your investments for long term retirement.

Too many people have these concepts intermixed.

Essentially all of AIG's problems came from one unit based in London. They wrote (sold) credit default swaps (CDS) that are going spectacularly wrong, in spectacular size. The people responsible are all fired, no more of that business is being written, AIG's CEO was fired in mid-08 and replaced with a new CEO, who was turn fired in late-08. I think most of the other top managers were fired too. The third CEO is trying to, essentially, dismantle the company. AIG's other businesses, including the core insurance businesses, had nothing to do with the London unit, they are doing well and are profitable. The plan was to sell the profitable businesses to raise money to avoid defaulting on the CDS. But in this market, no-one is buying even good, profitable businesses. Potential buyers figure they can wait as AIG twists in the wind and eventually pick up those businesses for pennies.

So, that's the situation. What further accountability and corrective action plan do you want? We could execute all the responsible managers and their families, wouldn't change the mistakes they made. We could seize every penny of their assets, might amount to 0.005% of AIG's liabilities. We could strip the company, sell the pieces, shut AIG down, wait that is what they are desperately trying to do.

I always thought the 401K took the place of a pension, (in theory), which generally wasn't at risk.
As POTUS how would you stop the carnage from happening again? ;)

Not a problem. Inflation will push wages to 100/hr for burger flippers.

John L you certainly know more than I. Thank you for your replies. As I asked Red-Beard what fail safes can be but in place so it can't happen again? Or at the very least the bleeding stops quicker.
(and execution isn't a half bad idea). Ok... I'll settle for a public flogging. :D

sadly, John is right.

the other "roadmap" is Japan - recall the decade of nothing? Not as bad as the Great Depression but not at all good either.

also, we (taxpayers) now own a big chunk of several big banks, ins. co.s etc. -- assuming those chunks can be sold off somewhere down the road, the cost will be mitigated.

this is what happened with the RTC cleanup of ... gosh what was that fella's name? Neil B _ _ _.

I do want the F*&Kers prosecuted.