Quote:
Originally Posted by competentone
If the government would not have bailed out Bear Stearns back in March, all the "house-of-cards" banks and brokerage firms would have toppled.
The government would have had to pay a few trillion in FDIC insurance. (People with non-FDIC funds would have lost chunks of money. The FDIC payouts would have created severe inflation.)
It would have been a horrible summer.
BUT, if the government had let all the "bad actors" in the economy fail when the market was ready to expel them (in March, with Bear's collapse), we would now be beginning to enter a real recovery.
Instead, the government has keep (and with the Citi bailout, is "keeping") all the "zombie" financial companies "alive."
The economy needs to "vomit" the poison (the bad debt and bankrupt businesses) out of the system in order to have a recovery. The government is keeping the poison in the economy creating a long-term debilitating situation that will take decades to recover from.
The government's actions is driving us into another Great Depression.
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Let's suppose govt had let BSC fail, and then completely stood aside and provided no support to rest of financial system - banks, money markets, brokers, non-financial companies, etc. Suppose other govts had done the same.
Then most likely LEH MER GS MS would have failed too, also numerous commercial banks including C. Similar results globally - Barclays, RBS, UBS, CS, many German banks, etc. Essentially a near-global collapse of banking system, triggering appx $4.2 trillion of FDIC guarantee payments, while another $2.6 trillion of uninsured deposits would be lost (end 2007 data).
Most money market funds would have collapsed, so that's $4 trillion or so of investors' money gone (early 2008 data).
Equities would have collapsed, of course. More than they have.
Credit to consumer and businesses would have shut down, full-stop. You can see how much damage a tightening of lending standards is doing to the economy right now, imagine the damage from a sudden -70% to -90% decline in lending?
Global trade, state/local govts, other areas of economy would have been slammed.
And the Federal govt's own ability to fund its operations - maybe even to pay the FDIC guarantees - would have been in danger. Since China, Japan, and other buyers of treasuries wouldn't be happy that the US govt decided to fiddle while America burns.
Under your scenario, the Second Great Depression would have started in spring 2008.