What kind of impact will the banking crisis have on the overall economy

ProfJohn

Lifer
Jul 28, 2006
18,251
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Ok I know that there are a TON of problems in our banking industry.

But what kind of impact is that going to have on the rest of the economy?

Can someone give a straight forward no political BS answer.
 

Vic

Elite Member
Jun 12, 2001
49,229
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No one knows. That's the problem and your straight forward answer. But it doesn't look good.
 

Darthvoy

Golden Member
Aug 3, 2004
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I think we will see a massive amount of new regulations...and the government will be owning all of the houses. You probably won't be able to buy anything with credit for some time.
 

Vic

Elite Member
Jun 12, 2001
49,229
11,084
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Originally posted by: Darthvoy
I think we will see a massive amount of new regulations...and the government will be owning all of the houses. You probably won't be able to buy anything with credit for some time.
But if the last part happened, it'd tank the whole economy. Consumer spending would drop in a big way.
 

Lemon law

Lifer
Nov 6, 2005
20,984
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My guess, far worse than 1929. Another great depression coming. And the only answer to US government debt will be hyper inflation.
 

Mani

Diamond Member
Aug 9, 2001
4,808
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Most direct impact will be felt in consumer confidence. Lower consumer confidence -> less spending -> company cutbacks -> higher unemployment & lower wages. That's the simplest way I can put it.
 

Ballatician

Golden Member
Dec 6, 2007
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I think more companies like Lehmans need to fail to send a message that not every failure of a company will be bailed out for their own irresponsibility.

As far as the impact, so far it's been pretty bad. More foreign ownership of US assets is something that really bothers me but I guess only time will tell.

I do know that many investors are salivating at the thought of buying in at all time lows, I just hope we are close if not at the bottom and it does not last long.
 

scruffypup

Senior member
Feb 3, 2006
371
0
0
There is no way of knowing absolutely,... otherwise we would have the prefect answer for the problem.

That being said,.. there are some things that are very evident.
This causes this downturn to most likely turn into a true recession by definition with a possiblity of a depression still lingering.

This causes the goverment to take on more than they should be taking on in an ideal situation, we have a big enough government as it is,... and yes maybe one side of politics wants it bigger,... but ignoring that,... it is not a good thing. The government should not be more than 20% of the economy,... consumer spending should not be less than 70%, no more than 85% either (those are my opinions as we can go on and on about that). We are 70% consumer and 20% government right now,... yes there is a third component for those wondering,...

This causes more government regulation in the long run which is not needed,... we have way too much as it is.

This causes those who did not practice fiscal responsibility in their own lives to have more headaches. (Harder to borrow to get through rough patch here,.. etc)

This causes a lot of money and power to change hands,.. and in many ways opens up great opportunities for those who can take advantage of it,... that is for businesses and investors.

The problem is not horrible right now,... scary yes due to the way debt and reserves are set up and the thin line most will keep on hand so they can invest the rest (businesses in the financial industry, which is more than just banking,... brokerages, banks, mortgage companies, insurance companies, reinsurers, etc). This is more of an issue if we reach a tipping point where it collapses on itself,... hard to do, but possible. The public perception and their fears go along way in making something like that happen -irrational perception that the sky is falling can lead to the reality of the sky falling,...
 

RichardE

Banned
Dec 31, 2005
10,246
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Originally posted by: scruffypup
There is no way of knowing absolutely,... otherwise we would have the prefect answer for the problem.

That being said,.. there are some things that are very evident.
This causes this downturn to most likely turn into a true recession by definition with a possiblity of a depression still lingering.

This causes the goverment to take on more than they should be taking on in an ideal situation, we have a big enough government as it is,... and yes maybe one side of politics wants it bigger,... but ignoring that,... it is not a good thing. The government should not be more than 20% of the economy,... consumer spending should not be less than 70%, no more than 85% either (those are my opinions as we can go on and on about that). We are 70% consumer and 20% government right now,... yes there is a third component for those wondering,...

This causes more government regulation in the long run which is not needed,... we have way too much as it is.

This causes those who did not practice fiscal responsibility in their own lives to have more headaches. (Harder to borrow to get through rough patch here,.. etc)

This causes a lot of money and power to change hands,.. and in many ways opens up great opportunities for those who can take advantage of it,... that is for businesses and investors.

The problem is not horrible right now,... scary yes due to the way debt and reserves are set up and the thin line most will keep on hand so they can invest the rest (businesses in the financial industry, which is more than just banking,... brokerages, banks, mortgage companies, insurance companies, reinsurers, etc). This is more of an issue if we reach a tipping point where it collapses on itself,... hard to do, but possible. The public perception and their fears go along way in making something like that happen -irrational perception that the sky is falling can lead to the reality of the sky falling,...
Sure seems like we need a bit more government regulation with all the bank failures, but that might just be me.
 

Grunt03

Diamond Member
Jun 24, 2000
3,131
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I do not have an answer to this one, please let me know if you hear anything worht reading and what about the bailout of AIG?
 

scruffypup

Senior member
Feb 3, 2006
371
0
0
@RichardE,.. a few bank failures does not warrant more regulation and government involvement. There can be a good system with failure,.. heck look at the 2007 Patriots, that was a good "system with failure at the end". Point that I am making is that this was not just about the banking or financial system, or even a failure of capitalism,.. though if anything shows the weakness in capitalism that can be brought on by large corps, government and the ignorance of the masses at the same time.

This is a bubble brought about by many circumstances working at the same time,... you can put illegal immigration in this as a big reason,... and I can point that out in many ways. The thing is, there is no one point to blame and no one point to say this is the fix,.. when this happens, it needs to happen and the happening is good,... it is part of the system (though noone will admit it). Now if you want more regulation,... where do you apply it? The banks? only solves part of it,.. the mortgage industry,.. only solves part,... illegal immigration,.. helps!!! but only solves part of it,... etc,.. so how much do you want regulated? We already have enough regulated as it is,... and this is where the argument turns political,...
 

Genx87

Lifer
Apr 8, 2002
41,069
499
126
It will make this recession much deeper than the one in 2001. And with the housing market in the toilet, the incomming regulations on banks, it will take awhile for this thing to work itself out imo.

I fear more of these banks going under and sending us towards a depression.
 

scruffypup

Senior member
Feb 3, 2006
371
0
0
The "bailout" is guaranteed loans with the government taking over the majority of the company,.. like other "bailouts" the term sounds like we are giving freebies to the wealthy and the big businesses which we are not. The government can actually profit and most likely will from these, the average American will actually benefit from these in one way or another, the losers are the ones who had invested heavily in the companies,... they lost money and cannot recover that no matter what. The media portrays this in a "bad light"(media hype I like to call it as all their reporting), which makes people think the sky is falling, and their first reaction is to sell,... 401k, IRA or retail brokerage accounts,... and that adds to the downward pressure causing even more issues,...

The economy will recover at some point, these holdings will be worth more at some point, the government has acquired a lot of holdings,... I wish I had the money to do the same as the government because most of this is not bad debt, it is based on many things our economy is set up on. If you think we should change those fundamentals,... look at what the fundamentals are, and you will see if we regulate more, the economy might be a bit more stable,.. but will never grow much. That is the trade off if you want to go that route.
 

brencat

Platinum Member
Feb 26, 2007
2,170
3
76
I believe this process will take 2 - 3 years to work itself out, and there will be many more smaller and mid size banks failing. I also believe real estate broadly has another 25 - 30% downward move to go before we reach real affordability levels again.

We will have some corrections upward in the stock market during this time but I think people are finally waking up to the fact that the Fed is intervening with our tax money and bailouts whenever they run into a 'holy sh*t' situation with a big financial institution. This will cause the dollar to tank again -- hell it already started yesterday and gold had its biggest daily move up ever.

Those dollar bulls that believe we are further through our crisis than Europe/Asia are dead wrong, IMO. Most of the financial problems can be traced right back to the U.S. and we are nowhere near a bottom. The realization of this fact and the corresponding crisis of confidence is what has caused the stock market to wipeout the past few days.
 

Dari

Lifer
Oct 25, 2002
17,134
38
91
Banking crises are the worst of the worst because money is the bedrock of any economy.
 

scruffypup

Senior member
Feb 3, 2006
371
0
0
One day movements are no indication at this point (volatility like we haven't seen for a long time has been ongoing for a year),... through this the old "recession retreats",..... gold and oil have gone back to where they should be,... my prediction was true on those in jan 08, the stock market I thought would correct by now,... I was wrong there,... The dollar has moved up since jan 08 as I thought,... and will make strides up,... those who want gold are going on fears and will be mistaken, oil will bottom out soon,... it used to be at $72 prior to the craziness,.. I see it a bit higher than that at its bottom.

The problem is what I call the "mass mentality fear", which has followed the "ignorance, infomercial greed" and if you have no clue to what I am saying,... real estate had unprecedented gains,.. everyone gets tempted to fip a house, there are informercials, books (kiyosaki is the worst), conferences, etc,... everyone flips 5+ houses which noone should do in reality,... the market gets saturated,... people bail, banks and some get left holding the bag, the others go to gold and oil,... those get inflated beyond reason,... they get bombed when reality sets in,.. some who can luckily time make money (and noone should count on timing).

Now we are left with too many houses and too many loans because everyone from,
illegal immigrants, speculators, average joe wanting a piece and the businesses, and now we have a bubble,.. the bubble is huge and doesnt go back just to those who caused it, it is burst all over,...

The more the burst,.. the more the average person who didn't get into the first part is scared and starts worrying. Now these people are stage 2, they think the sky is falling and want to get out of stocks,.... what happens when there is a downward pressure to sell stocks??? They go down!!!

Stage 3,... noone has the extra cash due to Americans having an instant gratification spirit now and negative savings rate (unlike any past generation). People leveraged themselves to get into the housing frenzy and now cannot unwind their own positions. Businesess get caught for their mistakes in lending, but also have double pressure from what individuals and American society has done,...

Stage 4,... public outrage due to the American way (we cannot blame ourselves,... blame others),.... we demand the government correct this,... the government is trying without overdoing it,...

Now I generalized the public, it is that way as a whole, but there are individuals that are blame free and financially responsible who this does not apply to (stating as such, so those hate responses are done with)
 

dphantom

Diamond Member
Jan 14, 2005
4,668
251
126
We may need to have something like the RTC that was formed after the SL implosion in the 80's. Take these bad loans over and allow banks to get back on their feet. I would not be surprised as well to see much stricter regulation, possibly putting some regs back in place that ahd been lifted in the 90's.
 

scruffypup

Senior member
Feb 3, 2006
371
0
0
I think we can all count on having stricter regulations,.. the public pressure and the political blame game will see to that,...

I don't necessarily agree with the stricter regulations. I think we need stricter enforcement of the ones we have if anything.
 

GTKeeper

Golden Member
Apr 14, 2005
1,118
0
0
Here is what I think is happening on a massive macro-economic scale.


We are about to hit the biggest financial and socio-economic RESET button we have seen in quite some time. What I mean by that is right now banks are failing, once they fail and capital is gone that will have a ripple effect on other companies that will clamp down to minimize costs by reducing work force etc.

After financial banks and quite possibly some commercial banks fail, I expect credit card companies to be next as people default more and more on their CC payments.


Cutting to the chase:

The end picture I think could be like we had in the early 1980s... 17% interest rates and 10% unemployement. You can seriously count on it.

Bottom line is that we are SOOOO enormously leveraged right now its mind boggling. Our budget deficit will hit probably 1 trillion dollars this year when its all said and done. This will lead to a massive inflationary period and I mean MASSIVE. If you think about it in scrict GDP terms of 2007 we just printed 7% more money than we had. So you can safely assume that you have 7% less money this year than you did last year.
 

scruffypup

Senior member
Feb 3, 2006
371
0
0
I don't think you can safely assume 7% less money by any means,.. you forget earnings,.. the rise or fall in the dollar, etc


Secondly all this crap hitting the fan so to speak will not actually take its toll on the government immediately. That is the great thing about being able to control interest rates, the amount of money out there, etc (most of which the president has no control over!!!).

I can see unemployment getting up there,.. 10% though is pushing it,... but we have already seen rises,... if it happens to be 10% that will take about 2 years to achieve at least. 17% interest rates is even more unlikely as it is 2% now, and the Fed will lower it more if it needs too,... the interest rates in the 80's was unusual,... this is the U.S with leverage over the financial system, not vice versa,.. and the Carter administration (or you can say Fed Reserve back then), engineered higher interest rates to try to "get a grip". Which I don't think we will have to do at this time,.. but there are signs that are scary out there when your stalwarts,... AIG for example come under pressure.
 

wpshooter

Golden Member
Mar 9, 2004
1,637
2
81
I know mostly no one will want to hear this, but the whole thing in a nut shell is that most every one on this planet wants to "live beyond their means".

And don't get me wrong, I am not saying that we should not try to better our lives, we just need to WORK for it, BEFORE we can have what we CAN'T YET AFFORD.

Hope this was not too political.

Thanks.
 

shira

Diamond Member
Jan 12, 2005
9,567
6
81
One of the biggest problems in our financial system is that people are rewarded for short-term good results but not held accountable for longer-term bad results. So you have some fund manager walking off with millions for investing heavily in sub-prime-backed securities (leading to huge short-term profits), but when the fund collapses that same fund manager doesn't pay a dime.

Similarly, CEOs are given huge incentives for increasing stock prices, but if the company ultimately fails, that CEO is simply shown the door and given a golden parachute.

More (and especially better) regulation is a good start. But the contracts of those in charge of making decisions that could bankrupt or severely weaken a company MUST be structured in such a way that there are severe penalties for horrific longer-term results.
 

mshan

Diamond Member
Nov 16, 2004
7,868
0
71
Cramer said what we are seeing is a run on investment banks by hedge funds, not a run on your local bricks and mortar banks by the public.

I am starting to wonder if the hedge funds ultimately all expected Fed / Treasury to bail these institutions out because they were too big to fail, but as Lehman and AIG showed, Fed / Treasury is willing to let them fail, but in AIG's case at least, not in a abrupt and totally disorderly fashion (they may have gotten a temporary line of credit that will allow them to liquidate over time). If you google for Business Pundit's cartoon "The Subprime Primer", I think they show that these investment banks were the ones who had to keep the really really really crappy lowest tranche of these cdos and could no longer keep them off balance sheet in the Cayman Islands (SPV's). This may be why a lot of people looked at Lehman Brothers books and said there was no way they were going to buy the whole company as is.

I am also wondering if Fed / Treasury is looking at the mistakes of Japan and trying to force that bad debt off the books as quickly as possible.

There have been many commentators saying there has been massive amounts of redemptions at mutual funds and hedge funds, so a good deal of the selling pressure in the stock market could be forced (margin calls, etc.) and this de-leveraging was projected to go through much of September, even at the beginning of September. Dennis Gartman previously said that endowments and pensions started loading up on commodities as a new asset class this spring and may not have even had committee meetings to reverse those decisions yet. Yesterday on Fast Money, he also said the explosive move in gold was triggered by an article in the "official" newspaper of the Chinese government saying they would have to diversify away from the dollar and into gold.

 

StageLeft

No Lifer
Sep 29, 2000
70,150
3
0
Personally I have only two concerns: 1) Keeping my job (no worries at the moment, but a bad economy never helps), 2) My 401k which though not being big has fallen like a stone. I'm starting to have some real doubt in the ability of the stock market to provide a great investment vehicle. Even going back several decades, adjusted for inflation, it's good but it's not really that fantastic, is it? I need to be a slum lord and built up real estate.

I'm glad I have a house, so no need to get a loan now, and it's locked in for 30 years at a decent rate. No meaningful consumer debt.
 

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