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Financial Apocalypse - What would it look like?

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I am off by a few days, but there have been a number of articles about how Sept 15th 2008 - the fall of Lehman Bros - was almost the onset of 'financial apocalypse' which was narrowly averted by Ben Bernaeke loading up a giant snow making machine full of dollar bills and spraying them liberally all over the country side.

Now my question is, if 'financial catastrophe' HAD NOT been averted, if 'the worst' had actually happened, how would this have manifested? What would have happened on Sept 23rd or Oct 7th, or whenever it would have been, that would have marked that point?

I am guessing that the banks would have all been closed. I am guessing that all the online banking was offline, and that you couldn't actually get your hands on any money aside from what you had in your wallet. And that they wouldn't be able to open, because so many of them would actually collapse that the whole lot of them would follow, and then there would be no money.

Does anyone know - is this what would have happened? Is this how the financial catastrophe, that we narrowly avoided, would have actually turned up in our lives?

@jeeprs,

jeeprs;92846 wrote:

Does anyone know - is this what would have happened? Is this how the financial catastrophe, that we narrowly avoided, would have actually turned up in our lives?

I'll try to simplify a very complex, cascading problem.

Lehmann was bad, but the real problem was AIG that was essentially insuring trillions of dollars in counter-party losses, including Lehmann. If they couldn't cover their obligations then all of a sudden there would have been hundreds of billions of dollars in losses throughout the financial system.

With most financial institutions leveraged 30x or more, even a small amount of losses would essentially send them into bankruptcy (3% if losses bankrupts the institution). These are the very institutions that keep all major corporations around the world afloat with overnight and other short term loans. If these loans could not be financed or payed back, every single major corporation would not be able to meet their overnight and short-term financing needs that pay for payrolls, material, services, etc.

In addition, such shortfalls would have put money market funds in danger (one actually broke the dollar), and personal as well as corporate cash would also begin to freeze and cause panic. It would have cascaded into a death spiral, with everyone rushing to get their cash. Probably, the Feds around the would would have to shut down the banking system and all financial trading to bring back order from the panic. They did this in the 1930s with disastrous results.

Essentially there is only a small amount of liquid cash available at any one time to cover demand. A shortfall of this magnitude would have put every major corporation in jeopardy and it would have cascaded to smaller companies who depend upon large companies to meet their account payables.

What the Feds did was pay all short term debts, insure all money market funds, buy sub-par loans, and gift a giant gift to all financial institutions to make the whole again. In the process, they are forcing financial institutions to deleverage.

Who is paying for all this? Savers! Instead of getting 5% on their money, they are getting less than .5% as the Feds forces rates down by giving banks cheap money (they are printing it). So, a person with $100,000 in savings, is getting $4500 less interest each year this goes on. That is one giant tax on savers to bail out large banks officers who took the profits and stuffed their own Swiss accounts while sending their companies into oblivion. It was the free market at work.

Hope this helps,

Rich

@jeeprs,

All true enough, but still interested in what would have actually happened if "the worst", that all the politicians hinted darkly at, had happened? You see what I mean? Everyone is saying a year later "we just avoided catastrophe". If we had not avoided it, would this have meant that money no longer had any value? Is that what "the catastrophe" would have been?

@jeeprs,

jeeprs;92910 wrote:

All true enough, but still interested in what would have actually happened if "the worst", that all the politicians hinted darkly at, had happened? You see what I mean? Everyone is saying a year later "we just avoided catastrophe". If we had not avoided it, would this have meant that money no longer had any value? Is that what "the catastrophe" would have been?

Companies wouldn't meet payrolls or their obligations, people would miss payments, more bankruptcies, more foreclosures, and more banks going under. A catastrophe. Maybe as bad as 1929 (which this situation was very similar to) or maybe worse because of the sheer size of the problem. What rescued the situation was the Bernanke had studied the Great Depression and realized that it had to pump liquidity into the financial system as fast and as large as possible. Literally trillions of dollars.

I was watching this all day, every day, on CNBC and I have a pretty good understanding of what was happening. It was frightening. Like the Cuban Missile Crisis. No one knew whether the system would topple or not. Even Iceland, as a country went under, and Ukraine and Russia was very close. Iceland was rescued by the IMF. I sure hope we don't have another one like that in my life time.

Rich

@jeeprs,

well I think what is bothering me is how quickly it seems to be back to 'business as usual'. Sure doesn't seem to me like there are going to be any fundamental changes to the way Wall St does business. The problem is if it were to happen again in 3-4 years, next time, The US, UK and most of the EU countries will already be up to their necks in debt. There will be no more money to print. I guess I should stop worrying about it. But somewhere in all this I smell a rat.

@jeeprs,

Would the question be, that if there was no money as it no longer exists, does everybody own everything or do we all own nothing. Chaos exists when greed and unacceptance combine, I want and you do not want me to have. A catastrophe would be that the "inferior" are told that something else now holds all the value and they are forced to accept it, while the apocalypse would be that we can harmonise giving and sharing without the need to take.

I know this is a strange point to add to this, well, more of a sombre issue but why was it acceptable to close all world markets, following the attacks in the United States of America, September 9, 2001.

@jeeprs,

hey rich-
what's going to happen in october, any ideas?

---------- Post added 09-23-2009 at 04:45 PM ----------

oops-sorry if that was off topic, i just had to ask.

anyway, i was wondering if the real one was imminent, actually....some people say.

@jeeprs,

jeeprs;92917 wrote:

well I think what is bothering me is how quickly it seems to be back to 'business as usual'. Sure doesn't seem to me like there are going to be any fundamental changes to the way Wall St does business. The problem is if it were to happen again in 3-4 years, next time, The US, UK and most of the EU countries will already be up to their necks in debt. There will be no more money to print. I guess I should stop worrying about it. But somewhere in all this I smell a rat.

Hi,

It is not business as usual in all ways. Financial institutions are being forced to deleverage. This is double edge. By deleveraging, future crisis are averted, however there is less money available for credit, so economic growth is slow.

Also, the G20 is meeting to decide on things like standard regulatory practices, e.g. pay packages, capital requirements, trading exchanges. This will help to avert future crisis by limiting risky practices.

Still, firms like Goldman, Morgan Stanley, etc. took the government bailout money (most of which can via AIG), and gave themselves big fat pay bonuses, which was criminal and should not have been allowed. Some of those bonuses were forced to be canceled, but most were allowed. It is really terrible how they legally steal money from taxpayers.

Rich

---------- Post added 09-23-2009 at 09:42 AM ----------

salima;92932 wrote:

hey rich-
what's going to happen in october, any ideas?

---------- Post added 09-23-2009 at 04:45 PM ----------

oops-sorry if that was off topic, i just had to ask.

anyway, i was wondering if the real one was imminent, actually....some people say.

I think that things are pretty stable right now. The key problem is the U.S. dollar which continues to lose value. Should the Feds begin to withdraw money from the system to prop up the dollar, there will be a reversal in stock markets around the world. But I think the Feds will move very slowly.

However, after a very heady run, all stock markets around the world could have a pretty nice correction (even crash) because so many people have made so much money, and they will want to cash out. I am out of the market now, but it is really impossible to predict the direction of the market. The key indicator right now seems to be Fed policies and the direction of the dollar. Should the dollar begin to gather strength then that may be a sign that the stock market will begin to correct.

Rich

@jeeprs,

I will spell out my cause for gloom. Part of me thinks that we are approaching the intersection of three mega-trends - global warming, environmental degradation, and over-population. People have said this before, notably Thomas Malthus and Paul Erlich. But so far we have avoided the worst. Overall, the proportion of the population living in abject poverty had actually fallen, up until the food price shocks a couple of years back at least.

On the one hand, at least we now have governments in place that are really standing up and acknowledging, at least, climate change. And in the US, Obama is really standing up for a lot of major changes. On the other hand, I don't know if we still really get the enormity of the problems. Capitalism as we know it is based on the fact that growth will continue indefinitely. Certainly the last crash was based in large part on the assumption that 'property prices always rise'. But as proponents of sustainable development have been saying for a generation, these very assumptions are being called into question now. I think the whole world has to change its attitude and behaviour in a very fundamental way so that those with very little get at least a chance, and those with a great deal actually make some real sacrifices for the greater good (that might mean all of us.) And that is the bit which I really am sceptical about. I think the mega-wealthy and the wannabe meg-wealthy will do what they have always done, and that is look after their own interests, regardless of the consequences.

A year ago people were saying 'is this the end of capitalism as we know it?' Well, apparently not, but on the other hand, all of the Governments in the first world have just assumed a couple of generations worth of public debt to keep the ship afloat. And if capitalism does go back to its own self-interested ways, and I am sure it will, what happens next time? Because there is bound to be a next time.

@jeeprs,

jeeprs;93172 wrote:

A year ago people were saying 'is this the end of capitalism as we know it?' Well, apparently not, but on the other hand, all of the Governments in the first world have just assumed a couple of generations worth of public debt to keep the ship afloat. And if capitalism does go back to its own self-interested ways, and I am sure it will, what happens next time? Because there is bound to be a next time.

Many countries, including the U.S. are undergoing a natural re-orientation to consumption because people are broke and they can no longer borrow. So, they will have to buy less, use less, and therefore create less waste. It is a very natural reaction to over consumption. Sort of like someone throwing up after eating too much and feeling to sick to consume any more.

Rich

@jeeprs,

well it is a very good argument for the pursuit of, and education in, philosophy! I often feel that we could gain a great deal if we trained ourselves in the classical philosophical virtues of modesty, reason, skillful thinking, non-wastefulness, contentment, enjoyment of simple pleasures and the attaiment of happiness through the pursuit of virtue. Because, looking at what is coming, we better learn to enjoy these things, in my view.

@jeeprs,

jeeprs;93178 wrote:

well it is a very good argument for the pursuit of, and education in, philosophy! I often feel that we could gain a great deal if we trained ourselves in the classical philosophical virtues of modesty, reason, skillful thinking, non-wastefulness, contentment, enjoyment of simple pleasures and the attaiment of happiness through the pursuit of virtue. Because, looking at what is coming, we better learn to enjoy these things, in my view.

What made me change was when I was once talking to a friend of mine from Europe, and I asked him how comes people can spend hours upon hours just looking at the lake (I live in Chicago). And he said, it is a matter of learning to enjoy the little things in life.

Rich

@richrf,

jeeprs;92846 wrote:

I am off by a few days, but there have been a number of articles about how Sept 15th 2008 - the fall of Lehman Bros - was almost the onset of 'financial apocalypse' which was narrowly averted by Ben Bernaeke loading up a giant snow making machine full of dollar bills and spraying them liberally all over the country side.

Now my question is, if 'financial catastrophe' HAD NOT been averted, if 'the worst' had actually happened, how would this have manifested? What would have happened on Sept 23rd or Oct 7th, or whenever it would have been, that would have marked that point?

Somewhat off topic, the financial crisis has not been averted... the second wave is just about to hit. So you may very well find out what will happen without the buffer zones of massive government bailout or the numerous banks (and their assets) to offset the loss.

Essentially, near future interest rate resets (which many of your remember were sub-prime) are not substantially sub prime, but rather Alt-A and Option ARM's (adjustable rate mortgages). These are basically for the people in the tray above the highest risk sub-prime threshold. The enormous danger in Option ARM's is that though you are given a few payment methods, you also have the ever popular payment option that does not include the interest from the previous month. So, people hit hard by the sub-prime crisis are easy prey to their Option ARM's which could force them underwater. The way the real estate market is currently looking right now, stay tuned for a very entertaining ride.

Personally, it is a tremendous opportunity for investors just starting out or people that want to get substantial deals on discounted homes. 2010-2011 is going to be good and bad for all of us.

@jeeprs,

Now would be an excellent time to form collectives and buy up decrepit property to form intentional communities. Sure, the second wave of the economic crisis is inevitable, but there is a great opportunity for common people to take their destiny in their hands and form real communities again.

@Theaetetus,

Theaetetus;93314 wrote:

Now would be an excellent time to form collectives and buy up decrepit property to form intentional communities. Sure, the second wave of the economic crisis is inevitable, but there is a great opportunity for common people to take their destiny in their hands and form real communities again.

Believe it or not, that's been happening for a long time in the form of co-operative apartments and other small businesses. The practice isn't that common anymore, but I always thought it was a somewhat good idea (and a few apartment buildings in New York city for example still do it). But the negative aspect of it is that the tenants deal with their fellow tenants instead of dealing with the bank. It could also be seen as a bad idea because a co-op is above all a corporation, so I don't know if that would be putting the power back in the peoples hands by just creating a neighborhood corporation.

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