Anatomy of a credit crunch induced bankruptcy - Eric Janszen

[we_are_toast]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

Toast, you have been breaking too many rocks down there in Colorado.

Yes, but it's the altitude that'll get ya! ;)

[Chris Coles]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

Thats right! All we have to do is roll up our sleeves, quit fighting, start pushing, and offer solutions!

What's that you say? We should recapitalize the banks? No, no, no, that won't work. We should build roads and bridges! Tax cuts?! Haven't we had enough tax cuts for the rich? We need to tax those who haven't been paying their fair share so those in need can spend and boost the economy! You're all wrong! We shouldn't do anything! The market will take care of us. ...

Sorry Pollyanna's there are plenty of people offering plenty of solutions and each one of them thinks they're right. And the people making the decisions only hear solutions from contributors and lobbyists.

Our founding fathers would be shocked at what we've done to what they started. We've got systematic problems. We need to break the foundation of the wall that surrounds the deciders. But no one wants to dig at foundations, it's much more glamorous to kick and shout during the crises, then go back to watching American Idol until the next crises hits.

Toast, you have been breaking too many rocks down there in Colorado.

[we_are_toast]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

I absolutely agree. Do not come to me with your problems, bring me solutions to those problems should be written upon the wall behind everyone with the power to make change happen.

Thats right! All we have to do is roll up our sleeves, quit fighting, start pushing, and offer solutions!

What's that you say? We should recapitalize the banks? No, no, no, that won't work. We should build roads and bridges! Tax cuts?! Haven't we had enough tax cuts for the rich? We need to tax those who haven't been paying their fair share so those in need can spend and boost the economy! You're all wrong! We shouldn't do anything! The market will take care of us. ...

Sorry Pollyanna's there are plenty of people offering plenty of solutions and each one of them thinks they're right. And the people making the decisions only hear solutions from contributors and lobbyists.

Our founding fathers would be shocked at what we've done to what they started. We've got systematic problems. We need to break the foundation of the wall that surrounds the deciders. But no one wants to dig at foundations, it's much more glamorous to kick and shout during the crises, then go back to watching American Idol until the next crises hits.

[Chris Coles]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

The US economy is built on the rest of the word trusting our leadership. As was pointed out on another thread, we've not done a great job during the RBCB years. I would expand that to the NCRBCB years. There is no inevitable, none. I would strike that word from our language. Americans have a system that, thanks to our founders, can turn on a dime with the right leadership and a hard push by its citizens. It's time to quit fighting, quit complaining and start pushing.

I absolutely agree. Do not come to me with your problems, bring me solutions to those problems should be written upon the wall behind everyone with the power to make change happen.

[metalman]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

The US economy is built on the rest of the word trusting our leadership. As was pointed out on another thread, we've not done a great job during the RBCB years. I would expand that to the NCRBCB years. There is no inevitable, none. I would strike that word from our language. Americans have a system that, thanks to our founders, can turn on a dime with the right leadership and a hard push by its citizens. It's time to quit fighting, quit complaining and start pushing.

thank you! all these whiny doomers are driving me nuts.

[santafe2]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

How can you possibly expect to have an economy based on consumption and spending when you don't have a REAL economy that provides the jobs necessary to support consumption beyond the basic needs of food and shelter etc. That is why we have resorted to FIRE and the "bubble" economy. Until they build a real economy based on producing and selling goods then all this stimulus and bailing out is just delaying the inevitable.At our present debt levels how long can the government keep replacing consumtion in the private sector?

The US economy is built on the rest of the word trusting our leadership. As was pointed out on another thread, we've not done a great job during the RBCB years. I would expand that to the NCRBCB years. There is no inevitable, none. I would strike that word from our language. Americans have a system that, thanks to our founders, can turn on a dime with the right leadership and a hard push by its citizens. It's time to quit fighting, quit complaining and start pushing.

[Roughneck]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

How can you possibly expect to have an economy based on consumption and spending when you don't have a REAL economy that provides the jobs necessary to support consumption beyond the basic needs of food and shelter etc. That is why we have resorted to FIRE and the "bubble" economy. Until they build a real economy based on producing and selling goods then all this stimulus and bailing out is just delaying the inevitable.At our present debt levels how long can the government keep replacing consumtion in the private sector?

[LazyBoy]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

...the impairment of banks for future lending. To me, that isn't a bad thing. They SHOULD be impaired.

YES! The root cause of this whole mess is easy credit.

Credit should be hard to get.
Use of credit should be exceptional not everyday.
Credit is not capital.

Easy credit has not only led to people/businesses/industries/economies/governments living beyond their means, it's lead to businesses/industries/economies that depend on people living beyond their means.

OMG! People can't borrow money to buy a GM car! We're not talking about people put afoot here. We're talking about people driving their cars 5 years instead of 4. That's a fundamentally good thing! But our businesses/industries/economies depend on us going into debt to buy more, more, more!

The government should be encouraging people to save not borrow.

The US won't make any production-economy money on that $3000 TV, but it can make some finance-economy money when you borrow to buy it.

Credit is the problem, not the solution.

I could continue with some ranting on "Growth" and "Confidence", but I'll leave that for the Rant forum someday.

[metalman]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

The big danger I see coming is trying to finance the levels of debt we are running when there are few buyers.

amen! that's the reagan/bush/clinton/bush gift to the obama admin.

[Roughneck]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

I do agree with this theory. However, the amount of losses facing the banking industry are huge. A lot of this money put into the system is and will be retained by the banks to satisfy their reserve requirements. So how much of this money that will eventually wind up in the economy is debatable. Plus, the Fed will(hopefully) start selling treasuries and pulling money out of the economy once(if) things turn around. The big danger I see coming is trying to finance the levels of debt we are running when there are few buyers.

[metalman]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

To echo hoodoo,



Not sure about major companies, but I know of a few pico-cap software companies which are privately held, self-financed, and have very good cash flow. My employer is a good example.

I wonder if there is any data available encompassing these types of companies. What portion of the economy do they represent?

very good question. wonder if a program can be written to scrape the d&b data to come up with a list. call it the sans-fire list.

[quigleydoor]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

In fact, the PE boys were not in the business of creating a long term stable business environment for the companies they bought into. No! They were simply in the business of selling debt for as much money as they could make in the short term.

To echo hoodoo,

What percentage of major companies out there don't have private equity or hedge fund sepsis?

Not sure about major companies, but I know of a few pico-cap software companies which are privately held, self-financed, and have very good cash flow. My employer is a good example.

I wonder if there is any data available encompassing these types of companies. What portion of the economy do they represent?

[metalman]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

meanwhile, back in the usa...

Leading indicators rise on increased money supply

Increase in money supply sends December's leading indicators unexpectedly higher

Monday January 26, 2009, 10:01 am EST
NEW YORK (AP) -- A private research group says its monthly forecast of economic activity rose unexpectedly in December, mostly because the flood of federal bailouts increased the money supply.

The New York-based Conference Board's monthly forecast of economic activity increased 0.3 percent in December. Economists surveyed by Thomson Reuters had expected a 0.3 percent decline.
The group's index of leading economic indicators had fallen 0.4 percent in November and a revised 1.0 percent in October.

With nearly every component but the money supply in decline, the Conference Board said unemployment could rise to 9 percent from 7.2 percent as the country remains in an intense recession through spring.

gold 'unexpectedly higher' too...

[Sharky]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

Becuase if you believe the garbage about defaults being deflationary, you will believe that the CBs should increase the money supply to counteract it.

Please don't put me in that camp.

The CBs can't solve this kind of deflationary problem with the kind of inflation they can create.

The way the Fed normally injects money into the economy is through the FOMC, by buying Treasuries. But that's a broad, economy-wide approach. The problem today is that specific banks are running massively short of reserves (due to losses, as per my previous posts...). So the Fed had to come up with programs like TAF that allowed them to help specific banks avoid the destruction of their reserves by temporarily taking loss-inducing loans off their books.

But TAF and programs like it aren't a solution; they are a short-term band-aid. Loans will continue to default, and losses will continue to mount. Since TAF is all borrowed from the Fed; in theory it has to be repaid at some point. But the banks have lost so much through defaults that it probably can't ever be repaid. Inflation in the form of more money in the general economy doesn't come close to solving that problem.

No, there are only two solutions. One is to let the banks go bust. But in that scenario, money in their depositor's accounts would be destroyed, and in their already-impaired state, the ripple effect would take out most of the US banking system. The FDIC could, with the Fed's backing, theoretically replace people's savings, but it would be a giant scare and a nightmare that isn't close to being politically acceptable.

The only other option is for the bad debt to be permanently purchased by the government in some way -- whether that will be through bank nationalization or something else isn't yet clear of course. Although it involves the creation of lots of new money, it's actually not inflationary in the usual sense, because the new money would offset existing losses and therefore wouldn't increase the money supply.

[Sharky]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

Debt deflation impairs the future ability of banks to lend, and the future ability of borrowers (newly insolvent) to borrow. But debt deflation does NOTHING to deflate the current money supply.

What is the mechanism by which debt deflation impairs the bank's future ability to lend?

Do banks experience a loss when a borrower defaults? If so, then how that can happen without money being destroyed? Where does the lost money go?

If the bank lends me $100, I pay the baker and the butcher that $100. Now, if I default, the baker and butcher still have the $100.

Of course.

The bank charges off the $100.

What does it mean to you for the bank to "charge off the $100"? What is it charged off against? What happens on the other side of the ledger?