(Blue collar filter) If stocks continue to rise throughout the week and reach the previous point or "close enough", what reason is there for a bail out? More inside...

September 30, 2008 11:24 AM

If stocks continue to rise throughout the week and reach the previous point or "close enough", what reason is there for a bail out?

I am grasping for knowledge about the bailout issue going on right now. I have read different websites, general news, some meta threads on the subject. Even though I do not own any stocks and have no immediate need of a loan, I still worry about government needing to spend tax payer money on business interests that have failed/failing.

While reading CNN today and seeing the dow has already recovered around half of the "stock dump" that happened on Monday, I noticed that CNN was reporting that the stock recovery was due to a new bill possibly delivered this week. How can they know this? What if investors are happy about the bill not being passed and are snatching up some stock at a lower rate and/or hope the US is getting their finances together??

Again... if the stocks are recovering, the dollar is showing improved strength, banks are being bought out etc. why would we still be haggling with each other about a buyout?

posted by Mardigan to law & government (18 comments total)

Well, stock prices are based on confidence, and most people are confident that some kind of bailout will be coming pretty soon. If people stop believing that, or an announcement is made that no bailout is forthcoming, I imagine stock prices would plummet.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 11:32 AM on September 30, 2008

It's not about stocks. It's about banks having money available to loan to businesses or other banks. Over the past few weeks, there was concern that credit was frozen, and that makes it tough for businesses to function. Ultimately, it may mean that your credit cards would stop working.
posted by willnot at 11:33 AM on September 30, 2008

I'm kind of a caveman when it comes to economics but this is an excellent question. My limited understanding here is that the rally is on the stock exchanges (where equity in top corporations is traded), while the banks still remain nearly insolvent and there's still a smoldering wreckage of derivatives, swaps, etc. YMMV with my accuracy.
posted by crapmatic at 11:34 AM on September 30, 2008

The stock market is not the issue. The issue is in the credit markets. Nobody is lending to each other because nobody thinks anyone has any money. If businesses can't raise debt, they have problems continuing their operations.
posted by milkrate at 11:35 AM on September 30, 2008

The bailout isn't (wasn't???) about pumping up stocks it's about saving the credit markets from which businesses power their businesses.

TMK, the status quo is a very unhealthy place for businesses who need access to credit to be right now. Continued failures will basically result in runaway chain-reaction defaults, much like a nuclear meltdown.

The core problem is simply there are anywhere from one to three trillion of dodgy loans made 2003-2007 that are jamming up the system and causing markets to freeze in fear of buying assets that will not yield income at any price.

The bailout idea was an extra-market fund to "quarantine" this bad debt, taking it off of Big Finance's balance sheets and re-starting lending.

While I followed the "NO BAILOUT!" arguments I don't particularly think they are arguing the facts correctly or honestly.

For an example of the tough environment facing borrowers today, LIBOR is pushing 7% right now. This is not good if you followed Greenspan's advice in 2004 and are now in an ARM tied to LIBOR.
posted by troy at 11:37 AM on September 30, 2008

the stocks merely reflect the market's assessment of the health of the economy, (and trillions in US investment wealth). The problem is that banks are scared and won't lend money to companies or other banks. the money is needed for everyday operating expenses because cash flow is always intermittent. If operating funds are not lent out, regular businesses and banks that are doing fine will fail because they can't pay out bills and payments to customers and vendors. The whole thing goes down.
posted by Ironmouth at 11:39 AM on September 30, 2008

You seem to be placing a little too much emphasis on a half day of recovery. The S&P 500 has made up half of yesterday's loss, so it's up 5% for the day. Woo! But it's still down 21% year-to-date. Boo!
posted by smackfu at 11:40 AM on September 30, 2008

The above posters have it. It's not about stocks. The stock market is going up today on the expectation that a deal will come through. If a deal is not reached it will crash.

If Monday rolls around and there still isn't a deal, and the market doesn't crash, there is confidence and maybe we don't need a bail out. But, I can assure you this will not happen.
posted by Fairchild at 11:43 AM on September 30, 2008

The DJX, S&P or NASDAQ indices don't matter. The TED spread does. Here's a chart of the TED spread.

Imagine a game similar to pass the parcel: ten people in a circle, each has a cake. Two of the cakes have a filling made of dog poo. When you pass your cake, the recipient has to take a bite. No-one wants to bite into the dog-poo cake, so there ain't no exchange going on.
posted by holgate at 11:47 AM on September 30, 2008 [1 favorite has favorites]

If the banks are not loaning money then they would not be making interest off of said loans though. I understand what a few of you are saying about the credit scare right now but how long do you think the banks would sit on not giving out loans to business? Isn't that kind of defeating their purpose? Wouldn't other banks that have less fear be reaping in good deals on companies that need money faster?

I'm seeing different banks consume each other in the news reports, as it is going wouldn't that just cut down on the competition and force the remaining, hopefully stronger banks to learn from the mistakes of those that have fallen?
posted by Mardigan at 11:50 AM on September 30, 2008

The issue is about having capital to lend against. Lending institutions are stuck with trillions of loans they would like to sell off to replenish their capital -- every $1 of loan they sell is another $1 they can loan out again.

But the credit markets are allegedly frozen or whatever so they are finding themselves stuck with these loans.

Also, in the bigger picture, many many businesses have become reliant on short-term financing, where they roll over their credit facilities every so many months. Reduced access to credit for these companies can kill them, or cause higher lending costs, resulting in feedback loops of company pullbacks, liquidation of assets, and general bad times.

I am no expert nor even that well-educated on this stuff but this is my impression of the current situation.
posted by troy at 11:56 AM on September 30, 2008

Isn't the frozen credit issue very recent though, I mean are they just waiting to see what the government is going to do?
posted by Mardigan at 11:58 AM on September 30, 2008

I noticed that CNN was reporting that the stock recovery was due to a new bill possibly delivered this week. How can they know this? What if investors are happy about the bill not being passed and are snatching up some stock at a lower rate and/or hope the US is getting their finances together?

The stock market is a very complicated and confusing system, but it helps to look at it like this: The current price of the stock market represents everyone's idea of how much money the businesses in the stock market will make over time. When people think that the companies are going to make more money than everyone assumed before, the market goes up, and when people think the companies are going to make less money than everyone assumed before, the market goes down. So the stock market today is basically a guess about how well the companies will do in the future, and that guess changes over time.

When the bailout plan was first announced, the Dow went up around 370 points, because the plan meant that companies would have an easier time making money after the government executed the plan. The plan hadn't been signed into law yet, so the market probably "priced in" the fact that the plan might fail. As an analogy, let's say I have a scratch-off ticket that has a 50-50 chance of being worth $5 or being worth nothing, it makes sense to pay $2.50 or less for it because you price in the known chance of it paying off.

As more and more news came out that the plan was having trouble being agreed on in Congress, the market continued to lower, pricing in a lower and lower chance of it passing. Finally, when the plan did fail, the Dow dropped over 700 points, suggesting that the market now thinks that there is less of a chance of a bailout than there was before the plan was ever announced. If there are rumors that a new plan is in the works, those rumors can and will affect the stock market by pricing in a higher chance of a bailout.

All of that is really a simplification, and there is no real way to know why the stock market moves the way it does in general, but this seems to be a pretty easy to understand pattern based on the events. The point is that the stock market is basically just a place where people put bets on companies to do well or not do well. The real underlying mechanic here is that a lot of the future earnings of companies will depend on how the financial sector does, and a bailout will most likely have a very positive impact for everyone involved (except probably the US taxpayers).
posted by burnmp3s at 12:00 PM on September 30, 2008

If the banks are not loaning money then they would not be making interest off of said loans though.

Well, the whole problem is that for the past several weeks they've been LOSING interest on the loans that they HAVE had out, so it's not about trying to get more interest right now, it's about trying to not continue to LOSE interest. Look at it this way -- If you've lost $300 at the craps table, you may decide to stop playing. If someone asks you why you'd stop playing becuase "you could win $100 if you played," you'd probably say, "yeah ,but I could also LOSE another $300, and I'd rather not do that." That's where the banks are right now.

I understand what a few of you are saying about the credit scare right now but how long do you think the banks would sit on not giving out loans to business?

The problem isn't how long the BANKS could wait -- the banks can wait a hell of a lot longer than WE can wait. Your average bank probably has at least one or two businesses that already exist that they've invested in that ARE doing okay, and if they stay put they'll get at least that bit of income. So the BANK can wait a hell of a long time without giving out loans to businesses.

The problem is how long WE can sit on the banks not giving out loans to businesses or to individuals. The banks can wait a long time, WE can't wait so long.

As for the stocks: think of the stock prices as like the degrees on a thermometer. A thermometer tells you what your body tempertature is, and as it rises and falls you know whether you're getting sicker or you're getting better. But it isn't your temperature that is MAKING you sick -- that's just a side effect of what's really going on. Even if your temperature starts going down, if the germs in your system haven't been wiped out, you're still sick, and your temperature could go up again. The stock market going up is just like when your temperature goes down a little bit; it's a good sign, but it's still way too soon to tell whether you're all the way better yet.
posted by EmpressCallipygos at 12:09 PM on September 30, 2008

It's not a stock price crisis; it's a credit crisis.
posted by orthogonality at 12:10 PM on September 30, 2008

Read the following story just published on the NY Times website:

GOLDSBORO, N.C. (AP) -- AT&T Chairman and CEO Randall Stephenson says even the world's largest telecommunications company is feeling the effects of the global credit crunch.

Stephenson said Tuesday during a visit to North Carolina that AT&T was unable a week ago to sell any short-term debt -- known as commercial paper -- for longer than overnight. That kind of loan is usually readily available to top corporations good for the money.

Commercial Paper is used to raise cash to do things like purchase inventory or pay vendors to keep the lights on, or to ship 10,000 phones to stores.

Imagine if AT&T had to wait until it had money in hand from sales to invest, to pay its workers, to buy inventory, etc. People would be laid off during the summer when cell phone demand is low, and the company would struggle to maintain enough workers during Christmas. Basically companies don't have the money on hand, they borrow it.

Now imagine that, but with banks added in. Now when you go to the ATM, it says sorry, no money yet, we haven't gotten a loan payment in. Wouldn't make you very happy, would it?
posted by Ironmouth at 12:27 PM on September 30, 2008 [1 favorite has favorites]

Yes, the problem is with the credit markets. Also keep in mind that stocks are up in part as a reaction to news that the bailout talks are continuing, and the Fed's injection of $630 billion into the world financial system (a move not without risks or long-term costs to the American public--I may be wrong here, but it's my understanding that some economists and people in the finance industry think this sort of massive injection only put off a day of reckoning, made the possibility of a future one much worse).
posted by raysmj at 5:54 PM on September 30, 2008

That was a currency swap though, I believe to help with transfers.
posted by Mardigan at 7:40 AM on October 1, 2008