In the wake of $800 billion of taxpayer money spent so far to try to fix what ails the financial system, people are concerned and facing different challenges depending on who they are. Different groups of people might consider responding differently.
Here are some thoughts on possible responses:
- Families need to find safe banks in which to deposit their money. With stocks down at least 13% so far this year, many people are thinking about how they can cut their losses. While some, like Warren Buffett, are using this decline as an investment opportunity, most cannot do that. A typical family needs to make sure that it has sufficient money in a safe place. To that end, families should keep funds in a bank account of less than $100,000 that is insured by the FDIC. That family should also make sure that its bank is profitable, has low loan losses, and no brokered deposits. If 1,000 banks fail in the next year, it would be less stressful to have money in one of the 7,400 banks that are not taken over by the FDIC.
- Banks need to reduce assets and/or raise capital, find a merger partner, or shut down. If you manage a bank that is solidly profitable with adequate capital and good credit quality, you are in relatively safe territory. If your bank is losing money, has too many risky assets, and inadequate capital, you may be able to sell assets and raise capital. But the markets for both are quite tight. If you can't do that, you should seek a merger partner or let the FDIC take you over.
- Companies need to conserve their capital. With the CP market drying up, companies that rely on these short-term credit markets are going to need to conserve their capital or come up with new ways to finance their daily operations. They could start demanding that their customers pay before they deliver service, delay paying employees and put off other bills, or shut down operations. They could also draw down the cash from their credit lines, if they have any, and try to get longer terms loans -- or sell stock. But these actions could send the global economy into a downward spiral; and
- Government needs to restore trust in the financial system. People are losing trust in our leadership. One way to restore that trust is for a respected political leader to patiently and repeatedly explain the problems we face and what will be required to fix them. In addition to communicating, our leaders will need to take action to unfreeze the short-term credit markets, recapitalize the banks, and rebuild our financial system in a way that will assure that such a financial catastrophe does not happen again. The first must be accomplished in days, the second will take years, and the third could take a decade.
For more thoughts on what government can do in the short-, medium- and long-term, keep checking back on this series of 100 Year Crash posts.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
Reader Comments (Page 1 of 1)
9-27-2008 @ 3:20PM
ed1305 said...
The amount of bad debt you mention seems larger than any amount of money the government can throw at it. If the institutions aren't sure what debts are good and which are in trouble, how is the government intending to figure it out? One of them has to decide what's up for grabs, and what the feds should pay. The financial institutions are huge, and have an immediate need to determine which loans are sound and which are at risk. Good grief, take 25% of your work force divide the loans among them and work them overtime. The work they normally perform can't be as important as getting a handle on this. Or 50%. Whatever it takes.
Second, it keeps coming up that short term and probably long term business loans are a main concern. Instead of buying bad assets, why can't the feds loan the money to business at attractive rates. The odds of getting paid back are a lot higher than selling bad debt.
In summary, let the banks deal with their own mess, and keep businesses in business so employment stays up and people have a chance of paying back their loans.
9-27-2008 @ 3:51PM
william lindblad said...
Peter, you sound like Alan!! 100 year crash!! - ?? There was no crash 100 years ago - no here, not across the pond either. As a matter of fact, in 1910 things were looking up. What are you talking about.
In 1909 there were some bank failures, but this was deftly handled by J.P. Morgan and there was no real "crash". Closest I can come is maybe you mean 200 years ago. 1816 was real bad and 1/3 the worlds population starved (many to death) but that was not due to finance.
This situation is UNIQUE, it has elements from the past but it really has no comparison.
The key to this "Pandora's box" is getting the price of oil down and the proposed bail out will on weaken the dollar. It is not going to save a damn thing - only make this mess worse.
A depression is in the works
Say thank you to the democratic chairs of the House and Senate Finance and Banking Committees and to the Republicans that are on them also.
I love it when the Chinese have to tell us who screwed up.!!!!
9-27-2008 @ 7:51PM
Jeremy said...
A letter sent to me this week from a Canadian Banker makes interesting reading and is sure to provoke comment.
here it is:
Bailing out the toxic mortgages found among the half of US real estate mortgages held or guaranteed by Phonie and Fraudie, some 5+ trillion worth, was not enough for them. Now, they want to pawn the rest of the toxins from the other half of US mortgages, which they estimate will be about a half a trillion. Gee, didn't they say the Iran War would cost 60 to 200 billion, only to find out later that when you add in future costs for veteran's disabilities and pensions, the cost could top 3 trillion?
The US taxpayer aka the "sheepeople" will eat multiple trillions of dollars.
This is not a sure thing for them. The fraudsters remaining, even the big guys, could still fail, that is how bad this situation has become. The Illuminati are quaking with terror that they have overdone things and that they could end up destroying the whole system irreparably. That is why we are having all these bailouts.
This is an outrageous, unbelievable, unprecedented consolidation of power, which flies in the face of free markets and paves the way for an ever-burgeoning corporatist, fascist police state.
They decide to let Lehman fail because their condition is irredeemable and it looks like criminal charges may come up at some point due to shenanigans that management committed against their employee's pension money, making them a hot potato. They pair up Bank of America with Merrill Lynch, and we see JP Morgan Chase and possibly Wachovia pairing up with Goldman Sachs and Morgan Stanley, respectively. Wachovia and Morgan Stanley are already in talks for a merger. AIG is being preserved to see if they can be fit into the consolidation scheme once all their problems have been sorted out.
The US taxpayer is being duped, if they ever wake up then look out and they better get ready to rumble down there. No doubt we will also soon feel the pain in Canada. Economy is starting to falter here. Manufacturing jobs in Ontario are being offshored at a rapid rate, some blame it on the PM in Ottawa, this is a lame excuse....as the US goes so we go up here.
Look out for the "New World Order", it is just around the corner and coming soon to a country near
you!
Living on a boat may be a good place to be in the next few years!!
9-28-2008 @ 7:25AM
meg said...
As a normal person....I'm sure those in Washington and Wall Street can't relate....I am self-employed, making a little money, but have all my bills paid, even my mortgage. I do have an outstanding credit card debt...my own fault...buying what I wanted. I have more fiscal control than anyone in the government because I knew that no one would bail me out and I paid for what I purchased. It seems that those in Washington and Wall Street never worry about putting money away for a rainy day. This is the rainy day...our cities are broke, the states are broke and the federal government is now broke. No one has money. So what's the big deal? Because of the irresponsibility of those in Washington and those on Wall Street...they are now coming to me for a bailout!!!! Me who makes about $15,000 a year???? Me who is going to help pay for 700 trillion dollars??? What did I do to deserve this? I pay my taxes, work every day, pay my bills, pay my utilities...I don't get any help or support from the government and now they want me to pay their bills. It's going to be like trying to get juice out of a turnip...and believe me, I'm not the only POOR person out there who is taking on this responsibility. I couldn't retire before this mess....now I'll have to work until I die to get my retirement.
9-28-2008 @ 8:00AM
namnduong said...
Mr Cohan. Thank you for your free advive.But please stay out of partisan politic.It is easy to say or critic after the fact.Our country is at war .We are attacking by ennemies( Russia,China,Iran,Venezuala...) by all means.
10-23-2008 @ 10:52PM
Jeremy said...
Hi Meg,
you are absolutely correct.
It is a great pity that the rest of the American population do not get it!!
A little revolution now and then is a good thing...no?
I think it is time America tended to its own issues ; let others take care of The World.
You have no national medicare;a crime against humanity in this day and age;bridges are falling down;expanding city transit systems will cost billions of $$$ to enable people to commute; your entire financial system needs regulating and restructuring etc; for a great country the USA seems have serious priority issues.
10-24-2008 @ 5:24PM
Jeremy said...
It amazes me that the whole world is standing by watching the crooks get away with the biggest taxpayer scam in history.
WHY do we have to bail anyone out???
WHY cant we just let the greedy WallStreet and Lehman Bros types go broke.
Why are we bailing out these crooks so they can continue scamming us poor taxpayers? Why ?????????
Wake up WORLD........our Politicians are all in on this.........
I dont suppose for one minute they would have helped us small guys if we messed up our finances,now would they???
Why dont we let the Free Market Rule........