Financial crisis

connieq288

I am just curious as to how everyone feels about this. I have a hard time following politics and Im not going to debate anyone on who should be president or anything. What I dont understand is why the market dropped so bad yesterday just because they didnt pass the bailout plan. It doesnt make any sense to me. Isnt that just people overreacting to something that hasnt happened. Like they say we are doing with the gas. I live in southeast and we are still having shortages here. We have so many gas stations out of gas still. I just dont see any reason as to why the market did what it did. Maybe someone could explain it to me.

Connie

connieq288

I am just curious as to how everyone feels about this. I have a hard time following politics and Im not going to debate anyone on who should be president or anything. What I dont understand is why the market dropped so bad yesterday just because they didnt pass the bailout plan. It doesnt make any sense to me. Isnt that just people overreacting to something that hasnt happened. Like they say we are doing with the gas. I live in southeast and we are still having shortages here. We have so many gas stations out of gas still. I just dont see any reason as to why the market did what it did. Maybe someone could explain it to me.

Connie

Anna_Banana

This is a pretty simplistic overview and in no means complete.

The markets are very sensitive on what people think is going to happen. While everyone thought that the buy out was going to happen, they left stocks in business that they thought were going to be okay. Now that those businesses might go bust, people are pulling out of them. Also because of the buy out some people were going to have some "extra"(it's not really extra, but I don't know what else to call it) money so they left some money in stocks. Now that extra isn't going to be there so they are pulling their money out. Which in turn makes the stocks worth less.

connieq288

But if the people left their money there then there wouldnt be a drop like there was. I understand what you are saying I just think that the people pulling their money out is what is making it worse.

Glammy

During the Great Depression there was a run on banks and soon the banks had no cash to hand out so people lost what they thought was safe. It's the same with the stocks today - people feel that if they don't get out with something now, they'll get out with nothing later. Cut your losses mentality.

rethun01

Right, and the problem right now is that the banks are so backed up with bad debt that they aren't going to be able to lend any money. So the bail out plan was supposed to buy up the bad debt, so that banks could continue lending to consumers.

The problem (in my humble opinion) is that the politicians are only looking at one part of a very large problem. If you look back in history, that's the same thing Herbert Hoover did. Instead of looking at the large picture and trying to fix the numerous things going on in the country, they tried to fix on thing at a time. That's why FDR is a hero. He came in with his multi-point plan of attack to stabilize the banking industry and stock market, create jobs for citizens, and focusing on domestic issues.

The problem eventually became that his whole plan turned us into a severe isolationist country, which is what in turn lead to how we were literally drug into WWII.

I'm sure some other history buffs will poke out some weaknesses in this overly simplistic desciption.

In the end, we need to have some business and banking people sitting on this committee to figure out the bail out plan. With this being an election year the politicians trying to draw this up are being to partisan.

Anna_Banana

But if the people left their money there then there wouldnt be a drop like there was. I understand what you are saying I just think that the people pulling their money out is what is making it worse.

It does make it worse and then more people get scared and more pull out and makes it even worse yet.

Personally I wouldn't bail out the lending companies. It's kind of like bailing a really bad person out of jail and not letting them suffer the consequenses. They won't learn anything and they are more likely to do it again. The lenders needed to be responsible and not lend money to people with out the ability to pay it back. Here's our situation. We moved (clear across the state) last year and have yet to sell our house, but we own some land here and were thinking of putting a house on it. We owe out the wazoo, because we are still making morgage payments on our other house, two car payments, some doctor bills, have kids. Well they looked at our income and then looked at what we owe and then said well we could loan you X amount to put up a house and you could make these payments. And the payments were equal to the difference in the debet and income. No left over for food or utilities or anything. I was smart enough to say no, and they actually were trying to get us to take the loan.

Things are pretty scarey right now.

mjfer123

I guess I'll try my hand at this. From start to finish.

The banks are hurting now because of the housing market, which in turn is a good indicator of the US economy.

When the US economy starts to slide, the housing market takes a hit within a few years.
Normally this wouldnt be a problem.
However, the regulation on banking has been pretty lax the past couple decades.
Banks were able to make decisions on who they gave credit/loans to.
More and more, banks thought it would be a good idea to give loans to people with bad credit, because they would be able to reposses everything and turn around and sell it again. What they didn't expect was people to be defaulting payments all at once. When almost NO ONE is paying, the amount of money a bank has severely drops. This "liquidity" or available cash, is what is put into a certain banks stocks.

So basically, America has no money to pay their mortgages, the banks dont have any one to resell properties to in order to dig themselves out of their hole, and now the entire country is suffering.

A) Banking firms shouldnt be handing out credit to just anybody, which is what they have been doing. Giving out these "flex" plans or at high interest. Well when the flex shoots up, they can be more than any normal payment, and when its already high and someone has bad credit, its usually for a reason, and they will stop paying
People who have extremely poor credit history shouldnt be APPLYING for loans, if you dont have enough money to make payments in the long term, plan on paying with credit cards for a while, etc., don't jeopardize everyone else, just rent until you save up enough money for a decent down payment to own.
C) THE GOVERNMENT, in a free market economy, they shouldn't be bailing out companies, they shouldnt be interfering at all. I know we dont live in a free-market economy, its more of a mesh of socialist-free marketing. But if the government backed out, these huge banks would falter, other banks would take their place and life would move on. Instead, their original plan and who knows what their next plan will be, was to put the burden on the already over taxed, tax payer. When they speak of adding an additional SEVERAL thousand dollars in potential taxes, its a very high burden. Especially when you see the amount of money CEO's at these companies were taking as of last Christmas.
The big question mark really is how much should the government interfere here.

So thats my little speech on a soapbox. Im not an accountant or FDIC member. I just know a little. I know I may have misspoke on the actual terms/actions above, but this is just a general overview.
Essentially, the way our economy was designed to work, this problem would take care of itself, possibly never happened at all.

Anna_Banana

I agree with mjfer, and this would take care of itself. And yes we would get a big hit, but eventually it will even out and the market will balance back to where it should be. But the longer they mess around with it the longer it will stay out of balance and it can't find it's natural equilibrium.

Okay here's the other thing (I'm at work and keep getting interupted by it:bigsmile: ). So the banks own all this and figure that they can just sell property if people default on their loans. Well because of everything it's not just the volume of home owner defaulting the value of the houses have dropped. So now John Smith is making payments on a house he can't afford and he would like to refinance. He paid $100,000 for the house and the silly bank people financed it for 100%. He has it paid down to $95000 and thinks he can refinance it and maybe get smaller payments. Well now the bank will only loan him 90% of the value of the house and the house is now only worth $90,000. So he can only get a loan for $81,000. So in order to get a loan he would have to come up with $14,000 just to get the loan, which he don't have so he has no choice but to let the bank have the house. The Bank takes back the house with a $95000 morgage on it and the value of the home is $90000. And nobody is buying anything any way so they are just stuck with it.

This is a very simplified example of what is happening. There are tons of things I left out. But I hope this helps.

lockedcj7

Despite the hand-wringing and predictions that the sky is falling, we're going to be just fine. If everybody will be like a bunch of little Fonzies, we'll be fine. What's Fonzie like? He's cool.

The world is a much different place than it was in the 1920's. The stock market crash of 1929 was precipitated by rampant speculation that drove up stock prices. When the market corrected (which was appropriate and was bound to happen), investors panicked and began selling off stocks which further drove down prices. Many banks were also investment firms and this created a crisis of confidence in the banks. Everyday Americans began withdrawing money from savings accounts and many banks failed since they had loaned out more money than they could return to their customers. The loans were in default due to the market corrections, firms were going bankrupt and none of the banks were in a position to lend money to each other. Shortly thereafter, the drought of the 1930's hit the prairie states which only made matters worse.

Fast-forward to today. The FDIC guarantees the deposits of normal citizens so there is no fear of losing what you have in your savings account. There won't be a run on the bank and most banks will stay open. Those that engaged in illegal, unethical or shady lending practices won't but average Joes will still get their money back. We also have safety valves to halt trading on the stock exchanges if they start into downward spirals.

Many parts of the country are in drought but we aren't an agrarian society anymore and we've changed farming practices to be more ecologically sound and sustainable.

People are still going to live their lives. We will still have to buy stuff and that will feed the economy. Gas prices will come down and it will get cheaper to drive again, freeing up income for other stuff, which will feed the economy. Housing prices will come down, meaning that people who couldn't afford a house 4 years ago will suddenly be in a position to snap up a bargain. That will feed the economy. It will be rough times for some and lean times for most but we'll be fine in the end.

There are a lot of people who are going to be just fine as it is. Those people chose wisely in career planning and their jobs are pretty recession-proof. (education, health-care, etc.) They also live well below their means and don't carry much (if any) debt. They've been saving for a rainy day and for retirement. They bought a house that was well below their max loan amount and got a traditional fixed-rate mortgage. They buy used cars and drive them until the wheels fall off. They're frugal and self-reliant by nature and those choices and habits will serve them well.

So said the little red hen.