Time to Panic?
Last night as I was watching TV, the local newscasters did their "tonight at 11" commercial. Normally I ignore those because they usually tell me about murders or hit and runs or something along those depressing lines.
This time they got my attention. Why? I heard "Washington Mutual" and "big news" and I knew I had to get on my computer to look up what was taking place. It is now official: we have our first major bank failure.
My students have been asking all week about the financial crisis taking place. After explaining to them about sub-prime mortgages and credit default swaps, I always get the "what do you think is going to happen?" That's when I sigh and dread my answer.
I am a historian. I've studied the recessions of our country throughout its existence as well as those of other countries. The big ones usually have triggers that cause a meltdown of a country's economics. In 1873 (what I'm teaching my U.S. history students right now), there were two main triggers: the horse flu of 1872 and overinvestment in the railroad industry. As our country was still heavily dependent on horse-based transportation at this time, when a good majority of the horses get sick with the flu, the country is basically at a standstill. It lasted a few months so it had a detrimental impact on the country's economy. Then, overinvesting in the railroad industry imploded as well. Many raced to participate in the railroad boom at this time looking for a way to make a lot of cash, but in the end, the returns did not come fast enough. Banks began collapsing when Jay Cooke & Co, a major investor in the railroads, declared bankruptcy. That brought on a depression that lasted for four years.
To me, from what I've learned from history, I believe that we are in big trouble. The sub-prime mortgage fiasco along with the credit default swaps have left this country in deep shit. Banks have already tightened their credit belts, reducing the number of loans available which hurts not only those of us who need car loans or mortgages, but businesses who might need an influx of cash. Even credit card companies like American Express are starting to lower credit limits. This means that people will not spend which means the economy is going to slow down even more.
Now we have the largest bank failure since the Great Depression. Lehman Bros. was one thing as they were an investment bank. WaMu is a "regular" bank, one that has savings accounts and CDs. Thankfully our government has certain safeguards in place to prevent something as catastrophic as the Great Depression from occurring again (e.g., FDIC). However, because a lot of the major banking regulations were stripped during the Reagan administration, there is no way to prevent a minor depression from occurring.
So what's my prediction: at the very least, a very major recession. However, a small part of me is thinking the "D" word. Will the proposed $700 billion bailout prevent anything? No. It will slow down the implosion and maybe prevent the recession from getting as deep but it's more of a temporary stop-gap to give consumers and banks more confidence. And it definitely won't do any good unless there are regulations tied to it, like getting rid of the "golden parachutes" for executives whose companies had to take the bailout. Hmm...they get $14 million as an "exit bonus" even if their company tanks. What is wrong with that? Also, the government needs to help those who are on the verge of losing their homes.
I hope I'm wrong with my prediction. Bear works in telecomm which is the one industry that rises and falls with the economy. I want the economy to do well for the sake of our little household. But since that's not going to happen, I'm hording our money just in case. I know I'm not helping the economy by not spending but I have to make sure we have a roof over our heads. To me, that's a little bit of a higher priority. Also, we don't make enough to have THAT much of an impact on the economy. LOL.
This time they got my attention. Why? I heard "Washington Mutual" and "big news" and I knew I had to get on my computer to look up what was taking place. It is now official: we have our first major bank failure.
My students have been asking all week about the financial crisis taking place. After explaining to them about sub-prime mortgages and credit default swaps, I always get the "what do you think is going to happen?" That's when I sigh and dread my answer.
I am a historian. I've studied the recessions of our country throughout its existence as well as those of other countries. The big ones usually have triggers that cause a meltdown of a country's economics. In 1873 (what I'm teaching my U.S. history students right now), there were two main triggers: the horse flu of 1872 and overinvestment in the railroad industry. As our country was still heavily dependent on horse-based transportation at this time, when a good majority of the horses get sick with the flu, the country is basically at a standstill. It lasted a few months so it had a detrimental impact on the country's economy. Then, overinvesting in the railroad industry imploded as well. Many raced to participate in the railroad boom at this time looking for a way to make a lot of cash, but in the end, the returns did not come fast enough. Banks began collapsing when Jay Cooke & Co, a major investor in the railroads, declared bankruptcy. That brought on a depression that lasted for four years.
To me, from what I've learned from history, I believe that we are in big trouble. The sub-prime mortgage fiasco along with the credit default swaps have left this country in deep shit. Banks have already tightened their credit belts, reducing the number of loans available which hurts not only those of us who need car loans or mortgages, but businesses who might need an influx of cash. Even credit card companies like American Express are starting to lower credit limits. This means that people will not spend which means the economy is going to slow down even more.
Now we have the largest bank failure since the Great Depression. Lehman Bros. was one thing as they were an investment bank. WaMu is a "regular" bank, one that has savings accounts and CDs. Thankfully our government has certain safeguards in place to prevent something as catastrophic as the Great Depression from occurring again (e.g., FDIC). However, because a lot of the major banking regulations were stripped during the Reagan administration, there is no way to prevent a minor depression from occurring.
So what's my prediction: at the very least, a very major recession. However, a small part of me is thinking the "D" word. Will the proposed $700 billion bailout prevent anything? No. It will slow down the implosion and maybe prevent the recession from getting as deep but it's more of a temporary stop-gap to give consumers and banks more confidence. And it definitely won't do any good unless there are regulations tied to it, like getting rid of the "golden parachutes" for executives whose companies had to take the bailout. Hmm...they get $14 million as an "exit bonus" even if their company tanks. What is wrong with that? Also, the government needs to help those who are on the verge of losing their homes.
I hope I'm wrong with my prediction. Bear works in telecomm which is the one industry that rises and falls with the economy. I want the economy to do well for the sake of our little household. But since that's not going to happen, I'm hording our money just in case. I know I'm not helping the economy by not spending but I have to make sure we have a roof over our heads. To me, that's a little bit of a higher priority. Also, we don't make enough to have THAT much of an impact on the economy. LOL.
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