DemocracyNow: System of payments stopped working last week; you'd have to buy groceries with gold

[HamdenRice]

Just heard this on the radio. I will post more later today when the transcripts are available, but this is one of the things I wish everyone would grasp about the gravity of the crisis.

The guest on DemocracyNow said that the system of payments stopped working last week. That means the system of interbank transfers that I tried to explain, in a post entitled, "How your cashing a check is related to the current credit catastrophe", ceased working.

He said that if that situation had continued, you would have to purchase your groceries with gold. (He was exaggerating but only somewhat.)

Yeah, "let it collapse."

:sarcasm:

He went on to say that the bailout had to happen, but he also made the astute argument that because the banks are so desperate, we have tremendous leverage to insist on far-reaching reforms of the financial system in exchange.

[kentuck]

1. But they're not willing to agree to any demands or restrictions?

They're are going under but they would rather drown than force their CEO to take a paycut or to allow oversight? Just give us the money, dammit!

[HamdenRice]

2. It's the stuff of politics, my friend

In the rest of the world it's called "struggle."

[tavalon]

3. They are the terrorists, they will make all the demands.

Silly, don't you remember how it works?

[HamdenRice]

4. Unlike Bush, then ...

We need to bargain with the terrorists!

:rofl:

[HamdenRice]

5. self serving kick for lunch time crowd ?!? nt

[pberq]

6. Kick & Nominated

[CoffeeCat]

7. So, if I understand this correctly--

...the system of payments was temporarily suspended last week, admid this
terrible financial news?

Why was this system of payments suspended and why was the suspension lifted?

Who makes the call to suspend and to lift the suspensions?

Is our banking system vulnerable to this happening again very soon?

I'm sorry for all of the questions. I'm just trying to understand. I do
appreciate your time and your wisdom.

My husband and I have been taking out $300 daily (the max we're allowed with
our ATM card).

[HamdenRice]

10. That's the scary part. No one party suspended the system of payments. It just froze up.

The system of payments and settlements is based on banks being willing to accept payment from each other either in the form of loans to each other or in the form of transfer of securities. Settlements are not only done in cash, but in the main assets they have -- securities -- and that consists to a great deal of mortgage backed securities.

The thing I wish I could get across to more people is that mortgage backed securities were never intended to be "risky"; on the contrary, they were created to be, and were perceived to be, and until recently were, among the safest conceivable securities. Because of that, for the last 20 years they have been treated like "money." They are the "money" of the banking system.

If no one in your community was willing to accept $1, $5, $10, $20 bills or any other bills, everything would grind to a standstill. Even if you wanted to buy milk and the grocer wanted to sell you milk, there would be no "money" capable of making the transaction happen.

But it wouldn't take all the money being bad. Suppose everyone realized that 1 out of every 20 dollar bills was bad, but there was no way of knowing which. Pretty much the same thing would happen.

That's what's happening in the banking system. No one will accept the other person's "money" because no one knows which mortgage backed securities are good and which are bad.

Briefly, because no bank trusted the any other bank's "money" or trusted any other bank enough to lend, settlements came to a halt. The only "money" that was accepted was US treasury bills.

This is also referred to as a "liquidity crisis."

No settlements means, banks don't trust each other at all to transfer money between them, won't lend anything to each other in settlements and wont accept each other's securities for payment.

No settlements means you can't cash your paycheck or use your atm.

We were days or perhaps hours from that last week, and there is every possibility it could happen any time.

[CoffeeCat]

12. Thanks Hammy...

You are a blessing to this site, and I appreciate you taking the time
to expalin all of that.

[MadHound]

8. Sorry, but that is more than a slight exaggeration

Cash would have been fine, you probably could still pay with check, but credit cards would be a different matter.

Meanwhile with the bailout, not only are we going to add between one and two trillion in debt, that amount of debt could very well push us past the tipping point and our Treasury Bonds will be downgraded. You want to see all holy hell break loose, let the Tbills be downgraded. Furthermore, pumping this kind of liquidity into the system is going to do two things, first it will lower the value of the dollar, we're already seeing that happen. It is also going to cause higher inflation.

Look, there's no good way out of this mess, only the choice between which is worse. Bailing out Wall Street is only going to provide short term help, it will be enough of a bridge to allow Bush to slide out of office leaving the stinking pile for whoever follows. Other than that, it is a long term disaster that could very well bring our economy and our country down within a year. Letting Wall St. go without a bail out will mean enduring some rough times for the short term, but it will, in the cleaning up process, allow for sensible long term planning and regulating to happen, and weed out the bad players in the market. Frankly, I would rather endure the short term pain now, as long as it leads to better things in the long term. The bailout however is a long term disaster, and frankly we shouldn't even be discussing it.

[prayin4rain]

9. I agree.... we are putting our entire country on the line and crossing our fingers

with the bailout the way it is proposed now. To me it like going to vegas and losing your rent money and instead of sleeping outside for a couple of months you go take out a $250,000 loan, cross your fingers and head to the roulette wheel. It's bullshit. I think if this trillion dollar plus bailout failed we would be literally risking our country not just comfort.

[lse7581011]

11. I Keep Hearing Things Like This

and wonder what they mean. Excuse my stupidity but could someone please explain just how bad things could get. What is the great unknown that everyone is afraid to talk about? I don't remember 1929 because I wasn't alive and just need to put this whole thing in perspective! Thanks so much in advance!

[HamdenRice]

13. What has them most spooked is a liquidity crisis

See post 10 above. Then you might take at the post cited in the OP about how a general liquidity crisis would affect you individually -- and of course all the businesses, employers, state and local governments, etc., in the country -- here:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4027506

That's what they are afraid of. And a severe liquidity crisis is likely to lead to a Great Depression type depression.

[HamdenRice]

14. delete - wrong place nt

[HamdenRice]

16. The gold part is an exaggeration

but in a complete freeze up, things would get dire quickly. We just don't realize what kind of stuff happens in less stable countries -- countries that cannot print the global reserve currency, the dollar.

We are basically in unchartered territory, so I wouldn't be very confident about what would indeed happen if there was a complete liquidity crisis.

I'm sure people would accept dollars, but if there are no interbank transfers, where do you get your own dollars from?

Argentina, for example, once froze all bank accounts for nearly a year, while the value of the peso was cut to 1/3:

http://query.nytimes.com/gst/fullpage.html?res=9800E7DC1F38F930A35751C1A9649C8B63

Argentina took a long-sought step back toward financial normalcy today as the government lifted a much-reviled freeze on most bank accounts. Depositors got unrestricted access to their savings and checking accounts for the first time in a year.

The freeze was originally imposed to halt a huge drain on the country's bank and currency reserves, and was described at the time as a temporary measure. But within three weeks, street demonstrations and food riots had driven Fernando de la Rúa out of the presidency and ushered in a period of political chaos and economic collapse. The country is still trying to recover.

Today's decision unlocks about 21 billion pesos in deposits. That sum was worth $21 billion when the freeze went into effect, and the peso was pegged at one American dollar. But since the peg was abandoned early this year and the peso was allowed to float, it has lost more than 70 percent of its value against the dollar. So the unlocked deposits are now worth less than $6 billion.

<end quotes>

I could certain see some merchants in international cities like New York only accepting Euros. Already in some shopping areas in NYC that are preferred by tourists, merchants are taking/preferring Euros over dollars.

[HamdenRice]

15. Rush transcript

AMY GOODMAN: Dean Baker, you’re the head of Center for Economic and Policy Research. It’s based in Washington, D.C. The climate right now? I mean, watching the Sunday talk shows, there was this clear sense that if this is not accomplished in the next few days, that—you know, it’s like before the invasion of Iraq. We can be hit by a weapon of mass destruction, is basically the idea. And this is about not saving Wall Street, but saving the American people. That was the message that was put out immediately yesterday.

DEAN BAKER: Well, I’m going to walk a line here. I mean, there is a point. The system of payments stopped working last week. If that happened, we would have to, like, go to buy our groceries with gold. We had a serious situation. Now, on the other hand, the Fed and Treasury were able to deal with it. They are able to deal with it; they have the resources to deal with that. But that is a very serious situation. So they aren’t talking about total nonsense in that. Now, they’re trying to scare Congress to death, because it’s not as though we have to do it today or tomorrow. And, you know, what I would say is we do have to keep the system operating, but it should be punitive.

<end quote>

Overall he and the other guest see this as an historical opportunity to be "punitive" toward Wall Street, to get equity in them and reduce CEO pay by 90-95%. The public hates the financials now, so this is a tremendous opportunity for progressives.

But the crisis is very real.

[JCMach1]

17. Paulson and Wall Street are following the Shock Doctrine playbook

and calling for the moon while everyone is still reeling from the event...

God, I hope Pelosi and Reid wake-up before it's too late.

[HamdenRice]

18. Not sure. In "disaster capitalism," the capitalists make money

In this meltdown, they are getting their equity wiped out. Perhaps in the push to sell the Paulson plan, there is some element of shock doctrine.

But it seems to be backfiring. This "shock" looks like it's creating a backlash of demands on Wall St., not a push through of even more free market mechanisms.

[nadinbrzezinski]

21. The elements in it were things like section two of the proposed legislation

as of last night, which essentially made this a no bids environment

THere are also elements of OMFG they have no idea what to do next

And yes, you are right, most folks don't get it, how serious this actually is

[JCMach1]

27. My tentacly appendaged friend is correct...

and so is Nad

[On the Road]

19. The "Let it Collapse" People

have absolutely no idea what they are saying. It's very frustrating. We are NOT living in anything akin to the great depression, and there is an enormous gulf. No one is secure if the whole economy falls.

Foreign collapses like Argentina and Indonesia were short-lived, partly because there was lots of external money to buy discounted assets. That would not happen here.

[4 t 4]

23. How about this...

Extend unemployment benefits, send out a second stimulus package and stop all foreclosures on homes until we straighten everything out just like we need to straighten everything out on Fuck-street. They're throwing money around throw some our way

[On the Road]

26. No -- That Would Not Address the Problem

The financial industry was teetering on the verge of collapse. If it does, the poor would suffer much more than the rich.

[seemslikeadream]

20. OK FINE

SOMEBODY USE THAT TREMENDOUS LEVERAGE

[nadinbrzezinski]

22. They are... why Paulson et al are starting to pull back from the brink

now that also means, have you fed your congress critter today?

[4 t 4]

25. I just saw you in the last post

and you are rather scary , LOVE THE ALL CAPS thats always trouble

[Captiosus]

24. Whatever. Mark my words, this 'bailout' bill is the beginning of the end.

They've added the idea of bailing out foreign banks to the bill and China has already shown their hand last week about dumping the dollar and going elsewhere. European banks are laughing left and right at the dollar. The U.S. is going to bail Chinese and European banks out of bad debt and the Chinese and Europeans are going to take their new found liquidity, cash out anything they have remaining from the U.S. Treasury and invest it in Euros or some other world currency.

By the end of this year, the dollar will barely be worth the paper it's printed on. System of payments will lock up harder than an engine with no oil. And this is with the bailout bill as it's currently proposed.