Thursday, September 11, 2008

What If?

Listen, I'm not an economics guy. My background isn't in finance. So I'm largely confused by all the possible bank failures and brokerage house disasters.

My question is this... what if all these big houses fail? With all the derivative shit and "counterparty risk" what would it mean to regular people?

If our country basically goes bankrupt, if the FDIC doesn't have enough money to insure the deposits of just the WaMu customers, what happens?


mOOm said...

If the FDIC runs out of money I expect the Treasury will pay the depositors of failing banks instead. In the future the FDIC will collect much higher fees from banks to fund the insurance system and in the long-run taxes will be higher because of the extra borrowing by the Treasury.

It's much harder to answer your other question about all the big investment banks failing. I don't think anyone really knows because it hasn't happened before at least not on that scale. Generally, bank failures mean a contraction in the money supply like what happened in the Great Depression. The main reason that it was much worse than an ordinary recession was that 1/3 of US banks failed and the money supply more or less halved. So this depressed economic activity very severely for a few years until the Federal Government managed to reflate the economy.

Complacent Panda said...

We print more money, of course!

mdawsz said...

Good questions, and I discuss the answers to these questions (and more) in this post over at iBC.

Dinosaur Trader said...

Thanks guys, and ummm.... mdawsz.


So that's what this all could lead to? A contraction in the money supply? And with the global economies so tied together, could we see the first worldwide depression?

Should I buy a gun to protect my family?


mOOm said...

No, the Fed and US Government are determined to stop a repeat of the Great Depression or even a Japan type stagnation. The cost will be a mix of higher inflation, higher interest rates, and higher taxes. And in the long-run higher taxes. But US taxes were going up anyway due to demographics and the crazy promises of the US government on Social Security, Medicare, and inefficient medical system and the procrastination built into the 18th century US system of government that was designed to not do anything...