Time has an interesting article on why people don’t support the bailout. Apart from being viewed as a bailout to rich people and corporations who don’t deserve it (which is true), it’s also that people do not specifically understand the risks associated with failure to act.
It’s like climate change–the risks are too amorphous, fuzzy, not in the here and now. Given the complexity of the situation, most Americans without a sophisticated background in economics simply cannot fathom how not acting could profoundly change American life for the worse. Our leaders have talked a lot of gloom and doom, but have done so in a vague and non-specific manner so as to avoid a widespread financial panic that would make things much worse. But the consequences are that Americans don’t really understand what they’re getting into.
So here’s my attempt to make concrete some of the consequences of failing to do anything (I’m not necessarily advocating the current package, just saying what happens if we do nothing). These are worst-case scenarios that may or may not come to pass, but Americans need to know about the possibilities.
1) You might wake up one morning and the money in your bank might be gone (likelihood: low). This is the Armageddon possibility. While it’s true that FDIC insures deposits up to $100,000, there are finite limits to the funds available. If the current crisis causes a string of banks to fail simultaneously, especially some of the biggest ones, it’s possible that the number of failures might overcome the amount of money available through FDIC. Congress would probably step in with an emergency infusion, but might it be enough to safeguard everyone 100%? Who knows–it depends on the severity of the crisis. This happened once, and was in fact one of the triggers of the Great Depression–which is why FDIC was founded in the first place.
2) Stock market crash, ruination of people’s 401k retirements (likelihood: high). The Dow Jones fell 90% from peak to trough during the Great Depression, and took decades to recover. Anyone with stock wealth would be financially ruined. You’ve been warned.
3) Inability to buy or sell a house, causing a much worse crash in housing prices (likelihood: high). The failure of the credit markets means it is much harder (perhaps eventually impossible) to get a mortgage. Since most people can’t pay for a house in cash given current prices, prices would have to fall and fall until either mortgages become widely available again, or until they fall to the point where people can in fact buy them with whatever cash they have. While renters (including myself) might rejoice at such a possibility, the truth is that the majority of American wealth and retirement security is locked up in their houses and such a deflation would be financially disastrous to millions.
4) Inability to get loans for college, buy a car, start a new business, etc. (likelihood: high). Again, with credit markets malfunctioning people will find it difficult or impossible to get necessary loans for life’s ordinary needs.
5) Mass bankruptcies of American businesses (likelihood: medium). Companies don’t keep spare cash for short term needs in some big massive steel vault. They invest it. If they need cash for those short term needs they also don’t pull the money out of some vault–they borrow it. Choking off credit means companies can’t borrow to meet their short-term needs such as buying inventory–or making payroll. Companies who cannot meet their obligations are insolvent, and bankruptcy is a possibility if they can’t afford or can’t get longer term loans to meet those needs. Even if they don’t go bankrupt, they would have to seriously curtail their expenses–including payroll. (see below)
6) Mass unemployment (likelihood: medium to high). Don’t believe today’s unemployment figures, they’re totally bogus. The government doesn’t include people who’ve despaired to the point they are no longer looking for work, or even people no longer collecting unemployment. So unemployment today is already higher than the 6.5% or so that is claimed. Unemployment reached nearly 25% during the Great Depression, as companies went out of business or had to severely restrain costs. Despite the sunny forecasts from people who a year ago were saying the crisis was "contained" (cough::cough), much higher unemployment is entirely possible.
7) Cities go bankrupt (likelihood: medium to high). Cities with plunging tax revenues from unemployed people, and unable to borrow money, will quickly go bankrupt. Thousands of cities went belly up during the Great Depression. City bankruptcies mean the disruption of many services from schools to police forces. Crime will increase and urban decay will spread rapidly. Civil disorder is a real possibility.
8. Hyperinflation (likelihood: medium). The American government can’t really go bankrupt (although it’s credit rating could be severely impacted)–they can just print more money. But printing more money to address the magnitude of the crisis might lead to inflation or hyper-inflation as everyone is chasing a higher number of dollar bills. Prices on everything could skyrocket almost overnight, severely eroding the value of whatever money people have figuratively stashed under their mattresses. Think it can’t happen? Imagine how it would be like if we suffered the same inflation rate being endured by Zimbabwe, which saw a yearly increase of 66,000%. (That is not a typo).
9) We grow it/make it, they use it (likelihood: medium): One nasty side effect of #8 if it occurs is that printing money devalues the currency (more dollars floating around mean each individual one is worth less)–meaning America will put up a big garage sale sign for foreigners with much stronger currencies like the Euro, who can then swoop in and buy up entire swaths of Americana (buildings, factories, commodities, food, etc.). Think this doesn’t impact you? Consider a hypothetical example where a global drought makes wheat scarce (as happened earlier this year). The US grows much of the world’s wheat, but because the dollar has become so weak, foreigners could outbid us on the open market for our own wheat! We grow it and then grow hungry as the wheat is shipped overseas to feed other people.
10) Deflation (likelihood: medium). The opposite of inflation, deflation is when an economy enters a vicious cycle where people believe that stuff will cost less tomorrow than today, so they put off buying–which causes prices to fall, repeating the cycle over again. Some economists think we’ll have deflation instead of inflation. So basically, everything you own will become pretty worthless, more companies go out of business as they become unable to earn any profits, and wages spiral downwards.
So there you have it: ten nasty things that could happen if we do nothing about the economic crisis. People who oppose "bailouts" in any form should carefully consider these consequences as they make their decisions.
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