Wednesday, September 24, 2008

Where Wall Street meets Main street

A few hundred billion in bank losses typically means a few hundred billion in someone else's pocket. Winners and losers, money sloshing about, but, really, it need not impact the real world all that much. Not like a massive earthquake in, say San Francisco. There you'd be talking about hundreds of billions of dollars of real losses.

Where things meet the real world is when the financial system is so disrupted it can't fulfill it's essential functions including setting prices, assigning risks, and moving money around:
Why the threat of systemic meltdown is real - How the World Works -

... So why should we all be worried? Well, for one thing, if banks start failing, and credit markets freeze up, then any business that depends on rolling over short-term debt to fund daily activities is in danger. Remember Enron? Enron imploded in a matter of days because its lenders suddenly refused to roll over its short-term debt. But it's not just Wall Street investment banks and out-of-control Houston energy companies that depend on debt markets -- a vast number of large corporations engage in the same practices. And if a significant percentage of large corporations can no longer borrow money the implications for the 'real economy' will be substantial. Higher unemployment, slower or negative economic growth, etc...
Less activity means lower economic growth -- which is the equivalent of real, tangible, things getting destroyed.

Nice summary from HTWW. Unfortunately, with Bush/Cheney in power, we can't trust the executive branch to get things right. We've got to rely on the Democrat majority in the Senate to work out the best compromise ...

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