Re: Be afraid, be very afraid!


"Islander" <nospam@xxxxxxxxxxx> wrote in message
news:FvOdnUcpWc6MjH3VnZ2dnUVZ_hidnZ2d@xxxxxxxxxxxxxxxxx
Rita wrote:
On Sun, 28 Sep 2008 14:20:26 -0500, "Harry Thompson" <me@xxxxxxxxxxx>
wrote:

snip

But you really don't pay cash, Rumpel. Your check is a credit to you and
a debit to your bank. Your bank doesn't have cash, or moola, long green,
the jack, or just plain dough. Your bank has lent it out. Those loans
are assets to your bank, but it takes time for the money to return to
it. If everybody wrote a check on your bank at the same time, the bank
would have to borrow the money to pay. What if nobody was willing to
lend to the bank?

You expressed a.consumer point of view. Let's broaden that view.

Most companies of any size don't keep money on hand. If they have dough
on hand, they lend it out at interest. Still, they have to pay
suppliers, payrolls, and so on. They don't have their profits yet from
the sale of goods, so they have lines of credit, that is, institutions
(usually banks) willing to supply the moola for a charge. This generates
all sorts of short term debt, normally quite good, and is the basis of
the money market.

Right now, the fear is that the credit squeeze will hit local
government. They don't collect taxes every day. So to meet expenses,
they borrow money with future tax receipts and revenues as pledge. TANs
(tax anticipation notes), RANs (revenue anticipation notes), and so on.
Day to day expenses. But with money sources hoarding their cash in fear
of creditor demands upon themselves these sources dare not pungle up the
dough for local government even though it is a sure thing.

To return to companies borrowing to pay suppliers and employees, the
same credit squeeze makes their sources fearful to lend the short term
moola, for the same reason, the normal lenders must hoard cash due to a
feared avalanche of demand for payment on them.

To see how it may affect you, imagine if there is no moola at hand to
fund the day-to-day credits and debits. There simply is no money to put
life and blood into our credits and debits.

A good explanation of what I have deduced could easily
happen. We are not talking here of running up more charges
on credit cards, but keeping day to day commerce going.
Including our ablity to withdraw our funds as needed from
ATM machines, etc.

Not so. The banks retain enough funds on hand to cover normal
transactions. Beyond that, FDIC protects normal deposits up to $100K
which takes care of most folk. Companies that cannot make payroll without
borrowing money are not being managed very well. There are also those who
claim that people cannot get financing to purchase a new car. It seems to
me that it is no great sacrifice to put off purchasing a new car for a
while until this mess gets straightened out. Since most of our car
purchases are now going abroad that should help the balance of payments
too. Detroit could use a time out to clean up their own mess.

Believe me, I fully understand the value of credit in normal times but
this has gone far too far from normal commerce!

Islander, that's just it. What you say about insurance and reserves is true
enough. In normal times we could go on thinking about our checks as cash
with no need to consider the system of credits and debits behind the checks.
As you note, though, we have left normal times.

But I'm not saying our little deposits will fail. I meant to use it to show
the system behind it.

You may be right about poor management being behind company borrowing to
meet payroll. That is happening now to Bo Pilgrim's chicken empire.
Apparently, he expanded with borrowed money from a small feed operation in
East Texas to become a huge chicken empire. As credit is squeezed, there is
worry that he will have difficulty meeting his payroll, among other demands.
Pilgrim's Chicken may soon be eligible for bankruptcy.

Maybe payroll wasn't the best example, and I should have left it with paying
suppliers.


I strongly dislike being put in a situation where we have to act without
taking the time to break this problem down into manageable parts. That
would be the responsible thing to do and I, for one, am not gaining
confidence in the financial community as a result of this bailout.

As I feel it, the situation is dire. Paulson doesn't know exactly what to
do, so he must play it by ear. However, he needs dictatorial powers to
escape punishment if he guesses wrong. I think that's why he asked for
non-reviewable power.

Nobody knows what to do.


.

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