[nobody3141]

Quick economics lesson. The money on Wall St doesn't belong to the guys in red braces - it is the pensions of ordinary Americans and the savings of little old ladies.

Letting Wall St crash and burn means everybody in America's pension disappears - everybody over 65 is out on the street. Everybody who saved money has lost it. Nobody accepts cash anymore, after all if you put it in the bank it might dissapear. You are back to bartering chickens.

[randomdata]

Letting Wall St crash and burn means everybody in America's pension disappears - everybody over 65 is out on the street. Everybody who saved money has lost it.

Was that not well understood beforehand? I'm Canadian, but our government will only certify certain investments. Everything else comes with the understanding that all of your money could be gone tomorrow. As such, we plan for such occasions. It is an expectation that an event like this will happen eventually.

[spot]

Here in America that certification is done by "the market" (S&P and Moody's). They gave the CDOs AAA ratings. Of course the fact that they were paid by the same companies that were submitting the CDOs didn't effect their judgement whatsoever. Except they found the emails where they said "go easy on these guys otherwise we lose their business". Oh you mean they made the ratings up? Yea. But that's legal, since the ratings came with no guarantees. They are the "free speech" like poetry. Welcome to America. Sucker.

[yummyfajitas]

You are very confused. Randomdata is describing the certification of banking deposits. In the US, this is done by the FDIC, a government corporation.

[cedlimed]

I think nobody and spot may have been referring to pension funds as well, seeing that many pension funds did have the AAA rated CDOs in their portfolios.

[seanalltogether]

And the reason the government won't seriously prosecute wall st is because these firms are holding the investment money for all these politicians.

[FJim]

There is the possibility that despite the populist rancor, no actual laws were broken.

[olefoo]

We already know that this is not the case; vide: Robosigning, the pushing of no-doc loans, the very existence of NINJA loans and the collusion of CDO packagers and the ratings agencies that has been amply documented.

The fact that not only have there not been high-profile prosecutions of the executives who created the conditions under which their employees engaged in systematic fraud; but the USDOJ has been actively coercing state AG's into agreeing to a thoroughgoing amnesty that will absolve most of the major players of any criminal liability. And pray tell, why would these bankers be demanding immunity from prosecution if they were not fearful that a serious investigation into their behaviour would find them guilty of, at the very least, criminal negligence if not outright fraud?

And that, my friend, is the point where you have to accept that the system is in fact broken; and that the checks and balances have been short-circuited; that the system is out of control and that we are fiscal flotsam on the tide of events from here on out.

[cobrausn]

IANAE, but this always struck me as... odd. How would the failure of the banking system stop people who really only use it for money storage and purchasing convenience from continuing to use hard currency?

[gallamine]

Someone correct me if I'm wrong, but bank consumers only perceive it as "money storage". In reality all deposits (after a certain point) are loans to the bank which then get pushed along/through/down/into the financial system. That's why runs on banks are so bad - the money isn't there.

[scott_s]

The economy is an interconnected system. If the banking system failed, then no one would be able to make over-night loans. If no one can make over-night loans, then large companies can't get the necessary funds for them to keep their regular operations running. If that doesn't concern you, consider that one of the largest companies in the country is General Electric. In simple terms, a failure of the banking system means the lights won't stay on.

Andrew Ross Sorkin talks about this in "Too Big To Fail" (http://www.amazon.com/Too-Big-Fail-Washington-FinancialSyste...). When things were really bad in 2008, and people were wondering what investment bank was going to go next, there was very real fear that eventually the biggest, most stable banks such as Goldman Sachs would go under. After Goldman, the next institution wouldn't be a bank. It would be GE.

[ajross]

General Electric doesn't sell electricity...

[pnathan]

Because most pensions are tied up in the market. So if the banking system deflates and resets, it drops the market value of pensions significantly.

The market essentially is a herd animal. Everything goes up or down together, in aggregate. Since wisdom in the financial market is to diversify, ie, hold in aggregate, a well-chosen portfolio generally does about as well as the market in the long term.

So if Grandma had 100K in her diversified portfolio of low-risk investments and the market exploded 50%, she'd have 50K, which represents a major loss of financial capabilities.

Whether it is better to drop such people in the cold while things reset or whether it is better to keep the cushion going, I leave to another media form, as such discussions tend to be too inflammatory online.

[yummyfajitas]

So if Grandma had 100K in her diversified portfolio of low-risk investments and the market exploded 50%, she'd have 50K, which represents a major loss of financial capabilities.

This is most likely not the case. There are many ways the market can "explode 50%". One way is for each security to take a 50% haircut. Another is for the high risk securities to take a 100% haircut and the low risk to take a 0% haircut. Obviously real life lies somewhere in between.

However, it's not by any means obvious that the low risk, well diversified investors would take a particularly large haircut in a market crash. This is particularly true if they don't cash out immediately after the crash.

[Anechoic]

What hard currency?

[cobrausn]

Cash, issued by the government, one would assume.

[Anechoic]

How does that cash get from the government to the people? Today it goes through the banks.

[nobody3141]

You don't trust your local bank to store your $10 bill - but you still trust the central bank not to print a billion of them tomorrow?

[cobrausn]

Never really said I did. But the fact is a lot of people still use cash, and would continue to do so (regardless of actual value) after a banking system crash. At least, I perceive it would, unless governmental authority also broke down. Then we are back to a barter economy.

[scott_s]

Where would this cash come from? Right now, banks get it from the mints, which print it on a demand basis. And even if you use cash for most of your transactions, if you keep your money in the bank...

[cobrausn]

My best guess to this would be the government would have to temporarily (or permanently) set up a federal bank that would get the cash out, perhaps giving back a larger amount than normal that year in tax returns that have to be picked up in cash from said bank. New problems would need new solutions.

[joe_the_user]

The government already insures most private pension funds.

That insurance fund would indeed have been wiped out, however, the government could have injected more money into it. This would have been the appropriate level for the bailout to take. Save the pension funds and FDIC insured savings, let all the large banks and brokerage houses go bust. The small business administration could also have provide some bridge loans for smaller companies stuck without capital.

See: http://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpor...

[rhizome]

Letting Wall St crash and burn means everybody in America's pension disappears

What are you talking about, where does the money go? Money doesn't just "disappear."

[DougBTX]

Simplistically, lets say that pensions and putting money in the Bank are the same thing. So, you put $100 in the Bank. The Bank then uses the $100 to buy a golden chicken; now the Bank has a golden chicken, the farmer has the $100, and the Bank owes you $100. The Bank expects the golden chicken to lay golden eggs, which it can sell. But instead the golden chicken dies, and no-one wants to buy a dead chicken.

Now the Bank has $0, and owes you $100. You can no longer withdraw your money from the bank, it has "disappeared". The farmer has the $100, it still exists, but the Bank has lost it. Saying that it has "disappeared" is a way to shift the blame away from the Bank.

The joke is when you realise that the farmer isn't a farmer, he is an investment banker. And he got a $100 bonus. And he actually works for the Bank.

[rhizome]

...and that's where the money went.

[burgerbrain]

http://en.wikipedia.org/wiki/Zero–sum_game#Economics

[burgerbrain]

Of course it can. Value can be destroyed just as well as it can be created.