Vice presidential debate
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here is a copy/paste of a very simplistic reasoning why the bailout was needed:
I consider myself to be a pretty well-informed, well-educated person. And I've read a lot in these past few weeks about the congressional bailout plan for the financial sector. But even still, I haven't really understood how and why such a measure is needed, and certainly not why it has to be done, like, yesterday.
Our leaders, including Barack Obama, have not done much in the way of explaining the situation except to tell us it's serious, and I don't blame people for not blindly believing what the Bush Administration says, particularly in crises (it shows we can learn!). So we're left to figure it out on our own.
I just had a conversation about all of this with my mom (who is the office manager/billing department/payroll person/all around money-handler at a local law firm). She broke this "credit crunch" down for me, explaining how already it is having an impact on even very successful companies like hers. And what I learned scared the heck out of me.
My fundamental mental stumbling block was around this whole notion of small businesses (and not-so-small businesses) needing credit to cover their payroll, which is the one specific thing we have heard repeated by the pols and talking heads. As a consumer, my frame of reference for credit involves long-term financing. So my reaction has been, "Well jeeze, if they have to borrow money to pay ther employees, something's wrong anyway!" But what I now understand is that for businesses, a lot of credit is actually used for short-term funding.
This is how it works. Widgets Inc. sells widgets. It sends out bills to its customers, with payment due on the 1st of each month. While some customers promptly pay their bills when they receive them, most wait until the last minute. In the meantime, Widgets has its own bills to pay. It has to pay rent, suppliers, and of course, its employees. When all the customers pay their bills, Widgets will have a good deal of money on-hand. But that's not until the first of the month, and employees get paid every week. So by the end of the month, Widgets needs a little carry-over cash. They use their credit line to cover payroll the last week of the month, and then pay the bank bank a few days later when the money comes in. This has been the pattern for years, and has never been a problem.
But now, because of things far beyond their control or ability to predict, Widgets can no longer get that short-term credit from the bank.
The company decides to make payroll the top budget priority: when money comes in, it goes towards payroll until that expense is fully-funded; only then do suppliers and other bills get paid. The problem is that many of the suppliers are themselves small businesses in the same exact position. So when Widgets Inc. only partially pays its bill to Dongles Ltd., the supplier has less money to put towards its payroll. And, conversely, more and more of Widgets' customers are making partial payments on their bills, meaning Wigets has an increasingly difficult time affording its employees.
Eventually, hiring is frozen and layoffs begin. Those folks, suddenly without a paycheck, have difficulty making their house and car payments. The banks are left holding more and more property, with less and less cash coming in -- and therefore less credit to extend to businesses. It's a self-reinforcing cycle, and we're already in it.
What I didn't realize, in addition to how this system works, is just how quickly it can all fall apart. Businesses don't get to just not pay their bills until the banks get this sorted out; people have to be paid, bills have to be paid, groceries need to be bought, etc. So the fact that Congress has been dithering on about this for 2+ weeks already has started to tighten the pressure on small businesses.
Now that the bill has been passed by both houses of the legislature, and Bush is due to sign it into law later today, it's possible that credit will start to loosen. (The whole idea of the plan is to buy some of the bad assets from the banks so that they have a better balance sheet and can more freely extend credit.) The Washington Post argues that as far as credit goes, the rescue plan may simply not be enough. But it's something, and in this case, something is definitely better than nothing.
For what's it's worth, I lay blame at the feet of all of the politicians and pundits who failed to explain in simple terms what this is all about and why it's so urgent. This conceivably could have been done four days ago if House Republicans had not been besieged by underinformed voters. A good leader should strive to inspire buy-in by the people he or she leads, not by scaring them with generalities, but by educating them and helping them see how a plan or project is beneficial. By that standard, we have seen dismal leadership in Washington and on the campaign trail during this crisis.
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Not saying I agree/disagree with what is above, but it kind of explains the impact it would have had (ok....might have had) on the public had it been defeated.
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US dollar up against euro though
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"But now, because of things far beyond their control or ability to predict, Widgets can no longer get that short-term credit from the bank."
can anybody elaborate on why they cant get short term credit from the bank?
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Their theory is the domino affect....one can't pay, the next can't pay, the next can't pay....eventually loans don't get repaid and their line of credit gets shut off...which causes more stuff to not be paid, which shuts off another line of credit...never ending cycle.
Basically the intent was to ensure that the banks have the money to borrow out to keep the country afloat.
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I can name a large number of businesses that use a revolving line of credit to cover all expenses....much like I can name a number of people who buy EVERYTHING with their credit cards and then pay it all off each month.
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