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Is This Really The "End Of the World"?

Government Bailout
Government Bailout

Forgive me for not quite grasping all the shock and panic of the last week. Maybe distance adds perspective, or ignorance.

I understand that the current "historic" situation is a huge deal for anyone working on Wall Street and in brokerages across America. Some banks, too. A friend told me that walking around Wall Street last week, "you could just feel the difference in the air.

People were walking slowly, no one was saying anything, you could only hear people walking. I have never seen it like that before." A friend at Morgan Stanleynearly screamed in my ear over the phone Friday that "Hank Paulson saved the financial system FROM COLLAPSE THIS WEEKEND!"

But here, 3,000 miles away, well, the sun was still shining this weekend. Gas prices were down, groceries filled the shelves, my home's value continued to fall, the ATMs all worked, and Ikea was packed on Sunday (and I mean, PACKED). I saw a lot of people over the weekend, and only one asked me about FDIC insurance limits, while another asked me to explain what a credit default swap is. The rest wanted to talk about home prices. THAT is the financial trauma we feel out here. Nothing has changed it.

Here's what I've been led to believe would have happened without the actions by the Treasury Department at the Fed. My employer, GE, or maybe your employer, or all kinds of employers across America, might not have been able to pay us. So many businesses depend on a revolving door of short-term loans to pay their expenses, loans basically funded by things like our money market mutual funds. And when so many people tried to cash out their money markets last week, there wasn't much money left for loans.

That meant employers would have had to use this week's income to pay last week's loans, and there would be no loans coming in this week to pay this week's bills (like payroll). I'm oversimplifying, but you get the picture. Hence, the new government insurance program for money market mutual funds saved my paycheck. And that is a good thing.

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But would this really have happened? Would the entire economy have seized up? Would regular Americans living west of the Hudson have suddenly panicked like traders did last week?

Vince Farrell at Soleil Securities says that, eventually, yes, we would have panicked. While in the short term "virtually everyone would have gotten paid their wages...some suppliers would have been put on hold, and eventually that would have meant some paychecks would be halted." Farrell says companies would have gone to banks to borrow what they couldn't get from the markets where money markets lend.

"In truth, if you're big enough to be in the commercial paper market you are almost by definition credit worthy enough to have a bank relationship. But banks would not likely have been willing or capable of stepping 100 percent into the breach," says Farrell. "If a company had an existing credit facility it could have used it. New facilities probably would not have been offered. Thus the need for Paulson to step in."

So what would have happened if he hadn't stepped in? Farrell says: "Money would have flooded into banks out of money market funds, but the banks wouldn't have loaned it out, preferring to hoard liquidity. We would have seen credit freeze up completely--my opinion--and layoffs would have been massive and almost immediate."

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As for me, he says, "CNBC would have kept you on the air 24 hours a day, but ad revenues would have plummeted and even at CNBC something would have broken. You would have seen neighbors walking around in shock having been just laid off."

If that's true, then catastrophe has been averted. But we'll never know for sure. Closer to home, will this $700 billion bailout help stabilize the value of my home? I mean, really?

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