Personal consumption is down, the labor market is softening, and food and fuel prices are soaring. Housing values are plummeting, wages have stagnated, and American households are more overextended, underpaid and stressed out than anytime in history. It's all bad. No wonder consumer confidence is at its nadir.
"THE SUMMER OF 1931"?...
"It feels like the summer of 1931. The world's two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution. ..."
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The next shoe to drop is the stock market. Its not that complicated either; when wholesale prices on supplies and raw materials go up, but businesses can't pass along those costs because consumers are already maxed-out, then corporate profits plummet and the stock market crashes down with the force of an avalanche.
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According to Bloomberg News: "Investors worldwide are betting more than $1 trillion on a collapse in stock prices".
This over-populated, over-exploited, ecologically devastated world is starting to wobble, like a top that is about to stop spinning. Are people truly concerned? Are they taking real action? What a silly question! They are humans ---- a bunch of pitifully mindless, indecisive anthropoid apes. _________________
This over-populated, over-exploited, ecologically devastated world is starting to wobble, like a top that is about to stop spinning. Are people truly concerned? Are they taking real action? What a silly question! They are humans ---- a bunch of pitifully mindless, indecisive anthropoid apes.
The world is over-populated? Say it's not so!
...but, but, it's human genetics that causes wants us to have children. We can't consciously choose not to have children.
Of course people are not taking action - simply look at all of the celebrity births filling the birth announcement section of your local newspaper lately.
...and being Americans - we have to keep up with celebrities - they are our new "Jones'."
...humans ---- a bunch of pitifully mindless, indecisive anthropoid apes.
I find it very interesting that you chose to use this language numan - because I agree.
I've never written this before here on the Internet - outside in the everyday 3-D real non-Internet, non-forum, world, people who know me know that I say often say that humans have AAS: Angry Ape Syndrome. (<----a 'syndrome' that I proudly coined.)
I say this because when humans read or hear or become aware of something they don't like they get all offended and upset and began behaving like an angry ape. Said humans begin to pace back-and-forth all agitated just as an angry ape would, get all bent out of shape, often eliciting members of their society to agree with them (...because there is safety in number and majority rule) and gang-up on and beat down, now as a group or individually, the very thing they don't like - mob rule mentality if you will.
So, I agree that humans are properly classified in the animal kingdom - kingdom as in "kingdom, phylum, class, order" - that kingdom.
This over-populated, over-exploited, ecologically devastated world is starting to wobble, like a top that is about to stop spinning. Are people truly concerned? Are they taking real action? What a silly question! They are humans ---- a bunch of pitifully mindless, indecisive anthropoid apes.
Originally Posted by california rick
I find it very interesting that you chose to use this language numan - because I agree.
I've never written this before here on the Internet - outside in the everyday 3-D real non-Internet, non-forum, world, people who know me know that I say often say that humans have AAS: Angry Ape Syndrome. (<----something that I proudly made up and invented.)
Your self-awareness transcends that of the average hominid on this planet, Rick.
When I was young, I was profoundly struck by the extent to which human activities are chimpanzee behavior blown-up to gigantic, grotesque proportions. This was brought home to me by watching TV programs about Jane Goodall and the chimpanzee troupe at the Gombe Reserve.
This is a topic which deserves a thread of its own, though I am uncertain which forum it belongs under. _________________________
[quote]According to Bloomberg News: "Investors worldwide are betting more than $1 trillion on a collapse in stock prices".
I make no prediction on stock prices. I do note a couple of contrary augments.
The fact that "Investors worldwide are betting more than $1 trillion on a collapse in stock prices" could indicate that stocks are over-sold. The fact is that these "investments will already have had their price impact. Additional selling will be required to drive prices down. And should prices start rising, then the investors who have sold stocks will have to start buying, which will drive prices higher and faster.
IMO, we are potentially on the edged of an inflationary spiral. If this happens, then all real assets (including some stocks) will likely rise.
Recent action by the Fed and other central banks indicates that they will work very hard at preventing a stock collapse. This is distinctly different for previous collapses where the central banks stayed out of the issue. Central bank intervention will also be an impediment to collapse. Doesn't mean it will not happen, just that it is less likely.
I personally think we will escape without the dramatic collapse that so many have predicted. However I think it will be very hard to return to aggressive growth we are accustomed to. I imagine this country as having a financial flu for many years to come.
Your self-awareness transcends that of the average hominid on this planet, Rick.
Good counseling, numan, good counseling - its simply a matter of truly being honest - humans haven't evolved that much from our primate cousins in 40,000 years. Isn't our DNA and primates DNA something like a 98% match up?
I snicker at humans that think that they're so "evolved." If truly "evolved" - they're freaks of nature - that's all I'm sayin'. I think its more a matter of elitist attitudes than "evolution" - but if we tell them that, their Angry Ape Syndrome will rear its ugly head.
Originally Posted by numan
This is a topic which deserves a thread of its own, though I am uncertain which forum it belongs under.
However I think it will be very hard to return to aggressive growth we are accustomed to. I imagine this country as having a financial flu for many years to come.
Any one who remembers the financials of the 70’s will remember the stagflation during those years. The markets went nowhere for many years, approximately 1968 through 1982, when it took off with a vengeance. In 1970 there were just 361 mutual funds, in 2008 there are over 11,000!!! .
The question becomes can all these funds survive in a long term drawn out bear market? I think your flu analogy is right on Ardy, and equity returns during the next many years will be meager at best. In fact, it is my opinion than Americans other than the mega wealthy are going to experience a slow decline in their standard of living as the rest of the world improves theirs. I think there is a global wealth redistribution process occurring at this time and the effects will be painful for many Americans.
Politicians can promise pie in the sky but the think the reality will be quite different.
Any one who remembers the financials of the 70’s will remember the stagflation during those years. The markets went nowhere for many years, approximately 1968 through 1982, when it took off with a vengeance.
Wow! I didn't realize that for nearly fourteen years the U.S. economy suffered. What was it about 1982 that caused the economy to take off?
Originally Posted by Ken Hill
I think there is a global wealth redistribution process occurring at this time and the effects will be painful for many Americans.
Naomi Klein writes about global wealth redistribution in her book, The Shock Doctine. She cites the US failure to secure Russia's markets when the Soviet Union collasped and instead, Russian industry barons took over their markets and became very wealthy.
Ms. Klein also states that the U.S. interests wanted to "privatize" Iraqi markets to gain an extravagant amount of wealth from those markets because they failed to secure wealth from the Russian markets in the 1990s. Ms. Klein states this is one of the reasons for the Iraqi "invasion" by the U.S.
Here's a summary of 1970's dow. There was also very high inflation during those years and the fed ultimately pushed interest rates to somewhere around 17% if memory serves. Can you imagine that today? Bond holders might enjoy it, but not too many others. When inflation was finally contained the markets took off.
July 29 (Bloomberg) -- Merrill Lynch & Co. took the biggest step toward recovering from the worst financial disaster in its 94-year history by acknowledging that $30.6 billion of its holdings are worth barely a fifth of their original price and securing new capital amounting to a third of its market value.
Merrill liquidated more than half of the mortgage-linked securities that have saddled the company with $27 billion of writedowns since the beginning of 2007. To cushion the loss on the asset disposal, the firm raised $8.55 billion today by selling new shares for $22.50 each, 60 percent less than Merrill's stock price at the beginning of the year.
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Almost $19 billion of net losses in the past year forced Chief Executive Officer John Thain to backtrack on assurances that the firm had enough capital to weather the credit crisis. Since taking the post in December, Thain has raised $30 billion in an effort to keep pace with mounting charges on mortgage bonds amassed by his predecessor, Stan O'Neal. Standard & Poor's cut the firm's debt rating last month and signaled that more downgrades were possible.
Beyond Zero
Thain "s trying to control the mess that he inherited,'' Scott Rothbort, president of Lakeview Asset Management LLC, said in a Bloomberg Television interview. "I would not rule out at this point their having to write down even more, but you can't write things down beyond zero."
My talk tonight is about the lack of collapse-preparedness here in the United States. I will compare it with the situation in the Soviet Union, prior to its collapse. The rhetorical device I am going to use is the "Collapse Gap" – to go along with the Nuclear Gap, and the Space Gap, and various other superpower gaps that were fashionable during the Cold War.
The subject of economic collapse is generally a sad one. But I am an optimistic, cheerful sort of person, and I believe that, with a bit of preparation, such events can be taken in stride. As you can probably surmise, I am actually rather keen on observing economic collapses. Perhaps when I am really old, all collapses will start looking the same to me, but I am not at that point yet. And this next one certainly has me intrigued. From what I've seen and read, it seems that there is a fair chance that the U.S. economy will collapse sometime within the foreseeable future. It also would seem that we won't be particularly well-prepared for it. As things stand, the U.S. economy is poised to perform something like a disappearing act. And so I am eager to put my observations of the Soviet collapse to good use.
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An economic collapse is amazing to observe, and very interesting if described accurately and in detail. A general description tends to fall short of the mark, but let me try. An economic arrangement can continue for quite some time after it becomes untenable, through sheer inertia. But at some point a tide of broken promises and invalidated assumptions sweeps it all out to sea. One such untenable arrangement rests on the notion that it is possible to perpetually borrow more and more money from abroad, to pay for more and more energy imports, while the price of these imports continues to double every few years. Free money with which to buy energy equals free energy, and free energy does not occur in nature. This must therefore be a transient condition. When the flow of energy snaps back toward equilibrium, much of the US economy will be forced to shut down.
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Economic collapse is about the worst possible time for someone to suffer a nervous breakdown, yet this is what often happens. The people who are most at risk psychologically are successful middle-aged men. When their career is suddenly over, their savings are gone, and their property worthless, much of their sense of self-worth is gone as well. They tend to drink themselves to death and commit suicide in disproportionate numbers. Since they tend to be the most experienced and capable people, this is a staggering loss to society. If the economy, and your place within it, is really important to you, you will be really hurt when it goes away. You can cultivate an attitude of studied indifference, but it has to be more than just a conceit. You have to develop the lifestyle and the habits and the physical stamina to back it up. It takes a lot of creativity and effort to put together a fulfilling existence on the margins of society. After the collapse, these margins may turn out to be some of the best places to live.
I am just wondering if there is something apocalyptic in human nature. To me, the rather regular talk of the coming economic collapse is not far different than the constant reminders from our religious friends that we are in the final hours.
It is not that I do not agree that the economy has been horribly mismanaged. And who knows, perhaps the collapse is on it's way. But having hears such predictions so often, I am a little skeptical in nature.
Historically speaking, the super nova type ending of empires is relatively rare. More common by far is the gradual wasting away.
It is not that I do not agree that the economy has been horribly mismanaged. And who knows, perhaps the collapse is on it's way. But having hears such predictions so often, I am a little skeptical in nature.
Thank you. That is how I feel.
I don't pretend to know a lot about economics. Math hurts my brain.
But what I do know is what I see in my household. We are almost debt free, (we have a van to pay off), except our house. We are throwing money into a money market each month. We have the cash to do fun things and to repair our home. If I believed everything I read or heard on the news, then I would be holed up in my home and trying to Ebay everything I owned.
Part of the problems with our current economic state is: 1. Companies looking at those with bad credit as potential money makers. 2. People with bad credit wanting something for nothing. 3. People with nothing trying to live the American dream without realizing that it takes work to achieve that dream. 4. The government putting its hands in everything and trying to save ourselves from ourselves.
There is more I know, but that is the basics as I see it.
Part of the problems with our current economic state is: 1. Companies looking at those with bad credit as potential money makers. 2. People with bad credit wanting something for nothing. 3. People with nothing trying to live the American dream without realizing that it takes work to achieve that dream. 4. The government putting its hands in everything and trying to save ourselves from ourselves.
There is more I know, but that is the basics as I see it.
1. Companies looking at those with bad credit as potential money makers. Not any more. I'm in the market for a house. Credit must be pristine. Income must be pristine. Credit standards have tightened immensely.
2. People with bad credit wanting something for nothing. People with GOOD credit want something for nothing. People with MONEY want something for nothing
3. People with nothing trying to live the American dream without realizing that it takes work to achieve that dream. That's over - if they haven't already ruined their credit or walked away from their upside down mortgage, credit has tightened to the extent that this group is eliminated from the get-go in the pre-qual processes.
4. The government putting its hands in everything and trying to save ourselves from ourselves. That's why GWB is being labled a psudeo conservative - by conservatives.
Are you speaking of our bodies Ardy, or the economy? Yes indeed humans like the idea of apocalypses. It gets the blood pumping. Utter destruction, chaos, wailing and gnashing of teeth, people eating people on busses—the list goes on.
But humans want stuff and will continue to want stuff. The cost and supply of energy and materials are the question mark. Western economies were built on cheap energy and plentiful resources. Both are gettting more expensive so that is why I see a slowing, but not a collapse, of the global economy. Global have nots want stuff and will buy stuff if they have the money. It’s all new to them so they haven’t yet realized you cannot buy happiness. But you can try. So as long as their economies grow and build a middle class I do not envision catastrophe.
The plight of the middle class in the US is another story. My crystal ball predicts the “iron law of wages” taking hold whereby wages for workers in the US drop and wages in developing countries rise, meeting somewhere near to each other. That will lead to wailing and gnashing of teeth in the Western world and will make for an interesting political sell.
1. Companies looking at those with bad credit as potential money makers. Not any more. I'm in the market for a house. Credit must be pristine. Income must be pristine. Credit standards have tightened immensely.
Not quite true. I work for a mortgage company and I can tell you that there are plenty of good deals to be had if you know where to look. There are a lot of houses for sale by banks and quite a few short sales as well. Also, if you haven't walked away from a government loan, a bankruptcy doesn't look as bad as you think. After 2 years, with a good income (compared to the value of the house you want to buy) and reasonable level of debt (total Debt to Income ratio under 45%) you can get a good 30 year fixed rate around 6.5% right now.
Historically speaking, the super nova type ending of empires is relatively rare. More common by far is the gradual wasting away.
You are right about history, but history is not a good guide to understanding many aspects of the present era.
The pace of history has quickened and intensified; the whole twentieth century was like a super-nova explosion in history, and it is a guarantee that the present century will make the twentieth look pretty tame.
Most Americans in 1930 did not realize that the world they had known was finished, never to return ---- gone with the wind.
The next few years will drive the point home ---- America as we have known it no longer exists ----- no human agency on Earth can change that fact.
This far into a discussion about the pending economic collapse and yet no mention of peak oil????
The industrialization of the entire world was built upon cheap oil in the last 100 years and oil is part of almost every aspect of the current way of life.
Leading geologists agree that no large undiscovered oil fields remain anywhere in the world and demand continues to skyrocket. If there are those on this thread who believe "peak oil" is a skam, they need only point out where the large oil fields are and compare that to the world's current and future demand and the light will begin to shine above your head like a light bulb in a cartoon.
I work for a mortgage company and I can tell you that there are plenty of good deals to be had if you know where to look. There are a lot of houses for sale by banks and quite a few short sales as well. Also, if you haven't walked away from a government loan, a bankruptcy doesn't look as bad as you think. After 2 years, with a good income (compared to the value of the house you want to buy) and reasonable level of debt (total Debt to Income ratio under 45%) you can get a good 30 year fixed rate around 6.5% right now.
In January 2008, I was pre-qual'd for $299k at 5.125% by Citi® Bank.
In June 2008, I was pre-qual'd for $205k at 6.50% by IndyMac Bank.
In August 2008, I was pre-qual'd for $220k at 6.50% by Countrywide Mortgage.
I was in escrow on a condo in July 2008 and pulled out due to the HOAs, but mostly, because the HOA was doing work on the property that I felt was shoddy. For $270/mo in HOAs - I could purchases $61k at 6.50% more in house - so that's what I am doing - looking to purchase a house.
I was looking in this one neighborhood and by happy coincidence, my Realtor's associate was hired by a woman, just yesterday, who purchased a home in the very neighborhood that I want to buy into. The lady purchased the home in June 2008 at an auction - site, unseen - all cash.
Well, it turned out once the CC&Rs were read, the home couldn't be rented out - it has to be owner occupied.
So, the four of us met this morning, and I made an offer on the house and the house hasn't even listed yet. It'll be listed this afternoon with an offer already pending. Pretty cool. The lady just wants to walk away from the house.
Fingers crossed...
Meanwhile, another house that I made an offer on I had to be pre-qual'd thru the lender bank that owns that house - a company I've never heard of, so I did, and I'm waiting to hear back on that one as well.
But...
This morning I looked at this one house that was perfect for me - I am really big on landscaping and this property was totally decked out in landscaping. The backyard was terraced and had a really nice redwood deck. This house has been on the market for only four days.
My Realtor made a call right then and there and found out there were 16 offers on the house.
I was kinda bummed - that house was so what I could see myself living in...
Although the basic and obvious conclusion is that the United States is worse prepared for economic collapse than Russia was, and will have a harder time than Russia had, there are some cultural facets to the United States that are not entirely unhelpful. To close on an optimistic note, I will mention three of these.
Firstly, and perhaps most surprisingly, Americans make better Communists than Russians ever did, or cared to try. They excel at communal living, with plenty of good, stable roommate situations, which compensate for their weak, alienated, or nonexistent families. These roommate situations can be used as a template, and scaled up to village-sized self-organized communities....
Where any Russian would cringe at such an idea, because it stirs the still fresh memories of the failed Soviet experiment at collectivization and forced communal living, many Americans are adept at making fast friends and getting along, and generally seem to possess an untapped reserve of gregariousness, community spirit, and civic-minded idealism.
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Secondly, there is a layer of basic decency and niceness to at least some parts of American society, which has been all but destroyed in Russia over the course of Soviet history. There is an altruistic impulse to help strangers, and pride in being helpful to others. In many ways, Americans are culturally homogeneous, and the biggest interpersonal barrier between them is the fear and alienation fostered by their racially and economically segregated living conditions.
Lastly, hidden behind the tawdry veneer of patriotic bumper stickers and flags, there is an undercurrent of quiet national pride, which, if engaged, can produce high morale and results. Americans are not yet willing to simply succumb to circumstance. Because many of them lack a good understanding of their national predicament, their efforts to mitigate it may turn out to be in vain, but they are virtually guaranteed to make a valiant effort, for "this is, after all, America."
------------------------------------------------------------------------ In Russia, normalcy broke down in a series of steps. First, people stopped being afraid to speak their mind. Then, they stopped taking the authorities seriously. Lastly, the authorities stopped taking each other seriously. In the final act, Yeltsin got up on a tank and spoke the words "Former Soviet Union." ---- Dmitry Orlov
In regard to the USA, the first step seems well on its way to completion.
I am a harbinger of the second.
I await with interest the unfolding of the end of the present constitutional system of the United States.
In the meantime, a preview of this exciting spectator event may be found in the writings of Dmitry Orlov, an intelligent Russian observer of both the Soviet collapse and the contemporary American scene.
I met a traveller from an antique land Who said: Two vast and trunkless legs of stone Stand in the desert ....Near them, on the sand, Half sunk, a shattered visage lies, whose frown, And wrinkled lip, and sneer of cold command, Tell that its sculptor well those passions read Which yet survive, stamped on these lifeless things, The hand that mocked them, and the heart that fed: And on the pedestal these words appear: "My name is Ozymandias, king of kings: Look on my works, ye Mighty, and despair!" Nothing beside remains. Round the decay Of that colossal wreck, boundless and bare The lone and level sands stretch far away. ---- Percy Bysshe Shelley ____________
Sure, as with any Mortgage Revenue Bond programs in the country there are quite a few more pages to sign (as if there isn't enough anyway when you close a loan) but they can help you with down payment through 30 year 'silent' seconds (that means that they are only payable if/when you sell the house or if you refi).
They have a few programs available but the rates are not as competitive right now (6.75% or even 7.00%) since they do allow financing up to 95%.
I too plan on buying a house in the next 2 years and plan on using that program.
The thing that really sucks is that due to my insider information, I am not allowed to buy any foreclosed home by my company. So what if I know how many bids are on a house... I don't really have a problem with it
So what if I know how many bids are on a house... I don't really have a problem with it
I wish I had that information. I lost on a few killer homes - one with a really sweet yard.
Should be in contract today or tomorrow on the house that's never listed.
...now to get a choice interest rate. I'm lookin' at 6.50% 30 year fixed at the moment - I'd like a lower one.
With your income you will qualify for an FHA loan in CA. The problem with the house you want to buy is that the previous owner does not have the house for 90 days (90 days are measured from the day the deed is recorded in the previous owner's name to the date on the purchase contract not the last addendum or counter offer or when the loan closes). Because of that the government won't insure the loan thus any good lender would not originate an FHA loan on that property.
You might also have so problems even if you close it as conventional because of the fast turnover of owners of that property and lenders are very wary of property flipping. Make sure your lender is well aware of that and if they tell you to hold off on making the offer do that.
With your income you will qualify for an FHA loan in CA. The problem with the house you want to buy is that the previous owner does not have the house for 90 days (90 days are measured from the day the deed is recorded in the previous owner's name to the date on the purchase contract not the last addendum or counter offer or when the loan closes). Because of that the government won't insure the loan thus any good lender would not originate an FHA loan on that property.
You might also have so problems even if you close it as conventional because of the fast turnover of owners of that property and lenders are very wary of property flipping. Make sure your lender is well aware of that and if they tell you to hold off on making the offer do that.
I understand this entire post. Hmmmm..... and yes my pre-approvals were to be FHA. Date of the contract, eh...hmmm...
...already made the offer. Signed it yesterday. Offer went to seller last night.
The reason why this house is turning so fast is because the CC&Rs state no renting. This was an investor that bought this house. This house is only for owner-occupied per HOA. House bought at auction in June 2008. No CC&R read til taking possession.
Given that we are this far into the housing bust, there are not that many first-time buyers, and a shadoobie load of investors out there looking for rentals.
Realtor states the ninety days goes from date seller took possession to date of closing escrow for me. Seller took possession on June 20, 2008, which means I have to close on or after September 22, 2008. (September 20th is a Saturday).
He's just worried about the appraisal since it's FHA and I'm asking for 6% in credits back because my offer is $7k over comps - which are REOs - in the neighborhood.
I pointed out this house is very "clean"; whereas, the others are REOs and need some fixing - and in some cases a lot of fixing - before moving in.
Resales Occurring 90 Days or Less Following Acquisition
If the owner sells a property within 90 days after the date of acquisition, that property is not eligible security for a mortgage insured by FHA unless it falls within one of the exceptions to the time restrictions on resales set forth in §203.37a(c) of the regulations. FHA defines the seller's date of acquisition as the date of settlement on the seller's purchase of that property. The resale date is the date of execution of the sales contract by the buyer that will result in a mortgage to be insured by FHA.
Exceptions to 90-day Restriction
The following sales are exempt from the time restrictions provided by §203.37a:
· Sales by HUD of its Real Estate Owned
· Sales by other United States Government agencies of single family properties pursuant to programs operated by these agencies.
· Sales of properties by nonprofits approved to purchase HUD-owned single-family properties at a discount with resale restrictions.
· Sales of properties that are acquired by the sellers by inheritance.
· Sales of properties purchased by employers or relocation agencies in connection with relocations of employees.
· Sales of properties by state and federally charted financial institutions and Government Sponsored Enterprises.
· Sales of properties by local and state government agencies.
• Upon FHA's announcement of eligibility in a notice (i.e., ML), sales of properties located in areas designated by the President as federal disaster areas, will be exempt from the restrictions of the property-flipping rule. The notice will specify how long the exception will be in effect and the specific disaster area affected."
Also bank REOs are exempt from the rule but you said that you're buying this home from an individual, not a bank.
Your realtor is wrong. I'd probably give a call to your contact at Countrywide if that is where you'll get the loan from.
He's just worried about the appraisal since it's FHA and I'm asking for 6% in credits back because my offer is $7k over comps - which are REOs - in the neighborhood.
I pointed out this house is very "clean"; whereas, the others are REOs and need some fixing - and in some cases a lot of fixing - before moving in.
FHA loans have an addendum to the purchase contract stating that if the appraisal comes back at a value less than the sales price, the borrower has the right to back out of the deal with no penalties so that should protect you a bit.
Depending on your loan to value, seller concessions are limited. The max is 6% if the LTV is 80%. I think at higher LTV it is limited at 3%.
Depending on your loan to value, seller concessions are limited. The max is 6% if the LTV is 80%. I think at higher LTV it is limited at 3%.
Nehemiah 3%; closing 3%; LTV 97.15% (I already have a Good Faith Estimate (estimate) based on the offer GFE will change of course once in contract and numbers are finalized).
I have to be in contract by 09-01-08 and close escrow by 09-30-08/10-01-08 as Nehemiah is going away on 10-01-08.
Seriously considering going conventional with a 5% down if the seller won't wait for the 91 days for FHA and Nehemiah. I've been doing this real estate thing for nine months and its getting tiresome and old.
...didn't really want to use my own money if I qualify for "programs" out there - but I don't want to lose another home - the whole point of this adventure was to start being able to claim interest deductions and to stop paying rent.
...didn't really want to use my own money if I qualify for "programs" out there - but I don't want to lose another home - the whole point of this adventure was to start being able to claim interest deductions and to stop paying rent.
As an idle aside, the reason real estate is often at the centerof a bubble or a crash is because the government distorts the market by offering "programs" and by allowing "interest deductions".:-) Yours, Issodhos
California has a program where some properties that are foreclosed on can receive points down on the interest rate for first-time buyers. The monies to pay for those points down is floated by bonds by the State.
The theory is to stimulate first-time home buying interest - not investor interest.
California has a program where some properties that are foreclosed on can receive points down on the interest rate for first-time buyers. The monies to pay for those points down is floated by bonds by the State.
The theory is to stimulate first-time home buying interest - not investor interest.
It doesn't have anything to do with the buyer's classification, california rick. It has to do with government induced misallocation of 'money' resulting in an artificially created higher demand for whatever the government is pushing at the time. Politicians hype real estate and legislate incentives at all levels because it is a basic industry that creates tons of jobs, provides mucho tax pickings, mega votes, mega campaign contributions, sweetheart deals for themselves (ask Obama;-)), lotsa profitable corruption opportunities, etc. Everybody wins -- until it comes time to pay the piper.
Unfortunately, the downside of these government-induced distortions inevitably result in a bubble that does nasty things to a lot of people when it pops and deflates.
You, as a prospective buyer, are a current beneficiary of that cyle by dint of getting in after the "pop" when prices began to fall (and may continue to fall). Please do not misconstrue what I am saying. If there are legitimate programs being offered for which you qualify and which would benefit you, it simply makes since for you to use them because that is the way the gaming table for home purchasing is currently arranged. Yours, Issodhos
Unfortunately, the downside of these government-induced distortions inevitably result in a bubble that does nasty things to a lot of people when it pops and deflates.
Yours, Issodhos
Just to clarify, are you saying that what ever the government does is inherently a distortion of the market and inevitably will result in negative consequences?
Unfortunately, the market is all too often a distortion of the market ---- particularly when it is a market of monopolies and vast conglomerates.
This is why I call our economic system the "Invisible Mind of the Marketplace," ---- as opposed to the "Invisible Hand of the Marketplace" of ancient fable.
Quite a few people here seem to whine about government dictatorship; very few seem to be bothered about economic dictatorship. To me, both are equally loathsome, and a cause for alarm. Indeed, economic interests are able to worm themselves into our lives even more dangerously than the government. _________________
Unfortunately, the market is all too often a distortion of the market ---- particularly when it is a market of monopolies and vast conglomerates.
This is why I call our economic system the "Invisible Mind of the Marketplace," ---- as opposed to the "Invisible Hand of the Marketplace" of ancient fable.
Quite a few people here seem to whine about government dictatorship; very few seem to be bothered about economic dictatorship. To me, both are equally loathsome, and a cause for alarm. Indeed, economic interests are able to worm themselves into our lives even more dangerously than the government. _________________
Frankly, Numan, I fail to see the difference between the two
Unfortunately, the downside of these government-induced distortions inevitably result in a bubble that does nasty things to a lot of people when it pops and deflates.
Yours, Issodhos
Just to clarify, are you saying that what ever the government does is inherently a distortion of the market and inevitably will result in negative consequences?
No, I meant exactly what I wrote, Ardy, and within the context of the subject california rick and I were discussing.:-) Yours, Issodhos
It doesn't have anything to do with the buyer's classification, california rick. It has to do with government induced misallocation of 'money' resulting in an artificially created higher demand for whatever the government is pushing at the time. Politicians hype real estate and legislate incentives at all levels because it is a basic industry that creates tons of jobs, provides mucho tax pickings, mega votes, mega campaign contributions, sweetheart deals for themselves (ask Obama;-)), lotsa profitable corruption opportunities, etc. Everybody wins -- until it comes time to pay the piper.
Unfortunately, the downside of these government-induced distortions inevitably result in a bubble that does nasty things to a lot of people when it pops and deflates.
You, as a prospective buyer, are a current beneficiary of that cyle by dint of getting in after the "pop" when prices began to fall (and may continue to fall). Please do not misconstrue what I am saying. If there are legitimate programs being offered for which you qualify and which would benefit you, it simply makes since for you to use them because that is the way the gaming table for home purchasing is currently arranged. Yours, Issodhos
I don't think you know how these "bond" programs work judging by your mis-informed post.
"Bonds" taken out by states are sold to investors and have a fixed rate priced by the market at the date of issuance. Investor's buy those "bonds" and they receive interest while they hold the bond and at the end of the term (usually 30 years) they receive back the investment. (That is a basic bond and there are others like 'zero cupon' bond that work a bit different).
Once the states auctions off the 'bond issue' then they allocate the money to whatever they want: there are bonds out there to build schools, prisons, maintain roads and some are out there to help first time homebuyers buy their homes. The people that use the state, county or city bond program do not get the money for free. They pay an interest rate which is higher than the 'bond issue' rate and thus the investors get paid plus the locality recoups the cost of the 'bond issue'. The benefit of using such programs is that you get a fixed rate and often you get down payment assistance to either pay for closing costs or to lower the loan amount. There are rules to obtaining such grants such 'recapture tax' which means that if you sell the home in the first 9 years than you have to pay back part of the grant (depending on when you sell the house or refinance and it can be up to the full amount of the grant) if you make a profit on the house. To qualify for these kind of programs there are income limits and they depend on the county you live in. In California, on average I believe the income limit for 1-2 people families is 88k per year and for 3 or more person families is around 100k. There are also house price limits thus you don't buy a mansion with these kind of programs but starter homes.
Programs like the one Rick mentioned, Nehemiah, is a program in which the seller provides the funds. NOT the state, not the lender, not the buyer, not a third party. Nobody is forcing the seller to put up the money. It is their choice.
Side note Rick - Nehemiah doesn't have an expiration period. Maybe your approval for the gift as it but you can re-apply. Nehemiah can also be used on conventional loan but only if you do a MyCommunity 97 Mortgage loan. The Max LTV is 97% but it doesn't have to be that high. Also there are certain requirements for that loan program and might include a home ownership course. The limit for Nehemiah is 6% of the sales price.
Also I kinda gathered that you live in San Francisco and there is a program in that area that also helps first time homebuyers. It is called Downpayment Assistance Loan Program and is offered by Mayor's Office of Housing of the city and County of San Francisco. They provide a 2nd lien that has 0% interest and can be up to 150k and is deferred for 40 years (if you keep that house that long).
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Repayment of the Downpayment Assistance Loan is deferred for forty (40) years from the date of the initial purchase or until the sale of the property or the rental of the property without the prior approval of the City. As of the closing date of the sale or rental occurs, the loan is due and payable. The payoff amount due by Borrower is (i) the principal amount of the loan plus (ii) the proportional share of the net appreciation of the property.
The proportional share shall be based on the ratio of the original downpayment assistance loan amount to the Purchase Price of the property or the fair market value of the property at the time of purchase;whichever is higher (both called hereafter the "Purchase Price").
BTW, there are programs like this one throught out the country.. you just have to know where to look... most lenders don't want to go into that kind of assistance since it greatly increases the paperwork
I have had so many thoughts on this thread that I haven't had the time to follow up with my own post.
Since it happens so rarely, I wanted particularly to point out where numan and I agree: The greater risk to economic stability and a "free market" is market dominance (monopoly, primarily) by global conglomerates rather than governments - although governmental market manipulation can also have destabilizing effects, they tend to be less long-term than market conglomerations.
Our overreliance on "stock prices" to determine the "health" of the economy has always troubled me, particularly as it is based upon a premise of constant expansion - anything less is considered "unhealthy." But the stock market is a pretty crude barometer of economic health, especially as it misses most of the most important aspects of what the average person considers important: e.g. cost of food and fuel, employment status, wage status, etc, and instead relies on "feelings" and "expectations" about the market rather than fundamentals underlying it. "Booms," "bubbles," and "busts" exaggerate the importance of the market to the overall health of the economy.
For most Americans, the economy has been ailing for over 30 years, as they have seen the cost of everything outstrip their income and more and more of the "expectations" of life - health care, insurance, education for children, adequate housing , an adequate retirement - slip further and further from their grasp. Middle Class 'On the edge' - CNN Money; American Middle Class Still Losing Ground - American Progress; The Heart of the Economic Mess - Rober Reich, 25 July 08. This has been masked, in large part, by the growth in the Dow Jones, NASDAQ, etc. - which means little to the average American wage earner, but, because of conditioning, they rely upon it to gauge how "the economy" is doing.
Long term, I think, the world economy has become less stable and more control has been concentrated in the "big pools of money." (Giant Pools of Money - This American Life). As these pools chase returns, they slosh around the markets and tend to destabilize whatever markets they touch, at the same time driving up prices for everything, without contributing anything to productive capacity. That, I think, is where the real economy is hurting most - we are losing productive capacity and relying more and more on "investments" to sustain "growth." This is a chimera. Some have described it as the problem with "fiat" money, and to that extent, I agree (although the reality is, in my opinion, that all monetary systems are fiat by definition). The end result, inevitably and inexorably, is that the world economy will collapse back in on itself as the gap between the production economy and the investment economy grows beyond even ephemeral support. The mass contraction will be devastating.
Our overreliance on "stock prices" to determine the "health" of the economy has always troubled me, particularly as it is based upon a premise of constant expansion - anything less is considered "unhealthy." But the stock market is a pretty crude barometer of economic health, especially as it misses most of the most important aspects of what the average person considers important: e.g. cost of food and fuel, employment status, wage status, etc, and instead relies on "feelings" and "expectations" about the market rather than fundamentals underlying it. "Booms," "bubbles," and "busts" exaggerate the importance of the market to the overall health of the economy.
While I agree that the stock market does not show the health of the economy as a whole, you'd be amazed at how little it misses. Stock prices of every company are traded on a bid/ask system and readily available information is incorporated into the stock prices with amazing speed. I forget where I read this number but information about the economy as a whole as well as company specific news for the S&P 500 companies is incorporated within the price in less than 10 seconds of the news hitting the public. Now, the public is not prevy to all information about a company as soon as it is available to 'insiders' of a company thus there are restrictions on the kind of trading an 'insider' can do.
While you might think that the price of a stock like Apple might not have anything to do with the economy as a whole, like food prices or natural resources prices (oil) or employment you'll be amazed at how much it does reflect those issues as well. While a change in oil is not going to affect that stock as much as GM, it wills till feel an affect. Investors are aware that if the prices of raw materials will eventually be passed onto the consumer, thus less money is available for luxury items and people will buy less of Apple's products and services.
Some stocks move in direct correlation with the market, some are affected more than the market while some are inverse to the market.
Since the world economy is no longer on the 'gold standard' the world economy 'works' on the belief that the major world currencies and economies are 'fail-proof' (you can debate that but that is the underlying belief otherwise sane people would no longer invest in it). A 'sane person' in economic terms is a person that will only invest if the expected return is higher than the cost (the person can be legally insane otherwise )
I can't think of anything I disagree with that you wrote, Kap. The only quibble I might have is that the "public" information is not generally available to all the investors, only to those with the inclination to follow the market (whichever market segment they might be invested in). So, to that extent it works. In the grander scheme, though, it is still based upon expectations, which is the fundamental flaw in the system. Even worse, though, the market in general is being influenced by big investors chasing short-term returns - this is the sloshing I was referring to earlier. The worst offenders are the investment banks, like Bear Stearns, that bid up offerings hoping to capitalize on the upswing, but when they pull out (or crash), that segment of the market is sucked into the vortex created. That is what happened with the CDOs created with sub-prime mortgage paper, and that influence created a huge instability in the overall stock market. It happens on a regular basis as money people get creative with finances, and program investors chase returns. It comes, in my view, from ignoring the production economy in favor of the investor economy. When they are out of sync - watch out!
I don't think you know how these "bond" programs work judging by your mis-informed post.
Thanks, but I am actually quite aware of how homebuyer's bond programs work, Kap17.
Rick was not referring to investors buying bonds, he was referring to a program directed at encourging first-time homebuyers, not investors, to purchase homes. Key phrase is "purchase homes".:-) Yours, Issodhos
California has a program where some properties that are foreclosed on can receive points down on the interest rate for first-time buyers. The monies to pay for those points down is floated by bonds by the State.
By "investors" I mean people who buy homes to rent out as income property. Right now the market is ripe for investors because those losing their homes now need somewhere to rent as first-time buyers have already soaked up much of the housing market leaving primarily investors left to buy.
What ever happened to the policy of sticking to the topic of a thread? _________
I apologize for that. But hey, at least I helped Rick from having his loan fall through.
Anyway, back on topic. The credit crunch is about to be extended when the 'liar loans' will start showing the same level of default as the sub-prime loans.
In the mortgage industry, they are called "liar loans" — mortgages approved without requiring proof of the borrower's income or assets. The worst of them earn the nickname "ninja loans," short for "no income, no job, and (no) assets."
The nation's struggling housing market, already awash in subprime foreclosures, is now getting hit with a second wave of losses as homeowners with liar loans default in record numbers. In some parts of the country, the loans are threatening to drag out the mortgage crisis for another two years.
When I used to review this loans for a brief period of time in 2005 and 2006 I was amazed at how underwriters approved people working at Walmart and saying they made 6k a month. But those were the rules back then. You can say anything you want and you'll get approved.
In a way, I don't think we drifted far from the topic. Although the particulars of Rick's particular loan may not be important (to the thread, I know they are to him), they are a pretty good exemplar of "how the crisis will develop." It starts when people feel that they will not be held accountable for their actions. And I use the term "people" deliberately. There are lots of players who are looking to avoid responsibility - the loan officers, the loan seekers, the packagers, the investors, etc. - by creating bad paper and passing it around, they were essentially playing "hot potato" with them, hoping that when they defaulted they would not be the ones holding them. Now, as the market shrinks back from the gross misconduct entailed, everyone is tightening back up, restricting the ability of even qualified borrowers to find reasonable loan terms. It could, eventually, settle out, but it is another example of why "markets" should not police themselves - because they don't. There isn't any real incentive to do so.
...loan officers, the loan seekers, the packagers, the investors, etc. - by creating bad paper and passing it around, they were essentially playing "hot potato" with them, hoping that when they defaulted they would not be the ones holding them.
That's how my Realtor describes loans being doled out in 2005 & 2006. When I pre-qual'd for the IndyMac Bank loan in June 2008, the loan officer admitted to me that he used handle loans without income verification - but now he couldn't do it.
So who was it that allowed loans without income verification - the CEOs of these companies? Somebody at each of these companies allowed this to happen - those folks should be the ones held responsible.
...loan officers, the loan seekers, the packagers, the investors, etc. - by creating bad paper and passing it around, they were essentially playing "hot potato" with them, hoping that when they defaulted they would not be the ones holding them.
That's how my Realtor describes loans being doled out in 2005 & 2006. When I pre-qual'd for the IndyMac Bank loan in June 2008, the loan officer admitted to me that he used handle loans without income verification - but now he couldn't do it.
So who was it that allowed loans without income verification - the CEOs of these companies? Somebody at each of these companies allowed this to happen - those folks should be the ones held responsible.
Techincally there is nothing illegal about these kind of loans, nor the PayOption loans nor the NegativeAmortization loans. The laws concerning mortgage indursty state that the terms of the loan must be fully disclosed to the borrower which in most cases they were.
Of course there are a few loans out there where people we're shoved into without fully disclosing the terms but isn't the borrower's duty to read what they are signing? I know that the note or Deed of Trust might look like a strange language to someone not familiar with it but if you don't know, then ask someone.
However, individuals wanted to move from the 250k house and get into the 450k home without having their income increase to support that. The lenders were more than willing to do their part to get them into them thinking that even if the borrowers wouldn't pay the monthly then they would take the house and not lose that much money. The more 'exotic' loans had loan to value caps around 80-90%.
However, there were lenders that specialized in ALT-A and subprime loans that gave loans to anyone and then sold those loans to investors through mortgage backed securities.
The majority of loans originated during those years, 2002-2006 are performing loans. The high deliquency rates and foreclosure are found in the subprime and the ALT-A loans (the stated income or no income no asset loans).
For example, when Indymac failed, the number of non-performing loans was at 8%. Because independent mortgage lenders are highly leveraged, even that kind of default rate will cause a failure.
Thankfully, since Countrywide was purchased by Bank of America and Indymac went down under (2 biggest independed mortgage lenders) there are not that many left that could have that much of an impact. The next one to watch is Washington Mutual... now that is a bank that is not too big to fail and their exposure to the west coast mortgage industry is very high.
The next one to watch is Washington Mutual... now that is a bank that is not too big to fail and their exposure to the west coast mortgage industry is very high.
The irony is that when Howard F. Ahmanson owned Home Savings, which Washington Mutual purchased in 1998, Home Savings was the soundest savings and loan and mortgage company in California. Home Savings was managed so conservatively, that if they were still around today, I doubt they'd be involved in the sub-prime mess.
Just a note, I didn't say it was illegal, only that it was irresponsible. I am very careful about bandying the term "illegal" about, as I am a lawyer and it means a whole lot to me to be accurate. There was some illegality going on, however, when the lenders colluded with borrowers to misrepresent the underlying basis for the loan. If someone claims an income and the lender knows it is false, they have committed a fraud upon whomever buys the loan.
You are absolutely right about the percentage of loans that are actually defaulting, too. It is the overleveraging - the same problem that led to the collapse of the system in the 1930s - that created the "crisis." The end result, however, is that the house of cards falls down - and we are the ones it falls upon.
"The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months. Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn in July, the biggest one-month fall since modern records began in 1959.
"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist." (Ambrose Evans-Pritchard,"Sharp US Money Supply contraction points to a Wall Street crunch ahead", UK Telegraph)
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The Fed lowered interest rates to 2 per cent hoping to help recapitalize the banks and stimulate consumer spending, but it hasn't worked. The banks still don't have the capacity to lend, so the main artery for credit distribution remains clogged and GDP is dropping off. A python has wrapped itself around the financial system and is gradually cutting-off the oxygen supply. Naturally, when the credit system is broken, the money supply contracts. That's true here, too. What's troubling is the speed at which it is all of this is taking place. It's "the biggest one-month fall since modern records began in 1959". The process is accelerating and will require the Fed to slash rates at its September meeting.
That's a good article you cited, numan - although I have no respect whatsoever for Ambrose Evans-Pritchard. Nevertheless, your writer puts it all together in a very cogent way.
Here's an interesting assertion from the middle of the article:
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It just goes to show that average working people can change their spending habits and making prudent choices when they see that times are tough. The culture of consumerism is the result of Madison Ave. saturation-campaigns and propaganda; there's nothing inherently wrong with the American people. Workers are constantly being blamed for "living beyond their means", but the real problem originates from flawed monetary policy and destructive commercialism. It's the prevailing "sicko" corporate culture that has created a nation of spendthrifts and speculators. Ordinary people are not at fault.
Here's an interesting assertion from the middle of the article:
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The culture of consumerism is the result of Madison Ave. saturation-campaigns and propaganda; there's nothing inherently wrong with the American people. Workers are constantly being blamed for "living beyond their means", but the real problem originates from flawed monetary policy and destructive commercialism. It's the prevailing "sicko" corporate culture that has created a nation of spendthrifts and speculators. Ordinary people are not at fault.
What are your thoughts on that?
The marketing referred to has been very much the marketing of a economic philosophy.... that itself has been equated with the founding principals of American political philosophy.
Free markets have been proposed as the economic reflection of the principals of democracy and thus fundamental to our national character. Pseudo free-market economics has been identified as being at the core of a ersatz survival of the fittest view of human existence where wealth is socially worshiped as the ultimate reflection a successful well lived life. Following along this logic, the power of the United States is itself a vindication of the idea that we, and our system, are better than anyone else. We stand as the sole remaining super power at the apex of humanity.
Given the collapse of the US Dollar, the rise of the Euro, the emergence of the Chinese, and the fact that Osama Bin Laden clones have more or less fought us to a draw around the world... one wonders at what point our nation might re-evaluate it's role in the world.
That's a good article you cited, numan - although I have no respect whatsoever for Ambrose Evans-Pritchard. Nevertheless, your writer puts it all together in a very cogent way.
Here's an interesting assertion from the middle of the article:
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It just goes to show that average working people can change their spending habits and making prudent choices when they see that times are tough. The culture of consumerism is the result of Madison Ave. saturation-campaigns and propaganda; there's nothing inherently wrong with the American people. Workers are constantly being blamed for "living beyond their means", but the real problem originates from flawed monetary policy and destructive commercialism. It's the prevailing "sicko" corporate culture that has created a nation of spendthrifts and speculators. Ordinary people are not at fault.
What are your thoughts on that?
Yet "ordinary people" can take individual actions that will cumulatively affect the outcome. They can withdraw, at least partially, from the consumerism culture.
But then it is easier to point the finger at someone else than to do what one can do.
The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives and prop them up financially, federal officials told the two companies yesterday, according to three sources familiar with the conversations.
Under the plan, which could prompt one of the most sweeping government interventions in the workings of financial markets in U.S. history, federal officials would place the firms under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies, the sources said. The value of the companies' common stock would be diluted but not wiped out; while the holdings of other securities, including company debt and preferred shares might be protected by the government.
Paulson and the administration came in for heavy criticism for seeking financial backup authority. Critics charged that the administration was, in a widely used phrase, "socializing the companies' losses and privatizing their gains."
That's because the chief beneficiaries of the new authority appeared to be the companies' investors, who saw the steep decline in the price of their shares level off with Washington effectively promising to assume risks of loss they had previously borne.
I sounds like a great idea Phil. Free market capitalism is also a great idea, until that is, the US financial system is faced with collapse and deep pockets are wiped out. And that indeed is what would likely have happened if the feds had not involved themselves with Bear Stearns and now covered their Fannies.
And as I said before the beauty of all of this is that no one actually pays for it. Ever more bonds are issued to cover the debt and the US backed Ponzi scheme continues for the foreseeable future. Don’t tax—but spend. It’s a wonderful country.
I sounds like a great idea Phil. Free market capitalism is also a great idea, until that is, the US financial system is faced with collapse and deep pockets are wiped out. And that indeed is what would likely have happened if the feds had not involved themselves with Bear Stearns and now covered their Fannies.
And as I said before the beauty of all of this is that no one actually pays for it. Ever more bonds are issued to cover the debt and the US backed Ponzi scheme continues for the foreseeable future. Don’t tax—but spend. It’s a wonderful country.
I think your argument fails because you mistakenly believe that a free market economy is operating within the financial sector, Ken. And you are also incorrect when you claim that no one actually pays for it. You need only look at the diminishing purchasing power of the dollars in your pocket to see that you and I and most of the rest of America are paying dearly for it. Yours, Issodhos
Indeed Phil. But if one wants to read an interesting and in my view legitimate site that will give you the financial willies check out Nouriel Roubini’s RGE Monitor. I did not provide a link because it is a site one has to register for but a Google search will lead one straight to it if one is interested.
I am usually not a sky is falling person by IMO the economic situation of the US today is in a mighty precarious position. It is said the darkest hour is right before the dawn and right now it looks to me pretty close to midnight.
I am usually not a sky is falling person by IMO the economic situation of the US today is in a mighty precarious position. It is said the darkest hour is right before the dawn and right now it looks to me pretty close to midnight.
Anyone who doubts that we are a year into a Depression, remember, these things do not hit you like a punch in the face; rather, they are more like an untreated boil that slowly festers until body parts have to be amputated from infection....
In October 1929, the stock Market crashed, yet there wasn’t a run on the banks until 1933....
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Last year, in this column, I identified the start of the New Depression as November 7, 2007. That was the day that China announced they’d be unloading about $400 billion in US currency they were holding in the form of treasury notes. It was a check in the global economic chess game, and the checkmate came from bad playing on the part of the United States.
Without the Chinese largesse, Treasury Secretary Paulson and Fed Chairman Bernanke – aided by both Congress and Bush, went right ahead and started fixing every problem by printing more money. Between stimulus packages, bank bailouts and, most recently (and most egregiously) the underwriting of Fannie Mae and Freddie Mac, nearly $7 trillion has been added to the existing $10 trillion of national debt. Your dollar is worthless, and the banks that are holding...your assets are insolvent.
I am usually not a sky is falling person by IMO the economic situation of the US today is in a mighty precarious position. It is said the darkest hour is right before the dawn and right now it looks to me pretty close to midnight.
Anyone who doubts that we are a year into a Depression, remember, these things do not hit you like a punch in the face; rather, they are more like an untreated boil that slowly festers until body parts have to be amputated from infection....
In October 1929, the stock Market crashed, yet there wasn’t a run on the banks until 1933....
Quote
Last year, in this column, I identified the start of the New Depression as November 7, 2007. That was the day that China announced they’d be unloading about $400 billion in US currency they were holding in the form of treasury notes. It was a check in the global economic chess game, and the checkmate came from bad playing on the part of the United States.
Without the Chinese largesse, Treasury Secretary Paulson and Fed Chairman Bernanke – aided by both Congress and Bush, went right ahead and started fixing every problem by printing more money. Between stimulus packages, bank bailouts and, most recently (and most egregiously) the underwriting of Fannie Mae and Freddie Mac, nearly $7 trillion has been added to the existing $10 trillion of national debt. Your dollar is worthless, and the banks that are holding...your assets are insolvent.
I'll take the 'worthless dollar' over the falling euro right about now.
What other option do you have other than US treasury bonds, notes and bills as a secure investment in the world today?
Euro backed government securities have not picked up as it was hoped when the EURO was introduced which makes sense. It's easier to trust 1 government than 15-25 different governments working toghether.
Also, China tends to play political games when it comes to their monetary moves. And let's not forget that the Yuan is not quite a market based currency yet. It has a fixed band (range) and it is only allowed to fluctuate in that range. That is why products made in China are cheaper than anywhere else. The government over there willingly has kept the Yuan weaker than it actually is.
The world economy depends on 1 thing and 1 thing only. The belief that the US government and the Dollar will always be there. Without that assumption there would be no global economy.
À propos of my last post, another financial giant is biting the dust right now. It is just one more of what will be a long chain of financial collapses.
Shares of Merrill Lynch & Co. declined Friday, as concerns over the fate of the investment bank's rival, Lehman Brothers Holdings Inc., spread to other financial stocks.
Merrill shares tumbled $1.61, or 8.4 percent, to $17.80 in late morning trading, after earlier falling to a 12-year low of $16.90. Shares have traded between $18.50 and $78.66 in the past 12 months.
Lehman's shares have plunged this week, as the No. 4 U.S. investment bank scrambles to find a buyer, or otherwise reassure Wall Street that it's stable.
Reassure Wall Street that it's stable? Ha! Fat chance! __________
If you see a lot of people going in one direction, walk in the opposite direction. If you see everyone going in one direction, run in the opposite direction.
Ho hum! Another week, another financial collapse! Bank of America takes over the remnants of Merrill Lynch; Lehman Brothers bankrupt; AIG surrounded by the wolves; stock market down, down, down. Dare one hope that the financial collapse of the USA and its repercusions all over the world will be able to distract attention away from the fluff called Palin?
I put this link on before, but probably no one looked at it:
But analysts say that the liquidation of Lehman will put the financial markets under pressure for some time as banks are forced to take additional write-downs and credit spreads widen. And the Wall Street Journal reports that some traders are having trouble trying to find new counterparties for their trades with Lehman.
The Next Victim: The financial firm seen as the most vulnerable is now clearly the American International Group. The insurance giant, desperate for new capital as its losses mount, may announce asset sales as soon as today. The company has also reportedly asked the Federal Reserve for $40 billion in short-term financing.
A.I.G. lost more than $13 billion in the first half of this year, most of it due to investments in mortgaged-backed securities and other debt-related instruments.
And there may be others. Still overhanging the financial-services industry is the fate of Washington Mutual, one of the nation's largest mortgage lenders. A team of private equity firms pumped $7 billion intothe thrift last April, but its losses have continued to mount and its shares barely paused in their slide. They have lost more than 90 percent of their value in the last year, and closed on Friday at just over $2.
The End of the Investment Bank: With Bank of America's $44 billion acquisition of Merrill Lynch, only two independent Wall Street firms remain: Goldman Sachs and Morgan Stanley. Will they now feel pressure to merge with a big commercial bank?
In the course of one tumultuous weekend, US treasury secretary Hank Paulson and Federal Reserve chairman Ben Bernanke have permitted one bank to go under and another bank to be quite unexpectedly sold. For some observers, the news is almost enough to bring on a 'Jim Cramer moment' – a meltdown broadcast on TV in August last year when the CNBC pundit Cramer wondered whether the US government had any concept of the trouble brewing in the US housing market. Orchestrating a sale and a bankruptcy in such a short period of time has certainly led to an acute sense of crisis both in the US and internationally. For a start, no one believed the sale of Merrill Lynch was so imminent; there had been very little discussion of a sale prior to this weekend. But the act of allowing Lehman Brothers to go bankrupt is especially high risk. The fire sale price of the mortgage-related assets that Lehman will now have to unload will depress prices across the board – including similar asset classes held by all the other major financial institutions. The fact that Washington Mutual and AIG – a deposit-taking bank and a major insurer even more important to the financial system than two broker-dealers – and also struggling suggests that the timing of Lehman’s demise could not have been worse. It may even provoke the dreaded 'domino effect', when investors panic and dump all financial shares, or in WaMu's case pull out their deposits, because there is no clear commitment from the government in the event of a crisis. The risk now is that sagging stockmarkets (inevitable after the failure to bailout Lehman) and a weakening dollar (equally inevitable) will affect the capital adequacy ratios of even the healthy commercial banks in the US. This will force them to reduce lending, worsening the credit squeeze, and condemning the US economy to further pain.
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Paulson's current opposition to a Wall Street 'bailout culture' developing rings hollow compared to his and Congress's inability to properly regulate the banks in the first place.
Ultimately, this is a heavy blow to the US model of capitalism. Very few countries around the world will now be tempted to open up their capital markets to turbo-charge growth. The US’s own transition from manufacturing to financial services has suffered a huge setback, even as China takes over its mantle as the world's biggest manufacturer. The UK is next in line, with its even more 'manufacturing light' model – mortgage-lender HBOS is already being shredded. But while Asian countries may be feeling smug, they are in trouble as well, with suddenly much fewer outlets for their manufactured goods. The world suddenly looks a much more dangerous place.
What has been said by much smarter people than me long before this, is that our country has been on an unsustainable track for a long time and that eventually something has to give.
After Nixon took the greenback off the Gold Standard, the US Dollar's value has been unnaturally propped up by the Petrodollar cycle.
Michael Ruppert and Ron Paul and Stephen Leeb, among many others laid out the sequence of events that we are now witnessing two and half years ago. The Mortgage crisis, over $100 a barrel oil, the failure of the automakers, lending institutions, and now the banks and the insurance companies.
The reality is that the world has experienced some of the greatest shift of wealth in recent history, from the Anglo-Saxon nations who have dominated the global economy for the last 200 years, to Asia and Continental Europe. This shift in wealth will shortly result in the economic collapse of the Anglo-Saxon nations their money will become worthless, and their economies will disintegrate into anarchy and poverty.
Printing money to solve a nation's economic problem can never be sustained. Eventually, it will lead to the debasing of a nations currency and run-away inflation. This is not about the sky falling, it's about not being afraid to see what is happening right before your eyes.
The rapid increase in the money supply of US dollars is the number one reason America's wealth has shifted from the US to Asia and Europe. In particular, China has benefited enormously from the inflow of dollars which has financed the rapid growth of its economy, providing the capital to develop their competitive export sector. The Asian economies high rates of personal savings have financed their domestic growth as well as finance the US deficits.
The reason why America has such large trade and current deficits is because of the expansion of its money supply, without the corresponding expansion of its productive capacity to produce the wealth to sustain the increase in money in circulation. The lack of domestic savings to provide the investment capital into new manufacturing capacity is also a contributing factor. The cost of maintaining a large military establishment and the decline in the social fabric of society are also significant contributing factors, both of which consume resources that should be invested in the manufacturing sector for a nation to remain internationally competitive.
Pretending as if what is happening right now and is just some sort of cyclical blip on the radar is the approach of fools. It not only ignores the very unique events that have taken place over the last couple of decades, it seems to lack the ability to understand how and why this is happening.
What has been said by much smarter people than me long before this, is that our country has been on an unsustainable track for a long time and that eventually something has to give.
After Nixon took the greenback off the Gold Standard, the US Dollar's value has been unnaturally propped up by the Petrodollar cycle.
Michael Ruppert and Ron Paul and Stephen Leeb, among many others laid out the sequence of events that we are now witnessing two and half years ago. The Mortgage crisis, over $100 a barrel oil, the failure of the automakers, lending institutions, and now the banks and the insurance companies.
The reality is that the world has experienced some of the greatest shift of wealth in recent history, from the Anglo-Saxon nations who have dominated the global economy for the last 200 years, to Asia and Continental Europe. This shift in wealth will shortly result in the economic collapse of the Anglo-Saxon nations their money will become worthless, and their economies will disintegrate into anarchy and poverty.
Printing money to solve a nation's economic problem can never be sustained. Eventually, it will lead to the debasing of a nations currency and run-away inflation. This is not about the sky falling, it's about not being afraid to see what is happening right before your eyes.
The rapid increase in the money supply of US dollars is the number one reason America's wealth has shifted from the US to Asia and Europe. In particular, China has benefited enormously from the inflow of dollars which has financed the rapid growth of its economy, providing the capital to develop their competitive export sector. The Asian economies high rates of personal savings have financed their domestic growth as well as finance the US deficits.
The reason why America has such large trade and current deficits is because of the expansion of its money supply, without the corresponding expansion of its productive capacity to produce the wealth to sustain the increase in money in circulation. The lack of domestic savings to provide the investment capital into new manufacturing capacity is also a contributing factor. The cost of maintaining a large military establishment and the decline in the social fabric of society are also significant contributing factors, both of which consume resources that should be invested in the manufacturing sector for a nation to remain internationally competitive.
Pretending as if what is happening right now and is just some sort of cyclical blip on the radar is the approach of fools. It not only ignores the very unique events that have taken place over the last couple of decades, it seems to lack the ability to understand how and why this is happening.
I'm not saying that the US economy is not in trouble. It has some very big problems that will have to be resolved before we see the bottom of this downswing and the instability settles.
This is a period in which the strong companies... the ones that have held onto their high standard of underwriting risk will take over those that have not. By the end of this 'season' of mergers and aquisitions don't be surprised if a forth or even a third of the banks in the US will no longer exist.
However, I don't buy this as the end of the western economies. The yuan is kept under it's real strenght by the Chinese government - it is not market based. That is a huge reason why the trade deficit will continue to go up. Until China is forced into allowing the yuan to be market based they will always sell products cheaper than anyone else around.
However, China is paying the price as well. The inflation rate over there has hoovered just below 10% and it is now slowing down a bit but still at over 6% yearly. Food prices in China have jumped 23% in the previous year.
So before you start saying that the shift is completed... look at where it is shifting to. China's economy is in even worse position than the US.
The world financial system is spinning out of control.
Today, September 15, 2008 will have a special niche in history as the day when large numbers of people finally realized that it will no longer be business as usual. We are moving into a new stage of history, into darkness and uncharted terrain. ________
Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.
The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation's largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.
Treasury has already come to the rescue of several corporate victims of the housing and credit crunches. The government took over mortgage finance companies Fannie Mae and Freddie Mac, and helped finance the sale of investment bank Bear Stearns to J.P. Morgan Chase & Co.
With the anticipated takeover of AIG in exchange for a mere $65 billion, the government is becoming a major owner of financial market entities.
What are the implications of this?
Bad. So much for free markets, sovereignty, and Congress. Was it Rogers that said that we're more communistic/socialistic than Red China now? It doesn't bode well.
No way to rationalize this situation. Aside the legalities... How in hell does one "aside" the legalities???... the actions for Messr.s Bernancke, Paulson, Bush and whatever members of government may be included... are outrageous and pander to what we seem to have named the "FAT CATS".
If there are iniquities, let the cost fall on the FAT CATS... and use America's money to bail out the little guy who got caught in a crossfire of greed. We could "fix" the situation for one one hundredth of what we'll be paying to bail out the greedy ones who got into this mess by themselves.
In the very worst days of Boss Tweed and the days of the Robber Barons, there was never such blatant treachery and doubledealing as we're seeing right not.
Too Big to Fail? Never Mind Freddie and Fannie and Bear Stearns and AIG... Too big to Fail????
How about America! America is Not too big to fail.
The last safety nets are gone... The FDIC is broke, and the Pension Benefit Guaranty Fund never seriously existed. Social Security was tapped out long ago, and the Medicare, Medicaid system is funded only on a day to day basis.
The actions of people with very dirty hands is doing in one short three or four months, what was built over the past 230 years.
We have a word for the people who turn their backs on their vows and their responsibilities.
Traitors.
How will the financial crisis develop? Hah... It already has, and there is no person or law that will stop this trip to the status of a proverbial Banana Republic.
Who will defend this treachery? Who has the unmitigated arrogance or ignorance to suggest that these actions are in the interests of the country.
The lessons of Enron were learned too well, and now the world of finance has taken the step towards governing the country in its own interests.
As the closing bell rings at the NYSE tomorrow... watch the joy of the new ruling class.
Originally Posted by Max Keiser, markets analyst in Paris
"There's a decoupling in the wind, America is essentially finished as a global economic power.
"The US dollar is now finished as the world's reserve currency and we are going to see now some other country rise up and take its place, most probably China."
[SNIP]
"Suddenly last summer, credit was unavailable, and then banks who need credit to live start to tumble.
"So this is gaining pace [and] there's going to be no credit for banks because you're talking about $700 trillion worth of debt in the global economy.
"The entire GDP [Gross Domestic Product] of the world is something like $60 trillion, so this has a long way to go as you deflate all of this debt back to something more sustainable."
Originally Posted by Alister Heath, editor of London's "City A.M." financial newspaper
"Everybody in the West, [or] at least a lot of people, have pensions and these pensions invest in the stock market, and a lot of the shares are actually the shares of banks.
"And when bank shares get hammered, people's pensions get hammered, so everybody loses."
Originally Posted by Andrew Critchlow, managing editor of "Dow Jones Middle East" in Dubai
"I think the impact is going to be quite profound.
"I think this is a defining moment for world economies, it's a defining moment for the United States, it's a defining moment for all of us that will remember [this] for the rest of our lives.
"People who were around in the 1920s, at the time of the Great Depression - that experience stuck with them for an awful long time.
"And I think that the economic events that we're currently seeing in the world at the moment - they can only be described in similar terms.
"Certainly in my career, I've seen nothing that compares to this and it's difficult to quantify at this stage where all of this is going to lead."
Originally Posted by James Galbraith, economist and professor at the Univerisity of Texas at Austin
"There is a threat --- it lies in these vast markets for credit derivates, credit defaults, swaps, mortgage backed securities and derivitives from them, which are not liquid at the moment, which are impossible to value and which result from the breakdown of prudent regulation and prudent financial practice over the past 30 years, but particularly in the last decade."
NEW YORK - The U.S. government has been reaching out to large banks in an effort to organize a buyout of the beleaguered Washington Mutual Inc., according to a person briefed on the talks between regulators and banks.
The obstacle, however, is that “no one knows what’s in their books,” the person said, speaking on condition of anonymity because of the sensitivity of the matter. There could be, he said, “a minimum amount of value there.”
A New York Post report Wednesday citing unnamed sources said regulators have reached out to Wells Fargo & Co., JPMorgan Chase & Co. and HSBC Holdings PLC, among other institutions. The Post noted that no discussions of a deal between any of those banks and Washington Mutual were under way.
The Bush administration sketched out a multi-faceted effort on Friday to confront the worst U.S. financial crisis in decades, outlining a program that could cost taxpayers hundreds of billions of dollars to buy up bad mortgages and other toxic debt that has unhinged Wall Street.
President Bush, flanked by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, acknowledged that the program will put a "significant amount of taxpayers' money on the line."
The administration is asking Congress to give it sweeping new powers to execute the plan. Paulson said it "needs to be big enough to make a real difference and get to the heart of the problem."
So now that the socialization of the economy is taking on massive proportions, at what point if any will anyone take a critical look at this? Neither McCain nor Obama seem willing to offer any leadership, Congress seems willing to do anything asked of it, and for the most part major decisions about the direction of our nation are being taken by non-elected officials.
This proposal for the government to take over all the bad debts just seems crazy to me. It is likely to
1) end up adding trillions of dollars to the national debt; and 2) offer no incentive to private entities to avoid making the same mistakes in the future.
1) end up adding trillions of dollars to the national debt; and
Is it not the role of a government to stabilize the economy of the country? What benefit do the people of USA have from a prolonged recession?
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2) offer no incentive to private entities to avoid making the same mistakes in the future.
Just crazy.
And if those big boys making the millions are taught a lesson, how does that benefit the people losing their homes, losing their retierment money, losing their jobs. Please explain that to me.
Yes, the past 30 years of deregulation in the US financial markets have brought this on and Democrats and Republicans have plenty of blame to share for that. What is done is done. Now it's time to get the economy back on it's feet and part of any country's economy has been government spending.
How does it affect your daily life if the US national debt is 12 trillion instead of 10 trillion? It doesn't.
Is your daily life affected if you don't have a job and you're about to lose your home? I bet it does.
1) end up adding trillions of dollars to the national debt; and
Is it not the role of a government to stabilize the economy of the country? What benefit do the people of USA have from a prolonged recession?
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2) offer no incentive to private entities to avoid making the same mistakes in the future.
Just crazy.
And if those big boys making the millions are taught a lesson, how does that benefit the people losing their homes, losing their retierment money, losing their jobs. Please explain that to me.
Yes, the past 30 years of deregulation in the US financial markets have brought this on and Democrats and Republicans have plenty of blame to share for that. What is done is done. Now it's time to get the economy back on it's feet and part of any country's economy has been government spending.
How does it affect your daily life if the US national debt is 12 trillion instead of 10 trillion? It doesn't.
Is your daily life affected if you don't have a job and you're about to lose your home? I bet it does.
Kap17, there is logic to your point, I agree. But that is yet another short term solution to a problem that I and some others contend is a systemic weakness. It is a ponzi scheme that has no "there" there.
Yes addint a few trillion to the national debt seems like a "so what" proposition. But if you think further, that debt has to be underwritten by someone. It requires some entity to actually pony up the money to cover the debt.
We appear to be close to having run out of such savior entities. Some day it will end and then what?
Further, as is pointed out, why should we underwrite the debt but the profit goes to the investors?
I did not take on debt because I felt it imprudent. Why should I pay for your debts?
Kap17, there is logic to your point, I agree. But that is yet another short term solution to a problem that I and some others contend is a systemic weakness. It is a ponzi scheme that has no "there" there.
Yes addint a few trillion to the national debt seems like a "so what" proposition. But if you think further, that debt has to be underwritten by someone. It requires some entity to actually pony up the money to cover the debt.
We appear to be close to having run out of such savior entities. Some day it will end and then what?
Further, as is pointed out, why should we underwrite the debt but the profit goes to the investors?
I did not take on debt because I felt it imprudent. Why should I pay for your debts?
Phil,
I agree with what you say and regulation is needed in a financial world that right now lacks a lot of it. However, you have to deal with the problem at hand which is stabilizing the economy.
And as far as who's going to buy the US debt... The world so far hasn't show any significat trend that it is not willing to buy what the US government has offered even as the dollar has gotten a lot weaker.
It's incumbent upon all political and financial journalists at this moment to remind Americans that every dollar spent in a bailout goes on our tab to the Chinese and other foreign investors. Somebody has to pay them back some day. One of the great crimes of misinformation in the George W. Bush era is that neither the cost of wars nor the cost of these bailouts gets counted on the official national deficit number. It's as if Enron and Lehmann Brothers accountants are working in the Office of Management and Budget. Who knows? Maybe they are. This is what we get for having a president with an MBA.
In the wake of the Great Market Crash of 1929, The Roosevelt administration brought in stringent regulations restraining the wheeling-and-dealing of the financial market vampires.
In my 1950's high school American history textbook it said that a financial colapse like the Great Depression could never occur again because the financial markets were now well supervised and regulated.
Ever since the Reagan years, these regulations have been systematically dismantled, especially by the Republican Congress of the 1990's. The "Invisible Mind of the Marketplace" has had free-rein ---- and behold the result!
Please! Mr. Gorbachov! Come and save America from its "Era of Stagnation!" ___________________________________________
“Companies are much worse than you think,” says Carl Icahn on Fast Money. "I go to these board meetings and I don’t have to watch Saturday Night Live anymore because they’re so crazy. The boards are completely out of it.”
Ichan feels that CEO’s have a lot in common with the guys who were president of the college fraternity. They were well liked but not particularly smart. Most were political animals afraid to be around smart guys who might show them up.
Well, those are the same guys who went to work in corporate America and as Ichan says, "eventually you end up with all morons running the company."
While U.S. banks took on lucrative risks, European banks have played it safe. Now Old World institutions are more likely to be buying.
Suddenly, stodgy banks are looking smart. And with former Wall Street giants toppling almost daily, some European banks are starting to look especially wise.
European banks are holding up pretty well amid the turmoil sweeping the industry. None of the Old World's biggest banks appears likely to fail or put itself on the block, analysts say. Indeed, the Europeans are more likely to be buying: London-based Barclays on Sept. 17 inked a $1.75 billion cash deal to buy the investment banking and trading businesses of bankrupt Lehman Brothers.
Another London-based bank, HSBC Holdings, has been mentioned as a potential buyer for crisis-racked Morgan Stanley, though HSBC won't comment.
HSBC stands for: Hongkong and Shanghai Banking Corporation ___________
Is it not the role of a government to stabilize the economy of the country? What benefit do the people of USA have from a prolonged recession?
No. It is not the role of government (meaning me) to support the financial gambling of others. I would rather see the entire system go to failure so that we can get back to some sort of honesty.
BTW, this fits neatly into the prediction of Shock Doctrine by Naomi Klein. This is the turn over of debt to the public will allow those with wealth to step in and acquire incredibly large profits.
Assumption: This débâcle will wind up costing three trillion dollars. This is enough money to provide a $100,000 mortgage to 30 million people ---- one-tenth of the American population ---- far more than than the number of people who will default on their mortgages in the present circumstances.
Could this money have been spent more wisely giving $100,000 to needy people buying houses, rather than making fat-cats yet more obese?
You can fool some of the people all of the time and all of the people some of the time,but you can't fool all of the people all of the time.[A. Lincoln]
"You can fool some of the people all the time, and those are the ones you want to concentrate on." ---- President George W. Bush, Gridiron Club dinner, March 2001 ___________
The roots of the panic in financial markets around the world are deep and complex but they lie in the convergence of three factors.
Millions of people pursuing the "American dream" of home ownership, politicians and regulators who dismantled a system of financial safeguards and then ignored warnings of impending disaster and financial markets and institutions disregarding risk in their headlong pursuit of profit.
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But something else was at work as the housing bubble grew: The US government, under the sway of the free-market, anti-regulation ideology, had begun to systematically dismantle rules and regulations established after the Great Depression of the 1930s.
In 1999, the US congress and Bill Clinton, the former president, repealed laws designed to stop financial crashes - saying markets should regulate themselves.
Why?
Lawrence Mitchell, the author of The Speculation Economy: How Finance Triumphed Over Industry says it was the triumph of ideology over caution.
"Since Ronald Reagan became president in 1980, free markets have been preached in this country as being our economic salvation," Mitchell says.
" 'Government regulation' we've been told, 'is bad, it's evil, and the government doesn't know what it's doing economically'."
" 'It should be out of people's business'. That's nonsense, but that was the ideology that was driving it. 'Regulation is bad, free market is good'."
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The problem then was not, and is not now, about houses. It's about credit — or the lack of it.
With so much bad debt out there - and no one really knows how much there is - banks around the world have become extremely risk-averse.
They've stopped lending money to individuals, businesses and even each other.
Unable to get loans, Lehman Brothers, the fourth-largest US investment bank, went belly up.
Central banks have by now pumped hundreds of billions of dollars into the global financial system, but the flow of credit, known as liquidity, has slowed to a sluggish trickle.
For the first time since the 1930s, a true, systemic financial crisis is under way.
That's why the US government is considering sweeping and costly measures to buy up millions of bad mortgages.
But while the plans announced late this week seem to have boosted confidence on Wall street, no one really knows what will happen next.
"It could get a lot worse, said Mitchell, gloomily.
"I haven't read any significant empirical evidence to suggest we are anywhere near the bottom."
Well, Al Jezzera provided an amazingly excellent summary of the problems. Too bad they have no insight into middle east problems.. .
All that said, the comment about the bottom is an interesting one to consider. You can have an amazingly heavy ship that floats majestically over a very deep bottom. Once the ship starts sinking, the bottom can indeed be VERY deep. On the other hand, if there is a way to keep the ship afloat, then there is not requirement that the bottom need be explored. And, IMO, that is the effort that the Treasury and the Fed are currently undertaking.
It is a prodigious and expensive effort to keep the ship afloat. But in the end, it is less expensive than letting the ship sink.
And, by the way, although there may be some satisfaction in saying that the ship should be allowed to sink because of the negligence of the crew and owners... the fact remains that the passengers will go down with the crew.
Ardy, you assume the proposed mega-bailout will avoid the "very deep" I am less sanguine about that.
I admit I am far from savvy in matters financial, so I may just be trying to apply common sense to something only experts can understand.
I agree that in the short term, the bailout will avoid a very costly depression that would have wide impacts on all but the very rich.
But the bailout does not engage with the real problem in my opinion. That problem is fantasy financing, a digital game available to all but in which only a very few can ever win. The rest of the players provide the fodder which is consumed at will and when needed.
Debt is the problem we are trying our best to avoid. But it will not ultimately go away. At some point we must face the fact that the underpinnings of the economy, both US and worldwide, are unstable and fundamentally flawed. You cannot simply increasingly print money and not have that come back to bite you in the ass big time.
This bailout will possibly, and I repeat possibly avoid a meltdown in the near term. But it really exacerbates what I consider to be the real problem. Sort of like solving a cavein by digging yourself in deeper.
Well, Al Jezzera provided an amazingly excellent summary of the problems. Too bad they have no insight into middle east problems.. .
Others often understand your weaknesses better than you yourself do. I am not too proud to learn from those who may not like me. That is why I read Pravda, Al Jazeera and Der Spiegel to find out what is happening in America, and western sources to find out what is happening in the Middle East, Russia and China. Naturally, one must be discriminating in accepting what is reliable. ____________
Ardy, you assume the proposed mega-bailout will avoid the "very deep" I am less sanguine about that.
You are quite right, Phil.
No matter how excellent the bail-out might be, the loss in value of the US dollar and its end as the standard of international currency are unavoidable. The US has no choice but print vast amounts of money ---- or the sophisticated equivalent. The dollar will be worth much less, and destabilizing inflation is inevitable.
P.S. The bail-out will not be excellent, of course. ___________
Just to be clear... I am not entirely sanguine about the mega bail out. I do think that... even with the problems... it is a better option than "letting the chips fall where they may"
Also, it is reasonable to keep the following in mind. The amount of the bailout is not necessarily buying entirely worthless assets. The assets are illiquid, which is causing a big problem. And there is the further problem that all assets of this type now have to be marked down on bank books to current "fire sale" prices... which may not be accurate in terms of the true value.
If... and I know it is a big if.... if the real-estate slide can be halted at about this level... then those assets will have a value of roughly 70% of the face value... and although that is a big loss, it is still manageable and also less than a total loss.
And then beyond that, there is the over all cost benefit analysis of taking a 30% loss on a big number (questionable real estate loans) vs taking a 50% loss on a tremendously larger number (the entire economy)
Well, we will see how it turns out. I remain convinced that Armageddon will be averted. The ship will be damaged, but remain floating. And that option will be better than allowing the ship to sink in order to prove a point about the culpability of the crew and ship owners/builders.
And that option will be better than allowing the ship to sink in order to prove a point about the culpability of the crew and ship owners/builders.
Straw man. I don't see anyone here taking that position. Maybe I missed it, but certainly I am not. I am not opposed entirely to the bailout, but without substantial safeguards to the public, severe restrictions on anyone profiting from this except the government itself, and so concrete steps taken to reduce both public and private debt, I think it is not worth a tinker's dam.
And that option will be better than allowing the ship to sink in order to prove a point about the culpability of the crew and ship owners/builders.
Straw man. I don't see anyone here taking that position. Maybe I missed it, but certainly I am not. I am not opposed entirely to the bailout, but without substantial safeguards to the public, severe restrictions on anyone profiting from this except the government itself, and so concrete steps taken to reduce both public and private debt, I think it is not worth a tinker's dam.
Yes, but Phil, this proposal is now going to the congress and it is their responsibility to shape exactly those details in this whole thing.
By the way, I heard an analysis of the AIG bailout... at in truth, it sounds like a good deal for the govenment... it was no give away. The government gets 80% of a very valuable company... and is charging 10% interest on the loan.
Also, just because the govenment "buys" the illiquid assets does not mean that the Government has to pay full face value... unless of course one takes the example of the GOP structured drug plan that prohibited govenment negotriation. It is obviously clear that this benifit offered to the financial industry should come at a price... as would be the case if some private source of finance should offer to rescue them from their distress.
There is absolutely, positively no way to put lipstick on this. It's a 100% bailout of a totally out of control financial system, run by people who live in a different world. First of all, the bailout will be at the very least 1.5 trillion, and likely more than 3 Trillion... because no one... not even the people who created the Credit Derivative Swaps, has an inkling of how much was siphoned out of the economy, and how deeply intertwined are the security guarantees that were made to balloon the hedge funds. Anyone who thought that wise investing allowed hedge funds to charge 20% fees, while they were making 30% value increases for their client.. still believes in Santa Claus.
Second... and much more important, the initial bail out, is just the first of four hits that the taxpayer will take.
The first hit IS the US Debt.
The second,will be the huge loss of jobs, as the economy deflates, and the erosion of the personal asset value.
The third, will be the new hit to the treasury, as the cost of borrowing money (for the Government) increases to unknown heights. Who can tell?.. 10%, 20% or even more.
Fourth... Hyperinflation... possibly as much a 100%.
Now all of these things interact, and won't necessarily be piled on on one, but you can easily see the steps that will combine to produce our newfound poverty.
The irritation is that non of these losses will affect the "Fat Cats", as they turn to new financial instruments (and the creativity here is unlimited) to bleed more money into their fortunes.
It's too early to say the form of the next insult, but do not doubt that it will be there.
Kevin Phillips has been and is right in "Bad Money" and despite his past optimism about the resilience of America, he now sees no solutions. Phillips on the Bill Moyers Journal
The final result of all of this turmoil will be war. There is no other possible way out... and the result of a new war, may be very suspect. War is always he final result of a failed government... the only way to keep the heat away from the people who caused the catastrophe in the first place. All wars rise from this.
Recognizing this now, and being prepared by not developing false hope, may be easier on the psyche... and not expecting anything from politicians from either party will be more realistic than hoping for significant change.
The network of politics and money is simply too strong, to be changed by any attempt to reform.
Change will eventually occur, but only bit my bit, and agonizingly slow.
Sometimes, the challenge of "Okay, if you complain about everything, what would YOU do to change the outcome?" just doesn't work... when there is no way to FIX it.
Sometimes, the challenge of "Okay, if you complain about everything, what would YOU do to change the outcome?" just doesn't work... when there is no way to FIX it.
Let's suppose for a moment that you are almost certainly correct: there is no way to "fix" the current situation. Still, is there even a tiny possibly that you could be wrong and that actually there is some hope? What is the downside from someone at least "trying " to do something?
Ultimately, I want radical changes to our economic system. I want to dismantle the consumerism, debt and dominate culture that we live in. I think it is unhealthful to humans and the cause of most of the conflict in the world.
I think debting is the tool by which we are all kept captive and enslaved. I think it prevents most people from seeing the nature of their own enslavement so that any hope for accomplishing what I think is necessary highly unlikely.
I do not seek to punish anyone. Nor do I want to be an enabler to those who are caught up in a form of addiction. So far I have pulled myself from the debt system. It means I live a life with fewer things, but more happiness.
Now, in my opinion the current financial meltdown only proves my point. People caught in it want someone else to cover their addictive behavior, just as a drunk wants his wife (or reverse) to cover their behavior.
To carry that analogy further, with a drunk I might be willing to loan that person the money to go into rehab if I became convinced there was a reasonable chance of separating that person from alcohol forever.
In this situation I am concerned that nothing will be done to break the power of debt and financial gambling. Face it, that is what this all is, gambling. We just have fancy words for it. I would not hand someone addicted to gambling my credit card and i would rather not do so to big scale gamblers either.
Again, if I could see a long range plan to break consumerism and allow people to throw off the oppression of having to buy at the cost of their family and health, I would be more inclined to listen.
I see none of that at all. Everyone at that level, Bush, Obama, McCain are just trying to make it all right and avoid the pain that often occurs in a withdrawal. Unfortunately, I see no way to where I think we need to go without substantial pain. I do not seek the pain, but to me it will be necessary no matter what is done now.
Ponzi schemes just always come crashing down at one point.
Ultimately, I want radical changes to our economic system. I want to dismantle the consumerism, debt and dominate culture that we live in. I think it is unhealthful to humans and the cause of most of the conflict in the world.
First destroy the economy, then rebuild it.
Americans don't do things by half-measures. ____________
Phil Your analysis has a certain fascination to it. I must say that it strikes me as being rather Utopian... and rather impractical despite all of the good intentions that it is based upon.
It does seem to me that you are using the current predicament as a lever to achieve a social/political/economical restructuring of colossal proportions. My own strong suspicion is that your ideal scenario is not the most likely residue of a total economic collapse.
Originally Posted by Phil Hoskins
I think debting is the tool by which we are all kept captive and enslaved. I think it prevents most people from seeing the nature of their own enslavement so that any hope for accomplishing what I think is necessary highly unlikely.
Phil My own situation is that I am entirely debt free. I can thank my depression era parents for shaping within me a frugal and largely non-consumerist life style. And, based upon my own experience of life would say that even within the current economic structure one is not obligated to become a slave of debt and consumerism. Possibly your life experience differs.
My own situation is that I am entirely debt free. I can thank my depression era parents for shaping within me a frugal and largely non-consumerist life style.
Well, goody-good good for you! What about everyone else?
Your situation might not be so delightful with society collapsing around you. ________
Let me be clear. The scandal is not that government is acting. The scandal is that government is not acting forcefully enough--using its ultimate emergency powers to take full control of the financial system and impose order on banks, firms and markets. Stop the music, so to speak, instead of allowing individual financiers and traders to take opportunistic moves to save themselves at the expense of the system. The step-by-step rescues that the Federal Reserve and Treasury have executed to date have failed utterly to reverse the flight of investors and banks worldwide from lending or buying in doubtful times. There is no obvious reason to assume this bailout proposal will change their minds, though it will certainly feel good to the financial houses that get to dump their bad paper on the government.
A serious intervention in which Washington takes charge would, first, require a new central authority to supervise the financial institutions and compel them to support the government's actions to stabilize the system. Government can apply killer leverage to the financial players: accept our objectives and follow our instructions or you are left on your own--cut off from government lending spigots and ineligible for any direct assistance. If they decline to cooperate, the money guys are stuck with their own mess. If they resist the government's orders to keep lending to the real economy of producers and consumers, banks and brokers will be effectively isolated, therefore doomed.
My own situation is that I am entirely debt free. I can thank my depression era parents for shaping within me a frugal and largely non-consumerist life style.
Well, goody-good good for you! What about everyone else?
Your situation might not be so delightful with society collapsing around you. ________
With all respect... I was addressing Phil's point about the enslavement of debt. And in my experience, people most often choose this path.
I agree with you about the problems of others. But are we saying that people have no responsibility for the choices that they have made?
And most importantly... if people have made bad choices... how can you eliminate this problem without eliminating their ability to make choices.
And further... I am on record as endorsing taking action now to mitigate the bad effects of the current situation and am , in fact , arguing against a position that basically says there is no point to do anything... or it is better to let the system collapse because the system is wrong.
In fact, I am aware that this proposed bailout will cost me money, and never the less I support it. I support it even though it will benefit people who have been less responsible, and even though it will also benefit people who caused the crisis by their greed. How exactly is that to be characterized as not caring about people who have been hurt in this crisis?
I am not boasting about my current situation. I am not a rich person. I do not earn a high income. I simply live a frugal life. And I really do not understand why it is that we must allow the entire economic system to collapse in order to possibly arrive at the Utopian vision that Phil has described.
Ardy... you suggest that doing something might help... Okay... I buy that!... What we should do, is let nature take it's course... Precisely what we should have done in the first place... Just obey the rules/laws. it will hurt... a lot... but it will never happen again.
I double dog dare... no make that "I triple dog dare" anyone here to read this... The Facts
Ardy... you suggest that doing something might help... Okay... I buy that!... What we should do, is let nature take it's course... Precisely what we should have done in the first place... Just obey the rules/laws. it will hurt... a lot... but it will never happen again.
I double dog dare... no make that "I triple dog dare" anyone here to read this... The Facts
It is a great read. But, I find your assertions unsupported by the article.
Just for example, You say
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What we should do, is let nature take it's course... Precisely what we should have done in the first place... Just obey the rules/laws. it will hurt... a lot... but it will never happen again.
There is absolutely no way to make that guarantee. The only thing that prevents a repeat is eternal vigilance.
Further, while the article does articulate the issues surrounding "moral hazard" and the concomitant importance of allowing companies to fail.... the article never says that the entire economy should be let to fail.
Further, when one reads the article concerning the AIG bailout, it is clear that that is not a free pass given to AIG
Further, if one looks at the planned bail out of illiquid debt... it is clear that this is also not a free pass.
Do not misunderstand my position. I am also angry as the dickens about the present situation and I do believe that corrective actions need to be taken. Phil has done a good job of outlining the issues in his new thread "Extreme Makeover"
But that said, the idea to do nothing as a means of economic catharsis is frankly crazy.
Historians have identified the causes of the 1930 Depression as: 1) Too much savings in relation to consumer power due to income disparity; 2) Over capacity due to excessive investment from surplus capital; 3) Over stimulation through the growth of debt through new intricate system of inter linked debt obligations; 4) Legalized price fixing through mergers and acquisitions; big corporations maintain price and cut production instead of lowering prices, resulting in massive unemployment; 5) Economic growth too heavily dependent of big ticket durable goods that cannot sell in a depression thus slowing recovery; 6) Exhaustion of public confidence and optimism; and 7) The collapse of international trade (Smoot-Hawley Tariff Act). 8) Irresponsible foreign lending (the US was a creditor nation with a credit balance about twice the size of the total foreign investment in the US.)
All of these causes are still present today at a larger scale and faster reaction time, with the exception that the US is now the world’s biggest debtor nation.
Historians have identified the causes of the 1930 Depression as: 1) Too much savings in relation to consumer power due to income disparity; 2) Over capacity due to excessive investment from surplus capital; 3) Over stimulation through the growth of debt through new intricate system of inter linked debt obligations; 4) Legalized price fixing through mergers and acquisitions; big corporations maintain price and cut production instead of lowering prices, resulting in massive unemployment; 5) Economic growth too heavily dependent of big ticket durable goods that cannot sell in a depression thus slowing recovery; 6) Exhaustion of public confidence and optimism; and 7) The collapse of international trade (Smoot-Hawley Tariff Act). 8) Irresponsible foreign lending (the US was a creditor nation with a credit balance about twice the size of the total foreign investment in the US.)
All of these causes are still present today at a larger scale and faster reaction time, with the exception that the US is now the world’s biggest debtor nation.
Hmmm. And who would those "Historians" be? Yours, Issodhos
Specifically, to pay for the bailout, which is estimated to cost up to $1 trillion, the government should:
a) Impose a five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers. That would raise more than $300 billion in revenue;
b) Ensure that assets purchased from banks are realistically discounted so companies are not rewarded for their risky behavior and taxpayers can recover the amount they paid for them; and
c) Require that taxpayers receive equity stakes in the bailed-out companies so that the assumption of risk is rewarded when companies’ stock goes up.
(2) There must be a major economic recovery package which puts Americans to work at decent wages. Among many other areas, we can create millions of jobs rebuilding our crumbling infrastructure and moving our country from fossil fuels to energy efficiency and sustainable energy. Further, we must protect working families from the difficult times they are experiencing. We must ensure that every child has health insurance and that every American has access to quality health and dental care, that families can send their children to college, that seniors are not allowed to go without heat in the winter, and that no American goes to bed hungry.
(3) Legislation must be passed which undoes the damage caused by excessive de-regulation. That means reinstalling the regulatory firewalls that were ripped down in 1999. That means re-regulating the energy markets so that we never again see the rampant speculation in oil that helped drive up prices. That means regulating or abolishing various financial instruments that have created the enormous shadow banking system that is at the heart of the collapse of AIG and the financial services meltdown.
(4) We must end the danger posed by companies that are “too big too fail,” that is, companies whose failure would cause systemic harm to the U.S. economy. If a company is too big to fail, it is too big to exist.
Here is Senator Sanders speaking from the Senate floor:
Historians have identified the causes of the 1930 Depression as: 1) Too much savings in relation to consumer power due to income disparity; 2) Over capacity due to excessive investment from surplus capital; 3) Over stimulation through the growth of debt through new intricate system of inter linked debt obligations; 4) Legalized price fixing through mergers and acquisitions; big corporations maintain price and cut production instead of lowering prices, resulting in massive unemployment; 5) Economic growth too heavily dependent of big ticket durable goods that cannot sell in a depression thus slowing recovery; 6) Exhaustion of public confidence and optimism; and 7) The collapse of international trade (Smoot-Hawley Tariff Act). 8) Irresponsible foreign lending (the US was a creditor nation with a credit balance about twice the size of the total foreign investment in the US.)
All of these causes are still present today at a larger scale and faster reaction time, with the exception that the US is now the world’s biggest debtor nation.
Actually, Phil, the above is highly questionable.
There were many causes to the depression. The above list contains some of the issues, but certainly not all the issues. And not even all of the most important issues.
Even taking the details of the list... it is not true that today's situation maps well onto that list.
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1) Too much savings in relation to consumer power due to income disparity;
The American situation is largely the result of unsustainable excess consumption that (among other factors) drove excess production. If anything, our problems are driven by a lack of savings rather than excess savings.
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2) Over capacity due to excessive investment from surplus capital;
Over capacity was largely limited to real estate. And that was driven by excess credit, and not surplus capital.
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3) Over stimulation through the growth of debt through new intricate system of inter linked debt obligations;
This is true of our current situation but not necessarily something that historians have identified as a prime cause of the depression.
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4) Legalized price fixing through mergers and acquisitions; big corporations maintain price and cut production instead of lowering prices, resulting in massive unemployment;
It is not clear to me exactly how this maps on to our current situation... Massive unemployment? Legalized price fixing through mergers and acquisitions big corporations maintain price and cut production instead of lowering prices, ..... Is someone seriously telling me that this is a parallel that is driving today's problems?
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5) Economic growth too heavily dependent of big ticket durable goods that cannot sell in a depression thus slowing recovery;
Again this is typical of today, but not something that historians would agree caused the depression.
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6) Exhaustion of public confidence and optimism; and
Now there is a truely significant cause of the depression... and today's problems as well....
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7) The collapse of international trade (Smoot-Hawley Tariff Act).
Please provide a link that this has happened. Last time I checked, walmart and every other store was full of foreign goods.
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8) Irresponsible foreign lending
Surely the proximate cause of our current situation si irresponsible domestic lending--- what am I missing--- oh yes, I am missing the parallel.
..............
You know, it is sort of interesting that such apparently brilliant analysis could turn out to be rather flimsy when you really look more closely.
The main parallels I see with the depression are that
It is a very serious situation that imperils both the domestic and world economy
It involves lax regulation of wall street and the shenanigans that most often emerge when the folks on wall street are left to their own devices.
) We must end the danger posed by companies that are “too big too fail,” that is, companies whose failure would cause systemic harm to the U.S. economy. If a company is too big to fail, it is too big to exist.
I am willing to allow big companies to exist. But if a company is "too big to fail".... then the government has a responsibility to see that the company does not fail. And if the government has that responsibility, then the government also has the obligation to provide sufficient regulatory oversight as to pre-empt the possibly of failure. Moreover, to the extent that the government provides insurance against failure, the government should also participate in the profits of the enterprise as well as regulation of executive payout schemes so that there is no incentive for those executives to take excessive risks.
Experts are sure the series of bankruptcies will not stop. They also forecast the closing of hundreds and thousands of financial companies.
Former U.S. Federal Reserve chairman Alan Greenspan has called the current crisis in the United States "the most wrenching since the end of the Second World War."
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Western futurologists of the 1980s created a theory of the postindustrial society - a market alternative to communism. They thought that scientific discoveries and technological breakthroughs would solve a number of economic, environmental and demographic problems as well as adjust most social differences. The key values of the information society were education and science, whereas the main part of its economy was not an industrial company but a university, research center or, using modern language, technology park.
But everything went the wrong way. Banks and stock markets became the heart of the economies of the postindustrial countries, though the utopian capitalists thought it would be a technology park. Financial traders, not scientists, became the main economic agents.
The end of the 20th century saw galloping growth of the financial component in the U.S. economy. It resulted in a great number of credits and the growth of a financial bubble - a system where profit does not depend on real production, but is a result of sophisticated financial transactions.
The industrial ballast, that did not experience the anticipated technological stimulus, was transferred to regions with cheap work force, like Southeast Asia. Having distributed its industrial potential all over the world, America retained control over the cash flows coming into the national budget and became a bottomless market for industrial goods.
There lies the main danger for the U.S. itself, as well as for all the countries whose economies are tied with the American one. The warnings about the possibility of a financial collapse were frequent. However, it was very profitable to make money out of money, thus the funds in the bubble surpassed the real economy. The current financial crisis may result in a loss of control over the periphery economies, as well as a decline of demand in the U.S. that will result in overproduction crises in the countries that supply it and collapse of raw economies.
) We must end the danger posed by companies that are “too big too fail,” that is, companies whose failure would cause systemic harm to the U.S. economy. If a company is too big to fail, it is too big to exist.
It seems to me that "too big to fail" should be a major consideration when companies merge under Anti-Trust law. All of these are conglomerates that are only too big to fail because they dominate the market and/or financial system. I am willing to allow big companies to exist. But if a company is "too big to fail".... then the government has a responsibility to see that the company does not fail. And if the government has that responsibility, then the government also has the obligation to provide sufficient regulatory oversight as to pre-empt the possibly of failure. Moreover, to the extent that the government provides insurance against failure, the government should also participate in the profits of the enterprise as well as regulation of executive payout schemes so that there is no incentive for those executives to take excessive risks.
Ultimately, what could prove to be the most expensive aspect of the bailout spree is the message the government is sending to firms in which the market has lost confidence. Prudent management, it seems, will be punished, while the status quo - however unhealthy - must be maintained at all costs.
The strong stock-market rally of the past two days aside, intervention that fails to foster a shakeout of weaker firms will only delay the reckoning that must occur before a sustainable economic recovery can take shape.
"We continue to believe that the financial sector is in need of massive consolidation because the sector simply has too much lending capacity left over from the credit bubble," Merrill Lynch investment strategist Rich Bernstein writes Friday. "History shows well that consolidation is the primary driver of post-bubble economies."
But that said, the idea to do nothing as a means of economic catharsis is frankly crazy.
This was in reference to my comment that we should "do nothing" which was followed by my reference to obeying the law.
I dislike word games, and leave that to the politicians.
The basic problem with the bailout is that once started, there may be no end. Pushing the end game is a cheap shot, which means that the final solution may be many times today's cost.
$700 Billion is a bad guess. With $1.6 Trillion at risk...(already spent plus the $700 bn) this comes to $15,000 per U.S.Family... and that's IF everything goes as Paulson "hopes".
Consider this (partial quote):
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He cites research by Citigroup London analyst Matt King, penetrating the smoke and mirrors in the last accounts of the five big New York investment banks.
This shows that while they had a combined $US1.6 trillion in finance secured by collateral on their balance sheets, the total blew out to $US3.5 trillion by the time off-balance-sheet transactions are included. The off-balance-sheet transactions are mainly collateral they have received in "repo" deals, but then on-lent to someone else (repos, or repurchase agreements, are essentially short-term secured loans).
King explains how this funding disappears from the balance sheet. The investment broker sells a hedge fund $100 million of stock in Company A, providing a margin loan to finance it.
The hedge fund then short sells $100 million of shares in Company B, and uses the proceeds to pay off the margin loan. The investment bank now records no change in cash and no net receivable from the client, so there is nothing on the balance sheet.
The investment bank needs to borrow the second stock so that the hedge fund can deliver on its short sale, so it pledges the first, which it is holding as collateral. The investment bank makes a margin on the transactions, coming and going.
So... let me clarify the "do nothing" by amplifying the use of the law to handle the divestment of bad debt from bankrupt corporations. Instead of guaranteeing the bad debt, the government should oversee the disposal and determine the residual value. The ensuing "chaos" will last until the wiser members of the financial community find a way to maximize the value according to the law.
I would suggest that the FED should use whatever "Treasury/Taxpayer" dollars that are needed, be used to make whole the innocents who have been harmed. Hedge Funds and Derivatives have been at the fore of Government advice to investors as high risk.
As to the resolution of AIG... the proposed "controls" on AIG were stipulated before the bailout was proposed. In effect, the bailout precludes the so called "controls".
This is a very intense situation, and, I fear, what we see is just the tip of a very large iceberg.
The derivative problem and the CDS's that ballooned between 2003 and 2007 are the unknown quantity. Stereoman remarked on the comment about banks trading the same security three times, through swaps. This actually happens as the identity of the artificial insurances becomes blurred... each time, with the brokers taking commission, and each time adding to the banks/brokers on or off the book assets. Remember the $1.4 quadrillion notional value of the derivative trade. While the industry uses this as a measure of trading volume, it really isn't. I haven't seen any responsible industry leader place an estimate on the actual value. A closer reading of the cited article above will bear this out.
This bailout is surely a done deal... with the only pushback coming from politicians who pursue their own interests without understanding the problem in the first place. Am afraid I just don't understand the "keeping people in their homes" argument.
Let me take a shot at the discussion about the Henry Ck Liu article. Phil picked up on the 10 depression similarities.
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1) Too much savings in relation to consumer power due to income disparity; 2) Over capacity due to excessive investment from surplus capital; 3) Over stimulation through the growth of debt through new intricate system of inter linked debt obligations; 4) Legalized price fixing through mergers and acquisitions; big corporations maintain price and cut production instead of lowering prices, resulting in massive unemployment; 5) Economic growth too heavily dependent of big ticket durable goods that cannot sell in a depression thus slowing recovery; 6) Exhaustion of public confidence and optimism; and 7) The collapse of international trade (Smoot-Hawley Tariff Act). 8) Irresponsible foreign lending (the US was a creditor nation with a credit balance about twice the size of the total foreign investment in the US.)
I don't wanna drive this into the ground, but I'd like to frame the points in the way that I think Liu intended. Even though I don't know much about economics, I've been reading most of Liu's works as far back as 2001, and I think that some of his statements are being misread.
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1) Too much savings in relation to consumer power due to income disparity; 2) Over capacity due to excessive investment from surplus capital
In both of these statements... based on knowing Liu's philosophy, he is NOT talking about the Nation, but the income disparity that leaves excess non working and non controlled monies of the very rich to remain underutilized. Henry Liu understands the concentration of wealth in the hands of a very few, and the quantum growth of this wealth, that occurs without risk, without management, and without direction.
He is saying that the very rich (perhaps the top 1/2 of one percent, is stashing away money and not cycling it into the economy. This is obviously true, in that the net assets of the world's billionaires grew by 35% last year alone. This was also happening in the late '20's.
The second point is a little more difficult to understand. I believe that the comment meant that an excess of capital was going in search of profit without serious management.
This probably seems like knit picking, but it's important to the whole situation with today's financial crisis. Just as the leaders of Enron placed themselves above the intent of the law, so have the leaders of the financial institutions pressed and exceeded the letter of the law, to create the phantom wealth that haunts today's economy. While liu pointed to parallels to 1929, I don't believe he intended the 10 points to be the heart of the article.
Itstarted, I appreciate you providing that background.
Watching the news there was an interview of Secy. Paulson. When asked if the bailout proposal would work, he responded "it has to work." It was clear he wasn't saying there is no doubt it would work but rather that we are in deep shite if it doesn't.
Since I doubt it will work except in the short term, anyone care to chime in on what happens if 6 months from now it becomes clear this isn't working?
Since I doubt it will work except in the short term, anyone care to chime in on what happens if 6 months from now it becomes clear this isn't working?
OK Phil, you are on record. See you in six months/
And in direct response to your question... if this does not work (which I admit is a possibility)... there is absolutely no prediction that is possible. As Iss separately posted
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I think you are correct in your guess, Ardy (muddy landing not crash). To some extent it may depend on how 'divorced' the financial sector is from the economic sector. But, I also think the government will not have enough "juice" left to do this again in another few years. Of course, the problem with being in the frothy part of a collapsing bubble is that a system can quickly go into a non-linear chaotic state with little to no warning and from the mildest of nudges. Time will tell. Yours, Issodhos
If this does not work, we enter a chaotic state where nothing become predictable and almost anything can happen. Unfortunately a viable economy depends upon exactly the opposite environment.
But, as I have said, I think that things will work out sort of OK.... although it seems possible/likely that world confidence in our economy and currency will be irreparably damaged.
I sincerely hope that any bailout of these high-stakes gamblers includes the provision that the CEOs and executive leadership of any company directly benefiting from a taxpayer-funded rescue must give up any form of compensation, such as bonuses, stock options, deferred compensation, and any other rewards; and receive only their base salary for a fixed period (3-5 years?). Additionally, any "golden parachutes" would become null and void. To reward these charlatans and swindlers for their bone-headed actions will only encourage more reckless behaviors and would be a slap in the face to the citizens of the United States.
Re: executive compensation... Gotta share this one with you...
This AM, on one of the financial channels, host was interviewing a wise, renowned gray haired "expert"... Conversation went something like this...
Host: "What do you think of the public's feeling that the top executives should not receive the multi million dollar pay outs and bonuses."
Guest: "That would not be a good idea. It will be necessary to pay these salaries to attract the kind of executives that will be able to handle the complex management challenges that are facing us during this recovery".
You couldn't make this up... Just imagine... paying the CEO who just ruined the company $140,000,000, to save it after the government buys all the garbage debt.
Just when you thought things couldn't get any goofier.......
Host: "What do you think of the public's feeling that the top executives should not receive the multi million dollar pay outs and bonuses."
Guest: "That would not be a good idea. It will be necessary to pay these salaries to attract the kind of executives that will be able to handle the complex management challenges that are facing us during this recovery".
It turns out that executives in every other part of the world make substantially less... and seem to perform adequatly.
I have an idea... let's out source these executive jobs to lower cost foreign labor.
So! Back in the real world, today the Dow plunged almost 400 points, the dollar was down, gold jumped more than 5% in one day and oil surged more than $20 per barrel as people sought desperately to put their money into something of real value.
A rousing vote of confidence in the bailout "plan"!
Krugman simplifies the crisis into a four-step catastrophe, and argues that it must be addressed at Step 2:
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1. The bursting of the housing bubble . . .
2. . . . left many financial institutions with too little capital . . .
3. . . . they haven’t been able or willing to provide the credit the economy needs.
4. . . . the “paradox of deleveraging.”
[SNIP]
And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.
So anybody who pops up on television, or in a congressional hearing, to talk about the vital necessity of this regrettable bailout, should be asked to give a sense of how much it might cost and then to come up with a way to pay for it. Two hundred billion dollars? Fine, please delineate $200 billion in spending cuts over the next two years or $200 billion in tax increases to pay to clean up your mess. Which cabinet-level agency should be zeroed out? Which benefits programs cut? Which component of the defense budget gutted? I'd love to hear what former Lehman Brothers CEO Richard Fuld, or President Bush (who continues to cower behind Paulson's large frame) or Goldman SachsCEO Lloyd Blankfein and Morgan Stanley CEO John Mack, whose butts were just saved, has to propose. After all, every dollar spent by the taxpayers cleaning up Wall Street's mess is one more added to the massive and expanding deficit, one more dollar that will have to be paid back with interest.
<sarcasm alert> But, but, but...don't you know that all these "toxic loans" that the government will end up owning will eventually increase in value, maybe even make a profit, and pay back the taxpayers with interest? Maybe just like how Iraq's oil profits paid for the reconstruction and revitalization of that country...? <end sarcasm alert>
What was it that P.T. Barnum said about suckers....?
these "toxic" loans have two distinct ways in which they are causing problems.
One way is the obvious way--- they are worth a whole lot less than face value and so someone will have to write off a lot of money. Never the less, these loans should have a value greater than zero... they are based upon loans on real estate that still exists--- even if less valuable that when the loan was written.
The second part has to do with valuation and liquidity. This is the issue that no one really knows what the loans are worth, and no one is willing to buy them at any price... and so the financial institution has to carry the loans at very low prices on their books... which results ins illiquidity... which means that the institution cannot do even it's normal lending business with well established customers... and so the credit markets are frozen... which in turn affects the entire economy.
So, lets say the government buys these loans... not at face value, but at some discount... say 50% discount. This is probably a realistic valuation of the underlying assets after all of the current problems settle out. And ... after all of this settle out, the government ... in theory, can wind down these loans by gradually selling all the properties, or re-financing the loans at realistic mortgage valuations. And there is some reason to expect under this scenario that the government would not come out a huge looser.... and... if handled correctly... the government could even make money on the deal... which I admit is a long shot based on how things usually work.
But along with the above come the impact of these "bailout" on the second factor I listed.... the general illiquidity of the system. And it turns out that buy buying up all these illiquid securities... even at a substantial discount... it is a great benefit for the banks and economy at large because now there is money to lend to do normal sorts of business.
And that is how... in theory... this could all work out to save the economy and allow the banks to get back into their normal line of business even whole those same banks would have to recognized very large losses on the securities taken over by the government.
I wrote The Shock Doctrine in the hopes that it would make us all better prepared for the next big shock. Well, that shock has certainly arrived, along with gloves-off attempts to use it to push through radical pro-corporate policies (which of course will further enrich the very players who created the market crisis in the first place…). But here’s the thing: these tactics can only work if we let them. They work when we give in to our fear and our desire for “strong leaders” – even if they are the same strong leaders who used the September 11 attacks to launch the Disaster Capitalism Complex. Sadly, there are no saviors in this crisis, and the only hope of preventing another dose of shock politics is loud, organized grassroots pressure on all political parties.
these "toxic" loans have two distinct ways in which they are causing problems.
One way is the obvious way--- they are worth a whole lot less than face value and so someone will have to write off a lot of money. Never the less, these loans should have a value greater than zero... they are based upon loans on real estate that still exists--- even if less valuable that when the loan was written.
The second part has to do with valuation and liquidity. This is the issue that no one really knows what the loans are worth, and no one is willing to buy them at any price... and so the financial institution has to carry the loans at very low prices on their books... which results ins illiquidity... which means that the institution cannot do even it's normal lending business with well established customers... and so the credit markets are frozen... which in turn affects the entire economy.
So, lets say the government buys these loans... not at face value, but at some discount... say 50% discount. This is probably a realistic valuation of the underlying assets after all of the current problems settle out. And ... after all of this settle out, the government ... in theory, can wind down these loans by gradually selling all the properties, or re-financing the loans at realistic mortgage valuations. And there is some reason to expect under this scenario that the government would not come out a huge looser.... and... if handled correctly... the government could even make money on the deal... which I admit is a long shot based on how things usually work.
But along with the above come the impact of these "bailout" on the second factor I listed.... the general illiquidity of the system. And it turns out that buy buying up all these illiquid securities... even at a substantial discount... it is a great benefit for the banks and economy at large because now there is money to lend to do normal sorts of business.
And that is how... in theory... this could all work out to save the economy and allow the banks to get back into their normal line of business even whole those same banks would have to recognized very large losses on the securities taken over by the government.
But, as was discussed in committee today, what if the loans are sold to the government for MORE than they are worth?
The banks and lending institutions, regardless of the pisspoor job they did in handing out those loans, will benefit from the bailout.
The homeowner, who may have entered into the agreement seeing the world through rose colored glasses, won't benefit at all.
The country as a whole will be hamstrung by the incredible amount of money being diverted from important citizen projects, into banks and lending institutions.
But, as was discussed in committee today, what if the loans are sold to the government for MORE than they are worth?
The banks and lending institutions, regardless of the pisspoor job they did in handing out those loans, will benefit from the bailout.
The homeowner, who may have entered into the agreement seeing the world through rose colored glasses, won't benefit at all.
The country as a whole will be hamstrung by the incredible amount of money being diverted from important citizen projects, into banks and lending institutions.
This is the main problem and this is the reason I don't trust the government to do a good job with this. Banks have already written down a lot of losses on those loans and if they will now sell those to the government at face value when they were originated then I think that is plain wrong.
It is not hard to find average current market price for a property and I think the government should pay that and nothing more for a loan, even if the face value of the loan is 100,000 dollars higher.
This is the main problem and this is the reason I don't trust the government to do a good job with this. Banks have already written down a lot of losses on those loans and if they will now sell those to the government at face value when they were originated then I think that is plain wrong.
I agree that would be VERY wrong. And as I understand it, that is not what is now being considered.... ie to take these loans at original face value.
If one were to price real estate in any given market before subprime loans were widely available (approximately 2003) one would have a pretty good idea of the value of a property attached by a mortgage. These houses are indeed worth something but they won’t begin selling in sufficient numbers until buyers feel confident a bottom has been reached (IMO 2003 levels) and, as Ardy says, money is available.
Most of California real estate values already have dropped to 2003 levels, which is double 1998 levels. If someone has not purchased a house there in the last few years they are probably not underwater and have accumulated quite a bit of equity. But if lenders are unwilling to lend, or funds simply are not available, we indeed have a problem.
[quote] But if lenders are unwilling to lend, or funds simply are not available, we indeed have a problem.
Lenders are willing to lend but they now focus on FHA/VA loans like they did in the 1950s.
For the company I work at, government business accounts for over 50% of loans originated now. At the peak of the real estate bubble it was less than 3%. (and I don't work for a small company)
The problem right now is that people are not willing to buy homes. They think the market will still go down and they would rather wait until they see some sign of property values not declining. Once the prices level off or start to go up a little bit you'll see a lot more buying of real estate.
But if lenders are unwilling to lend, or funds simply are not available, we indeed have a problem.
As I understand it, the "problem" is far beyond the mortgage market. Banks etc have certain regulations they have to follow regarding how much capital they have on hand as against their loan portfolio. Once that drops as it has, they no longer have the ability to lend until they can get more capitol. And if the cannot sell these illiquid loaned, that starts freezing up their loans. And this freeze extends beyond mortgage lending to include normal business lending. And so, as I understand it, we are now in a position where businesses are having a hard time getting very normal sorts of loans that they use to fund their day to day operations. At least that is what I understand.
The problem right now is that people are not willing to buy homes. They think the market will still go down and they would rather wait until they see some sign of property values not declining. Once the prices level off or start to go up a little bit you'll see a lot more buying of real estate.
And following on that thought.... the "idea" is to help form a bottom in the market so that the renewed buying can commence.
This all depends upon somehow stopping the self-reinforcing death spiral we are now in.
Again, back in the real world, trading was chaotic in New York, but the Dow lost "only" 160 points today. General Motors stock lost more than 7% in today's trading, and General Electric was down 4.6%. ______________
Listen to economist Nouriel Roubini who has been on target in most of his forecasts.
He predicts, according to financial writer Felix Salmon, "Credit losses of $2 trillion, half the US banking system nationalized, municipal defaults, house price declines accelerating, a sudden stop in consumer spending, global contagion, stagflation, you name it."
Roubini concludes: "At this point the perfect financial storm of the century cannot be contained. The only light at the end of the tunnel is the one of the coming financial and economic train wreck."
It is amazing that most people still have not grasped the magnitude of what is happening.
I read his RGE Monitor website. As I have stated previously it gives one the financial willies. And as you have stated he is usually spot on. Fasten your seatbelts.
The US government is buying bad debt for $700 billion. Now Washington is asking other countries to jump in and help, too, but the Germans are bowing out. Believing that the rescue package sends the wrong signal, experts from the country's leading economics think tanks argue it's the right call.
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Still, the financial crisis has already reached German shores, and banks here have had to announce write-downs of nearly €40 billion ($58.5 billion). "German banks are already sufficiently involved in the calamity," says Stefan Kooths of the German Institute for Economic Research (DIW) in Berlin. Either way, experts estimate that half of America's bad loans were sold abroad -- and a large part of that was assumed by Germans. And now the money is gone. "There's no reason why Germany should have to bear even more burdens," says Kooths.
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Instead of standing in the way of a market shakeout with a cash injection worth billions, Dierich argues the Americans should find another way for the banks to get ahold of some fresh capital -- by putting up new shares for sale to secure new funding, for example. In the current crisis climate, though, no bank is going to voluntarily issue new shares because that would signal to the market that the institution is facing difficulties.
Accordingly, IWH's Dietrich suggests that the US government require all banks to issue stocks and that they be required to back up the issuance with a set amount of capital. Under these circumstances, Dietrich believes that investors would buy shares of the banks that they consider healthy and that the market would make it crystal clear which banks these were. And the institutions that are having a rough time because they can't find investors will go broke. "That step would send the right signal to the market," Dietrich says, adding that those who were performing the worst wouldn't be rewarded in such as situation -- as they are being now.
Whether or not tomorrow’s accounts of today’s turmoil prove David Owen of Dresdner Kleinwort right; whether or not this is the beginning of the end of the dollar’s pre-eminence in the world’s central banks and foreign exchanges, the economic landscape has undoubtedly changed forever.
[SNIP]
The biggest question, however, is whether the reserve managers in central banks in China and elsewhere will treat this as a justification for selling off some of their massive mountain of dollar-denominated investments. If this were to happen, it could cause a catastrophic drop in the US currency, potentially compromising its status as the world’s reserve currency.
Oh, this is a question that is difficult to answer? Ha!
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What was perhaps even more worrying for investors was an item in the small print of Hank Paulson’s rescue plan. It said that, separate to the $700bn markets rescue package, the US Treasury would plunder the Exchange Stabilisation Fund – the US currency reserves, established in the 1930s – in order to pay for an insurance scheme for the money markets.
“The Treasury has committed the nation’s FX reserves to supporting the money market industry,” said Chris Turner, head of foreign exchange strategy at ING. “That suggests to us that the dollar has fallen down the list of the administration’s priorities – a worrying development for foreign investors in the US.”
The fund’s cash is being funnelled into a new scheme designed to protect money market mutual funds, which mirrors the Federal Deposit Insurance scheme for consumers’ bank savings. “What worries us is that the US Treasury has committed the nation’s FX reserves at a time when the dollar is exceptionally vulnerable,” said Mr Turner.
Wash. DC (The Intelligence Daily) -- Well, they finally did it. The Money Party exposed the nauseating underbelly of first world finance. It's a cross between a Ponzi scheme and a complex math puzzle, all geared to let those in charge rake off as much money as they can, whenever they can, while they leave us out in the cold. Unfortunately, this time their greed and lack of control has the world poised for a systemic economic meltdown.
The collapse and subsequent government rescue of home mortgage giants Freddie Mac and Fannie Mae, stock brokerage Merrill Lynch, investment bank Bear Stearns, and, an insurance company, AIG, are designed to show we're moving away from the brink of disaster to a safer place. "The system is working" to manage what Alan Greenspan is calling a once in a century event.
One thing the system might do while it's working so hard is explain why we're bailing out a stock brokerage and an insurance company? Isn't this about banks? Don't hold your breath. The corporate elite and political misanthropes who caused this are getting ready to put the final nail in the coffin of the United States economy and the livelihood of the vast majority of citizens.
This can all be summed up in the great one word speach by the late John Reed.
"The system is working" to manage what Alan Greenspan is calling a once in a century event.
-Except that it's far more than once in a century.
1913-fiat money legislated into law 1934-gold currency and bullion confiscated 1971-gold removed from treasury standard
It's an event that's been GOING ON for a century, and the only thing that's changed is that the hood is now open and everyone can see the three cylinder tractor motor standing in for the mighty 16 cylinder turbo diesel that was advertised.
The arrival of Black September on Wall Street focused an unwanted spotlight on the cracks in the United States economy, not to mention free market capitalism. In terms of journalism, Black September also highlighted deep deficiencies. Namely, how the mainstream media went AWOL for much of 2008 in covering the U.S. economy and the state of the financial markets.
I cannot say I was surprised, but I was interested that, even a week after Black Monday, there were few magazines on the news-stands with much of anything on the crisis. Granted, there is usually a week between issues, but really! No one foresaw this coming? I did....
The magazine that I love to hate, that beat the drums incessantly for the Iraq War, that tells middle-managers what to think, the Economist, was virtually a financial-crisis free-zone. And they are the experts on economic matters? Or was it that they did not want the suckers to see it coming? __________
Barrick Gold Corp., the biggest bullion mining company, climbed 2.9 percent to C$39.91. Chairman Peter Munk said the bailout of credit markets will erode the value of the dollar and support gold prices.
Barrick's standing as the largest gold producer and owner of the world's largest gold reserves will make it easy to attract buyers for its debt even as credit tightens, Munk said. The stock has surged 42 percent from a three-year low after Barrick raised $1.25 billion on Sept. 9 in its biggest offering of U.S. bonds.
Back in the real world today:
The smart money knows that the US dollar is toast.
Even Buffett's come-hither ploy could not stop the Dow from falling 29 points today, but it did help to slow the slide. _______________________
Stage 1: Financial collapse. Faith in "business as usual" is lost. The future is no longer assumed to resemble the past in any way that allows risk to be assessed and financial assets to be guaranteed. Financial institutions become insolvent; savings are wiped out, and access to capital is lost.
Stage 2: Commercial collapse. Faith that "the market shall provide" is lost. Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down, and widespread shortages of survival necessities become the norm.
Stage 3: Political collapse. Faith that "the government will take care of you" is lost. As official attempts to mitigate widespread loss of access to commercial sources of survival necessities fail to make a difference, the political establishment loses legitimacy and relevance.
Stage 4: Social collapse. Faith that "your people will take care of you" is lost, as local social institutions, be they charities or other groups that rush in to fill the power vacuum run out of resources or fail through internal conflict.
Stage 5: Cultural collapse. Faith in the goodness of humanity is lost. People lose their capacity for "kindness, generosity, consideration, affection, honesty, hospitality, compassion, charity." Families disband and compete as individuals for scarce resources. The new motto becomes "May you die today so that I die tomorrow" (Solzhenitsyn, The Gulag Archipelago). There may even be some cannibalism.
This is the main problem and this is the reason I don't trust the government to do a good job with this. Banks have already written down a lot of losses on those loans and if they will now sell those to the government at face value when they were originated then I think that is plain wrong.
I agree that would be VERY wrong. And as I understand it, that is not what is now being considered.... ie to take these loans at original face value.
I like what Warren Buffett suggested today, although I'm not sure precisely how it would work...
Let's say a bank has $50 billion in 'toxic trash'... put $2 billion of it on the market, and whatever markdown % it gets from the market, is the same markdown % the gov pays for the remaining $48 billion (which, of course, would not be $48 billion). Some kind of safeguards should be in place so no one 'games' the auction, but it sounds as good or better than anything else... it preserves the market valuation model, but does not create a low-biased market by flooding the market with the 'toxic trash' all at once.
My question is, though, are about the derviatives - arev those being bailed out also, or just the underlying actual mortgages and/or securities? And let's make sure that no one tries to pretend a 'credit swap' is a 'security'! It's not, it's a bet, plain and simple.
I read that the credit swap were so wrong, because it allowed people to take positions on the health of a security without having any stake in it - these things were made up out of nothing, literally! I don't know how it can be true, but apparently there is 500 TRILLION $$ of derivatives, compared to less than 75 Trillion of actual real estate, and 100 trillion in all stocks and bonds of ALL companies - WORLDWIDE. And, the way it was explained, this 500 trillion came into existence in the same way it would be if ANYONE could take out a fire insurance policy on YOUR house... the value of the house could be only 100k, but there could be bets on it that it will not burn down (or, for the shorts, WILL burn down!) to the tune of millions. Hmm. I think I'd be a little nervous living in said house!
How in the world did these 'obligations' come to exist, without appropriate regulation and oversight??
Oh, right, McCain the Deregulator, in charge of the Commerce Committee which, as he puts it
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John McCain, just one week ago “I understand the economy. I was chairman of the Commerce Committee that oversights every part of our economy”
Never mind that he's wrong, but even to any extent that he's even partly right, isn't he indicting himself??
You know, now I'm not so sure if Congress should pass ANY kind of bailout... anything done along those lines, especially rushed, stands a good chance of being worse than the problem it is purporting to solve.
A side benefit would be, with McCain's campaign 'suspended', we wouldn't have to watch all those lie-filled adverts.
John McCain, just one week ago “I understand the economy. I was chairman of the Commerce Committee that oversights every part of our economy”
So, if we take John McCain at his word, he was chairman of the committee that was overseeing this whole mess as it developed?
In any case, I have not heard that the "bail out includes derivatives. As I understand it it is mostly focused on the "securities " that are comprised of large numbers of bundled mortgages.
numan : Thanks for the "5 stages"... a good subject.. all by itself.
I'd tie it in with the concept of finite wealth, to finish the circle. In another post, I posited five steps as: 1. Deflation 2. Inflation 3. Deflation 4. Hyperinflation 5. Revolution
Yeh... apples and oranges, but not really. Part of a continuum...
Oh, you only post when it goes down... and you wonder where I got the impression that you cheer only when something goes wrong or in the case of the market, it goes down.
In general, people that only cheer when things go wrong make me sick.
US demand for durable goods and new homes plunged in August, and weekly jobless claims surged: a triple dose of bad economic data.
Orders for durable goods decreased by 4.5 per cent last month to a seasonally adjusted $US208.5 billion ($250 billion), the Commerce Department said.
New-home sales dived 11.5 per cent to 460,000, the lowest mark in 17 years, Commerce said in a separate report. The Labour Department said new claims for jobless benefits jumped by 32,000 on a seasonally adjusted basis to 493,000 in the week ended September 20.
"The market has taken three straight punches to the jaw today," said Patrick Newport, an economist at Global Insight.
Still, the Dow Jones Industrial Average closed up 196.89 points, or 1.82 per cent, at 11,022.06 on [misplaced] optimism about a deal in Washington to bail out Wall Street.
Durables are manufactured goods designed to last at least three years. The report was much worse than Wall Street expected; economists had forecast a decline of 2 per cent for August. The 4.5 per cent drop was the sharpest since 4.7 per cent in January. It followed three consecutive increases. Orders in August fell in virtually every big category.
"The economy is clearly in a sinking spell, and this report does not offer any signs that that's going to end anytime soon," said Hugh Johnson, chief investment officer of Johnson Illington Advisors.
Forward-looking indicators within the report, durable orders excluding the transportation sector and orders excluding defence, both plummeted, down 3 per cent and 5 per cent, respectively.
A barometer of business equipment spending - orders for non-defence capital goods excluding aircraft - decreased in August by 2 per cent, after going up 0.4 per cent in July.
"This was an ominous report," said Mr Newport. "Nearly every shipments and orders category posted a loss."
Demand for durable goods in the transportation sector decreased 8.9 per cent.
Orders fell 6.2 per cent for machinery. Primary metals tumbled 9.3 per cent, the biggest drop since 10.8 per cent in April 1993.
Kap, I am sorry that you get sick so easily. You will need your full strength in order to survive the next year or two.
Sorry my update is late. I just got home. I have a life outside these forums.
In the real world today:
So with all those weak numbers the market still went up...
And about those numbers... New constructions starts being low, well, I want that. I want that number to be non-existant for the next 6-9 months until the whole backlog of unsold properties on the market are sold.
I think this kinda fits in here... Basically... what will 700B mean when the need is 4+ T
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To put the problem into perspective, let’s just consider some base statistics.
The publicly issued debt of the Unites States was, until very recently, a massive $5.3 trillion. The total debt, including non-public IOU’s and unfunded obligations including social security and Medicare, is now a staggering $50 trillion! The total annual wealth generation, or GDP of America, is some $14 trillion.
Contrast those figures with the current debt problem ascribed to the reckless pursuit of predatory lending. Incidentally, predatory lending was made illegal in most states until overridden by President George W Bush to protect Wall Street profit opportunities.
The US mortgage holdings are some $14.8 trillion, including some $3 trillion of commercial mortgages. Local government debt is about $3 trillion. But, even these gigantic figures pale in comparison beside the $20.4 trillion of consumer and corporate debt. Therefore, the total of non-federal government debt is in the region of $38 trillion!
Of course, not all of it will default. All things being equal, possibly only a small proportion will fail, at least initially. But today, all things are not equal. We know that we are heading into a recession. This means that increasing amounts of debts will default.
The main problem is that predatory lending incurs a high default rate. So if only 10% of outstanding loans default, the government will have to raise some $4 trillion, or more than five times what Congress is being asked. It will increase the US government public debt by some 80%.
This will threaten the triple-A credit rating of US government debt. It will also crowd out corporations and entrepreneurs from crucial debt funding. Finally, it will put upward pressure on interest rates at precisely the time when lower rates are called for to avoid recession slipping into depression.
If the economy moves into a severe recession and then depression, default rates will explode. These, in turn, will cause stock markets to implode, as they did in 1929. In addition, the US dollar is likely to plummet, driving up the trade deficit in the longer term. Considering these factors, many of which the government prefers to hide, things look bad - very bad.
All this talk of Trillions reminds me that a Trillion Dollars is a Stack of $100 Dollar bills 800 miles tall. A single bill is 5/1000ths of an inch thick. We are talking about really serious money here.
Thank you for your postings, itstarted ---- they are unfailingly helpful.
When I started this thread on august 10, I had the following quote:
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The next shoe to drop is the stock market. Its not that complicated either; when wholesale prices on supplies and raw materials go up, but businesses can't pass along those costs because consumers are already maxed-out, then corporate profits plummet and the stock market crashes down with the force of an avalanche.
The problem indicated has become enormously more serious due to the financial catastrophe. The decline of the dollar will be accelerated and deep. Both raw materials and finished goods will become ever more expensive for Americans. We won't be able to pay for them. The American Way of Life is finished ---- nada ---- toast.
Foreigners own trillions of US dollars. They want to use them to buy assets before they are completely worthless. That sucking sound you hear is foreigners buying the assets of the United States and shipping them overseas ---- or leaving them here as factories and plantations for us peons to work on. What Americans have done to others will now be done to us. The Indians call that karma. __________ __________
LONDON : Global share prices crumbled Friday and investor anxiety mounted as political wrangling blocked a deal to save the US finance sector, a big US bank collapsed and a European institution showed signs of stress....
"We've got a big problem ... we need a rescue plan," Bush said in televised remarks minutes after Wall Street shares plummeted in line with Asia and Europe and as central banks again injected tens of billions of dollars to avert seizure on interbank lending markets.
After a rescue for US savings giant Washington Mutual by JP Morgan Chase in the biggest-ever US banking failure, shock waves hit European financial markets.
NEW YORK – Stocks have turned in a lopsided finish as investors nervously wait for more news on the government's financial bailout plan.
The Dow Jones industrials rose 126 points to the 11,149 level, lifted by big national banks like Citigroup Inc. and Bank of America Corp. Although investors are very nervous about the financial sector, they were gravitating toward companies they believe are in more secure financial positions.
Smaller banks and tech stocks led the day's selling, which came on very light volume as many investors chose to sit out the session....
Broader indicators fell. The Standard & Poor's 500 index declined 5.16, or 0.43 percent, to 1,204.02, and the technology-heavy Nasdaq composite index fell 14.42, or 0.66 percent, to 2,172.15.
Declining issues outnumbered advancers by more than 3 to 1 on the New York Stock Exchange, where volume came to 624.5 million shares....
Uncertainty over the bailout package left the dollar mixed against other major currencies. Gold prices rose.
What we are witnessing is the end of THE DEBT STANDARD of money. As I have been stating for a few years here on CHB...the fiat monetary system has a terminal point within its life span. The underlying issue is DEBT MONEY and any society that builds its economy on such money always, without exception, ultimately fails when the debt becomes a larger burden than the economy can service.
Oh, and this so-called bailout will only hasten the end of our monetary system by simply layering more debt upon bad debt, get ready for it. Our government is simply in the business of debt swapping. It is acting in a similar manner as it does with the national debt, in order to make payments on the national debt it must re-borrow creating new debt to pay the old debt. You cannot retire old debt with new debt, it is simply impossible to do, you cannot pay a liability with a liability instrument. You see, within our DEBBT STANDARD of money, there is no way to use a debt instrument (the dollar) to pay a debt, you can only exchange one debt for another. Eventually of course, the debt consumes all economic viability and I believe that is exactly what we are seeing, at least the beginnings of it, I give us about two years before we fully see the effects of the massive debt burden throughout the economy.
The International Monetary Fund has been cautioning for months that the global economy was much weaker than governments were admitting. Bush missed a chance to use those warnings to bring international organizations and cash-rich nations together to talk about creating a global insurance fund and taking other steps to keep credit problems from metastasizing.
It is still worth trying. French President Nicolas Sarkozy has suggested that a summit of major financial powers should take place shortly after the U.S. elections. Such a gathering should begin a systematic effort to update the six-decade-old Bretton Woods institutions, which risk being swamped by the economic overhaul that Bush has undertaken on the fly.
It doesn't just "sum it up"...that has been the plan all along, since 1913. And speaking of plans, we know that the elite will not tolerate anything that disturbs their heavenly orbit above Plantation Earth hence the reason I suggest the possibility that THIS Mother of All October Surprises has one more bonus that few have considered...
This might be the end of the dollar and CASH as we know it. What better excuse to usher in electronic credit money, what better excuse to debut The Amero? (look it up, it's not a hoax)
Then, with everyone shackled to the Mother of All Hamster Wheels and no way out, the American people will have no choice but to accept the new electronic money, which of course can be shut off on a whim if they don't like you, or even "temporarily frozen" due to technical errors, which of course could last for years.
Oh, make no mistake about it, I firmly believe that this is a crisis, one that is deeply embedded in the Fiat Monetary System as it rapidly approaches the end of its life span, but I also believe that these thugs, these parasitic elitists are taking full advantage of the crisis in hopes that they will come out on top of things, but they are in for a very rude awakening. The entire system they depend on for both their power and their wealth is THE DEBT STANDARD of money and that standard is coming to an end really, really fast.
The VAST MAJORITY of that "Wealth" is DEBT WEALTH based totally on a fiat monetary system that will collapse, just as every single fiat monetary system in history has done, with, I might add, the very same effects. After reading many, many works by Fabian Socialist, such as H.G.Wells 1940 work entitled The New World Order and others such as the Fabian Socialist EPC-Economic Planning Committee which, if you look at its proposals you will see that just about everyone of them were put in place in this country over the last 95 years. I honestly think the Elitist have blown their collective wad with the Fiat Monetary System. I feel that they have placed all their hopes and dreams in the system and actually thought they could buck history by controlling and maintaining such a system, one that has been shown to be the most unstable monetary systems in history.
So, I think The State, with all its power and all its debt wealth, will follow its fiat monetary system to the bone-yard. Even if they went to an electronic system or an alternative fiat system, the problems within the economy would remain the same. Just making a switch would not solve a single problem faced by the terminal point in the fiat system. I think this is it.
The Life-Blood of The State Leviathan is Fiat Money, it has allowed them to expand in their excesses and their overwhelming power, but The State Leviathan is hemorrhaging at the moment...and I say let it bleed out!
Joe, they think they are throwing water on the fire, but in fact they are throwing gasoline. There is little that this bailout will do so solve the systemic problems faced by this and the global economy because all it is doing is treating symptoms, not the disease.
We are witnessing the end of the DEBT STANDARD of fiat money, all fiat systems follow the same basic pattern of destruction, ours is no different. When debt becomes so massive it will begin to siphon off, gradually at first, more and more viability from the economy.
We will not see the end of this, there may be lulls, but we will continue to see economic seizure in various sectors and, perhaps the most dangerous, a hybrid depression with characteristics of both inflationary and deflationary pressures. Eventually, as this government and the FED continue to "spend" the pressures of inflation will turn to hyper-inflation and all hell breaks loose at that time.
You're probably right. I wouldn't be too surprised to see 20-30% inflation within the next two years. Looks like the dems will be left holding the bag.
We will not see the end of this, there may be lulls, but we will continue to see economic seizure in various sectors and, perhaps the most dangerous, a hybrid depression with characteristics of both inflationary and deflationary pressures.
Republicae,
Like our fascism our hybrid depression will be uniquely American. Looks like it's BOHICA time again.
BOHICA is the perfect description of the entire situation! Yeah, I am with you, I fully expect double digit inflation leading to triple digit within a few years. Additionally, there are two extremely massive bubbles that are so bloated that they will dwarf the housing bubble and that is the derivatives and the SSI bubbles. SSI is about to be hit with a massive, truly massive drain as the baby boomers press their retirement requirements on the system. As we know, since the late 80s and early 90s, the system has been on a pay-as-you-go system because the entire Trust Fund was raided by Congress and replaced by "special government securities" in other words non-marketable paper. We haven't seen anything yet...get prepared!
Put simply, the hastily crafted plan lawmakers agreed to in principle on Sunday is intended to revive jittery and fragile banks on Wall Street with enough money -- by using taxpayer funds to purchase billions upon billions of their worst mortgage-related assets -- so that lending, the lifeblood of the American economy, flows freely again.
If it is working, signs will emerge almost immediately in the interest rates on U.S. bonds and in an array of obscure -- but crucial -- financial benchmarks.
[SNIP]
Still, rising unemployment, high energy prices and falling real estate values will not disappear overnight.
"At first, there will be some sort of sigh of relief, which I'm afraid would be misplaced, because when you get through the shorter-term terror, you're left with an economic landscape that will be very fragile," said Michael Farr, president of Farr, Miller & Washington, which manages investment portfolios for people and businesses.
The financial system is blowing up. Don't listen to the experts; just look at the numbers. Last week, according to Reuters, "U.S. banks borrowed a record amount from the Federal Reserve nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression." The Fed opened the various "auction facilities" to create the appearance that insolvent banks were thriving businesses, but they are not. They're dead; their liabilities exceed their assets. Now the Fed is desperate because the hundreds of billions of dollars of mortgage-backed securities (MBS) in the banks vaults have bankrupt the entire system and the Fed's balance sheet is ballooning by the day. The market for MBS will not bounce back in the foreseeable future and the banks are unable to roll-over their short term debt. Game over. The Federal Reserve itself is in danger. So, it's on to Plan B; which is to dump all the toxic sludge on the taxpayer before he realizes that the whole system is cratering and his life is about to change forever.
Just to get a grip on the numbers being reported there, numan, if the Smirking Chimp has correctly quoted Reuters, and if Reuters has it right, US banks borrowed a total of $940 Billion last week?
Sorry, I have to see a link to the primary source before I'm buying that swampland.
Just to get a grip on the numbers being reported there, numan, if the Smirking Chimp has correctly quoted Reuters, and if Reuters has it right, US banks borrowed a total of $940 Billion last week?
Sorry, I have to see a link to the primary source before I'm buying that swampland.
Get out your wading boots:
Quote
NEW YORK/LONDON (Reuters) - U.S. banks and money managers borrowed a record amount from the Federal Reserve in the latest week, nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression.
To make sense of these numbers, you must rember a few things.
The Fed is empowered to create money out of thin air.
The international credit system has seized up. Banks are hoarding their money. They are not lending to each other. In order to function from day-to-day, the banks have no recourse except to borrow from the Fed.
I emphasize the word borrow. These are loans.
Theoretically, $X out plus $X in equals $0, and does not debase the money supply. Of course, real life is much more messy.
Many of these loans are very short-term, and some or much of the money has already been re-paid to the Fed. Therefore, less money is involved than may appear at first sight. ________________
I find that the reverberations of Berlin in the 30s are not forgotten by all; but for the most part, people do not even remember. And sadly, the vast population of the US does not want to hear the lingering sounds of money being printed and the ensuing explosion of national pride.
The following will also set the fox among the hens. I have been waiting for years for this to happen. Let's hope US regulators can stand their ground....
Quote
WASHINGTON/NEW YORK Sept 28 (Reuters) - Hedge fund managers are reluctantly preparing to disclose their short positions to U.S. regulators on Monday, a move set to give a rare public glimpse into their secretive trading strategies two weeks later.
For shareholders who have blamed short sellers for driving down company stocks, it will be a chance to see who is targeting their firm.
It is also an experiment by U.S. securities regulators, putting short sellers briefly on a similar footing to large investors who accumulate stocks and are required to regularly disclose their positions publicly.
Under a temporary Securities and Exchange Commission order, big money managers will have to reveal the number and value of securities sold short each day last week.
The disclosures are part of a series of measures the SEC has undertaken to crack down on market manipulation with an eye to calming markets rocked by a series of bank failures and fears the credit crisis will worsen.
Many people do not agree with the current system of financial instruments, but we have all learned to speak the language, whether or not we agreed with the politics of the players.
Sept. 29 (Bloomberg) -- European and U.S. stock futures fell after the evaporation of investor confidence spurred a $16.3 billion bailout of Fortis and concern grew a U.S. rescue plan won't prevent more bank failures. Asian shares declined....
Futures on the Dow Jones Euro Stoxx 50 Index, a benchmark for the euro region, decreased 40, or 1.3 percent, to 3,143 at 7:44 a.m. in London. Futures on the Standard & Poor's 500 Index lost 1.2 percent.
``There's more pain to come,'' said Andy Lynch, who manages about $3 billion at Schroder Investment Management Ltd. in London. ``People knew the bailout was going to happen. Now it's back to the same-old same-old of capital writedowns and weekend bailouts. Earnings estimates for next year still are too high.''
Sept. 29 (Bloomberg) -- The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.
$188 billion per day was a mere drop in the bucket last week. The Fed is off to save the world! Come on, big fella! Hi-ho Silver [gold?] away...! ___________
Well, another day of triumph for the New World Order of the American Empire.
We are in free fall. Hope you don't get nose-bleeds from the change in air pressure.
Our great leaders in finance and politics are running around like chickens with their heads cut off, trying to protect their asses!
Markets fall in Asia and Europe, European banks fail, Wachovia here in the U.S. fails, the trumpeted bailout fails, credit markets are frozen, the Fed prints money out of thin air at light speed, and George Bush will say: It's all your fault!(to whomever he might happen to be speaking)
Oh, did I mention that the Dow plunged 778 points today? Biggest one-day drop ever. ______________
The Irish stock market saw its sharpest one-day fall in more than 25 years today as governments across Europe were forced to bail out three banks and the $700 billion plan to rescue American financial institutions failed to unlock money markets.
The Iseq fell by 493.25 points, or 13.0 per cent, to drop back to 3,291.52 points, its greatest decline in a quarter of a century and greatest ever one-day drop. .....
Anglo Irish Bank suffered the most, as its share price was almost halved, declining by €1.98 or 46.2 per cent, to €2.30. This is the steepest drop experienced by the bank since at least January 1987....
In my humble and perhaps somewhat uninformed opinion here is what will happen if the bailout fails completely. Those who have built their entire lives on credit will be in for serious trouble because life as they know it will end.
The family down the street with the brand new homes and cars or SUV's and the house full of the latest furniture, all bought with no money down, with Mom and Pop keeping up with the Joneses by blowing up the plastic; they're going to be in a lot of trouble.
If Mom or Pop work at a job where business as usual involves a bridge loan twice a month to meet payroll which gets paid back on a ninety day net term, then their job is in trouble.
But the news media has been repeatedly blasting the airwaves all day with Wall Street execs claiming "this isn't Wall Street, it's MAIN STREET!"
Well, I hate to be the first to inform them, but outside of the folks I just described above, Main Street has been strapped for a very long time, and most people don't dare blow up the plastic or if they already DID, they DO NOT HAVE ANY credit anymore, and they're just getting by. For them, life is not going to change very much. They didn't have credit before and this means they won't have it for the foreseeable future.
But if they've been getting by....guess what? They'll continue to get by. That's me and Karen by the way...aside from our fixed rate mortgage on the house, we don't use credit because we have very little of it. We have two well used cars and a house full of "vintage" furniture which is either hand-me-down or purchased at thrift shops and yard sales, and you know what? It's pretty good looking stuff, and there isn't a stick of particle board anywhere either. It is ALL real wood cause it is all fairly OLD.
We do not owe anyone a dime. Our stuff ain't the latest and greatest but it's paid for. Our kids will be going to community colleges, not Harvard, Yale or even Texas A&M. But Brianne is taking Chinese in high school. They're the next superpower, and she wants to have built in extra value along with whatever job skills she learns. We didn't much in the way of credit before and guess what? We still won't have much in the way of credit.
The high roller lifestyle is now going to subjected to a thinning of the herd as all the thirty thousand dollar a year millionaires get culled and tossed by the wayside. From this point on, if the bailout does not pass, when you see a high roller, you know that they have a lot of CASH to back up their lifestyle.
But for the most part we're going to see a paradigm shift and the beginning of a new practicality. Things we have not seen for at least two decades are going to reappear. Things like SHOE REPAIR SHOPS, small factories where appliances get refurbished, as the Western world once again starts to see value in keeping things working instead of funding the disposable lifestyle. Rap is going to change to Blues as the brothers start to remember the value of the classics instead of over extended credit card payments on trendy bling bling.
Our parents got through The Great Depression and they ended up being known as "The Greatest Generation" simply because they learned to stick with what counts and they learned to stick together as functional villages and towns instead of insulated cell phone users zipping by in their impersonal wheeled transport capsules.
The new mantra will be "Economize, Localize, Produce" and the slogan will be "Adapt or Die", and I believe that Americans will learn to adapt, slowly at first, then more quickly as they realize that the world has not come to an end.
The bankers will be jumping out the window, we will see 1929 Redux. The American people have spoken, and if we want the message to stick we have to contact our elected officials and promise a swift and public hanging for anyone who tries to revive the bailout of the fat cats. It is time that the fat cats learned some humility in New York. But if there is anyone to point the finger at, it's the ones on Wall Street who had the hubris to think that they were the "Masters of the Universe".
I'm not saying everything will go smoothly....a lot of us are in for a shock and a reeducation...case in point: Fed chairman Ben Bernanke uttered the seven filthiest words I have ever heard on television the other day in front of Congress and the American people and almost nobody even blinked.
He said, "credit is the lifeblood of our economy".
After hearing him spew this ghastly gob of BS I waited to hear the howls of censure and wondered if there were riots breaking out on the Capitol steps. There was nothing of the kind, because most Americans have never learned or forgotten this one simple fact.
WEALTH not CREDIT, is the lifeblood of ALL economies, and the only way that CREDIT can create wealth is if you happen to be one of the creditors.
CREDIT IS SLAVERY.
The media has also gone to great lengths to paint the Republicans as the villains for not passing this bill, but they overlook the fact that there were plenty of DEMOCRATS who also refused to vote for this turkey. The rest of the Democrats should probably listen and learn, because the American people are being given a rare chance to unhook themselves from the Mother of All Hamster Wheels by being denied credit across the board. The day we learn to live WITHOUT credit is the day we learn to earn back our own personal economic freedom.
Thanks for listening, we love all of you and we hope that everyone gets through this unscathed. We will come out of it banged and bruised but stronger and wiser in the end. Keep your powder dry.
Good job. I think the bailout will go through, but it won't do much to change the kind of picture that you paint C.S. Yeah... they still don't get it. They live in a different world.
Here's what may be underlying the vote, that so many folks don't seem to understand. The quote comes from a maplight.org letter sent out to members. (good site for insight into the greed side of politics.)
Quote
I thought that you would be interested in this report on how U.S. House members voted, this afternoon, on the $700 billion bailout bill. Among all House members, those who voted in favor of this bailout received 54% more money from banking and securities firms than those who voted against the bailout. Looking at just Democrats, Democrats who voted for the bailout received twice as much money as Democrats who voted against the bailout
Good rant, Jeff. Many thanks for opening your heart and letting the ichor spew forth.
Originally Posted by Checkerboard Strangler
He said, "credit is the lifeblood of our economy".
[SNIP]
CREDIT IS SLAVERY.
Well then, by your logic, SLAVERY is the lifeblood of our economy.
I must say, I am inclined to agree. And, I might add, has it not always been thus?
Originally Posted by Checkerboard Strangler
But for the most part we're going to see a paradigm shift and the beginning of a new practicality. Things we have not seen for at least two decades are going to reappear. Things like SHOE REPAIR SHOPS, small factories where appliances get refurbished, as the Western world once again starts to see value in keeping things working instead of funding the disposable lifestyle.
StereoMan hopes you're right about that. My shop runnneth empty at the moment.
Averages can be deceiving, itstarted. Your source reports that of the 205 Rep's who voted for the Bill, the average donation from banking businesses was $231,877. However only 65 of the Rep's who voted for the bill were given that much or more, while obviously 140 who voted yes fell below that average amount.
The mean amount contributed to those voting "yes" was $103,000. The mean amount contributed to those voting "no" was $102,000.
But for the most part we're going to see a paradigm shift and the beginning of a new practicality. Things we have not seen for at least two decades are going to reappear. Things like SHOE REPAIR SHOPS, small factories where appliances get refurbished, as the Western world once again starts to see value in keeping things working instead of funding the disposable lifestyle.
StereoMan hopes you're right about that. My shop runnneth empty at the moment.
-DUDE! Wouldn't you love to be able to have a ton of refurbbed Yamaha Natural Sound receivers right about now?
But if they've been getting by....guess what? They'll continue to get by.
Not necessarily. You have lived a debt free life but how long can you last without a job?
Lower spending means less demand for products and services which means less production by companies (big and small) which means layoffs, which means that even people with no debt could lose their jobs which means that nobody, ABSOLUTELY nobody benefits from a credit crunch (well except those that root for the collapse of society - you know who you are).
For now the economic problems have been felt only in USA and the dollar has suffered since the FED kept interest rates low to stimulate the economy which weakens the dollar. The slowdown has slowly spread to Europe in the past few months and you have seen the dollar gains some strength. As you have witnessed today, the global market is directly correlated to the US market.
If there is no bailout plan I believe we'll see 15-20% unemployment in 2009 in parts of the country.
A lot of business, big and small, fund their payrolls through credit lines... if credit is tight, look for struggling business to close their doors fast.
No you didn't. I re-read your post and you make it seem that only those that have lived beyond their means will suffer... what I'm saying is that everyone will suffer, including those that have lived modestly.
And BTW, Bernake is correct. Credit has been the lifeline of our economy for quite some time. Why? Because a lot of the assets companies hold are not liquid thus cannot be used to pay for payrolls, raw materials, operating costs etc.
Can you imagine having WEALTH to create 100 cars, you make them, then you have to fire your workers until some if not all of those cars are sold so you have cash to buy raw materials and pay the workers to build more. Whereas, if you use your assets as backing for a loan, you can maintain production while you sell those cars.
I do agree with you that Wall Street has gone crazy since 1999 and the deregulation of a lot of the financial world. Rules have to be implemented to reduce the chance of another collapse. Our government has failed up because they did not take the necessary precautions of limiting the growth during good economic times in order to cushion the fall in the bad economic times.
The bigger the bubble, the bigger the burst... and the real estate bubble was huge.
Nope, sorry...allow me to amend. There WILL be lots of lost jobs, you're right Kap. Okay now on to the rest.
You say "Bernake is correct. Credit has been the lifeline of our economy for quite some time. Why? Because a lot of the assets companies hold are not liquid thus cannot be used to pay for payrolls, raw materials, operating costs etc."
I say he is uttering the relationship between the Federal Reserve and the American people, that of Master to Slave.
If a lot of assets that companies hold aren't liquid, then they aren't proper assets. Somehow goods and services managed to be rendered in this and other countries BEFORE widespread use of credit became commonplace and eventually IRREPLACEABLE. We muddled by.
Can I imagine having to fire workers because I made a hundred cars and couldn't sell them? What about all the customers who have to use THEIR assets to buy those cars. At some point actual wealth has to trade hands, sorry if that's inconvenient. At some point credit has to be regulated so that it is not used as a drug. The situation we are in right now is because there IS NOTHING BUT credit. If my position seems extreme, it is because we are in a situation that is extreme to the opposite. "Give me control over the issuance of money and credit and I care not who makes your laws" "Modern banks pose a larger danger to this country than standing armies" Kap, until we learn once again how to create goods and services with LESS credit and more actual wealth, I'm afraid nothing will be made, and the hard truth is that perhaps the best economy is one that does not rely solely on continuous growth but which can be healthy and stable in a growth state or a steady state. Economies that are backed by sound interest bearing money which is based on intrinsic value are capable of that. Economies which are backed by fiat currency behave exactly the way you described in your post. You are pointing out the symptom. I'm trying to point out the cause.
And think about this for a moment, Kap. Assets that are not easily liquid are sometimes assets that aren't worth what someone claims they're worth.
Sound familiar?
CREDIT IS SLAVERY for one simple reason. Our system of credit is based on debt money. Therefore the control of credit is the creation of debt. To be forever indebted is to be a slave.
I truly have mixed emotions about this bailout bill, I'm not happy with some of the language, including that which would allow our money to fund bailouts of foreign banks, still a large lack of oversight, and I would like to see much stricter caps on executive severence packages.
I did like the part where firms had to start paying into an insurance fund, but would like more taxpayer protection. What IF these firms we bail out turn a profit, what happens to those proceeds? Are they immediately applied to our national debt? Or do they disappear into the ehter of Washington spending?
I would like a lot more assurances on oversight, limits on how much will be bailed, and honestly, would like to see other routes tried before resorting to throwing more money into the maw of Wall Street. I'd like to see Glass-Steagel(sp?) reinstated.
My county is already in double digit unemployment, credit card use in my shop has dropped dramatically(a good thing in my opinion) my income is WAY down, but thankfully I have an awesome landlord who understands it's better to have rented property, than empty property and he's cut me some slack on rent till the economy improves(this without me asking for a reduction!!)I'm cutting back on 'extras' in stocking, and concentrating on getting by with the least possible. Does it hurt? Sure it does! But as long as I can provide food and shelter for the kids, we'll get by without the extras(which we didn't have anyway<G>)
I hope CS is right, that there is a resurgance in self reliance, and production. And on a purely local level, I sure do hope our current fuel crisis results in our state govt getting off their duffs and looking seriously at light rail transport. We are seriously crippled right now with empty gas station tanks, and folks panicking about being able to find fuel, it's truly insane down here!
Good post, Frazier. Right on. How quickly we forget that even if people can't get a home loan, they still have to live somewhere, and renters throw more liquidity into the market than buyers because they are paying cash up front for something they don't even own. Good thing your landlord didn't forget that. Hang in there!
I was wondering if someone would be addressing this point:
Originally Posted by kap17
If there is no bailout plan I believe we'll see 15-20% unemployment in 2009 in parts of the country.
As Frazier says, we already have that. It doesn't always look that way on paper, because the gubbmint has come up with creative ways to define "employment" - for example, a person who has been without a steady job for so long s/he has stopped looking is now considered "employed".
And look at some of the jobs people take in order to pay the rent: any of you ever worked for a manpower agency? Is that "employment"?
Originally Posted by Checkerboard Strangler
Wouldn't you love to be able to have a ton of refurbbed Yamaha Natural Sound receivers right about now?
I have two at the moment. I expect they will sell to two people who realize they won't be able to buy that hi def set with their maxxed out cards, and so will settle for a used receiver with mere composite video capabilities.
Originally Posted by itstarted
How didja get that calculation in 3 minutes?
Lots of fingers and toes. Just kidding. I had already begun working on it when you made your first post. I found the numbers instantly suspect.
And think about this for a moment, Kap. Assets that are not easily liquid are sometimes assets that aren't worth what someone claims they're worth.
Exactly - like art pieces - which I have several that I'd like to liquidate but can't due to finding a buyer who'll pay me what I at least paid for them many, many years ago.
And think about this for a moment, Kap. Assets that are not easily liquid are sometimes assets that aren't worth what someone claims they're worth.
Sound familiar?
CREDIT IS SLAVERY for one simple reason. Our system of credit is based on debt money. Therefore the control of credit is the creation of debt. To be forever indebted is to be a slave.
CS,
I agree that some of the evaluation models for some assets are outdated and frankly, some companies use some models that should not be allowed. But the point remains that Credit has been a huge part of our economy since WW2, if not before then.
The whole global economy is based on leveraging debt to raise the return on equity. Our government has FAILED us because it allowed financial companies to over leverage themselves. There is no reason why banks should have cash reserves as low as they had them when this whole mess started.
And think about this for a moment, Kap. Assets that are not easily liquid are sometimes assets that aren't worth what someone claims they're worth.
Exactly - like art pieces - which I have several that I'd like to liquidate but can't due to finding a buyer who'll pay me what I at least paid for them many, many years ago.
That is the worse example you could have used. Valuation of art is not even close to the valuation of fixed assets like factories, buildings and other assets that companies have.
Your art can be priced... you just don't like the price it is at. Mortgage Back Securities right now cannot be priced due to a lack of market for them.
Your art can be priced... you just don't like the price it is at. Mortgage Back Securities right now cannot be priced due to a lack of market for them.
True—but they are worth something. As are the houses secured by them. Figuring out the true value is the tricky part. I say go back to 2003 housing values and you’ve gotten pretty close.
What will the next weeks hold for us? Maybe this will come to fruition:
Quote
"In a good case scenario, the economy is slow. In a bad case scenario, there are massive bankruptcies," said Axel Merk, portfolio manager at Merk Funds.
"The problem is, the general public doesn't understand this. Maybe we need to see a few payrolls fail at a few companies before they realize," he said. "This has a very direct impact on Main Street."
People on "main street" have no idea how payrolls are financed and that most of them are on credit. They'll cry when they find out that because they didn't want to bailout the banks, the company that they work for can't pay them because they can't get a loan from those banks.
Main street and Wall Street are not parallel streets... they are curvy streets with loads of intersections between them.
The whole global economy is based on leveraging debt to raise the return on equity. Our government has FAILED us because it allowed financial companies to over leverage themselves.
Very well stated. About as pithy as anything I've read to date on the crisis.
People on "main street" have no idea how payrolls are financed and that most of them are on credit. They'll cry when they find out that because they didn't want to bailout the banks, the company that they work for can't pay them because they can't get a loan from those banks.
What??
Given that most people are paid every two weeks - employers are borrowing money to pay their employees?
The payroll monies are coming from loans and not because the company has sold enough goods and services to pay its employees?
If this is the case, then the company needs to go out of business.
People on "main street" have no idea how payrolls are financed and that most of them are on credit. They'll cry when they find out that because they didn't want to bailout the banks, the company that they work for can't pay them because they can't get a loan from those banks.
What??
Given that most people are paid every two weeks - employers are borrowing money to pay their employees?
The payroll monies are coming from loans and not because the company has sold enough goods and services to pay its employees?
If this is the case, then the company needs to go out of business.
That's like me borrowing money to pay my bills.
You obviously don't know how the financial world is financed. Everything is based on credit.
Most companies have lines of credit opened with banks and they use that credit to cover day to day operation costs, payroll being one of them. Those line of credits do not carry a large balance and are paid back within days.
But let's say that your company has a slow week and has not made enough money to cover the payroll this Friday. No problem. You can still pay the employees through the line of credit and pay back the bank next week.
I'm not an accountant so I can't really explain how payroll line of credit work. But I do know that they are backed by real assets and do not have a high re-payment time... Kinda like Amex.. you pay balance in full when statement is due.
I was just watching the House Dems' hearing being broadcast live on CNN, and Rep. DeFazio mentioned that many credit unions have come to him and told him:
a) They are doing fine, have plenty of money to loan, being based on deposits and not 'financial instruments' b) They are now getting new customers, large companies that, although solvent with plenty of assets, have been working with large commercial banks, who can no longer use their credit lines because c) their commercial banks told them that the FDIC told THEM to freeze all credit lines...
His question: Are the Feds trying to solve the problem, or are they trying to make the problem more of a crisis, to get the solution they want?
I was just watching the House Dems' hearing being broadcast live on CNN, and Rep. DeFazio mentioned that many credit unions have come to him and told him:
a) They are doing fine, have plenty of money to loan, being based on deposits and not 'financial instruments' b) They are now getting new customers, large companies that , although solvent with plenty of assets, have being previously working with large commercial banks, who can no longer use their credit lines because c) their commercial banks told them that the FDIC told THEM to freeze all credit lines...
His question: Are the Feds trying to solve the problem, or are they trying to make the problem more of a crisis, to get the solution they want?
Is this the last puscht attempt by the neocons as predicted by Naomi Klein in Shock Doctrine?
Boing, boing! Are we on a pogo-stick, or is this the staid world of high finance in the twentyfirst century? Stocks in Asia and Europe were mixed as people tried to grab profits and make sense of the global mess we have caused. The Dow was up 485 points.
Technical correction. It will drop again tomorrow. But maybe some market makers in the know are sure a bailout is coming. My crystal ball broke many years ago.
Rep. DeFazio mentioned that many credit unions have come to him and told him:
"The Faz" is our district guy. He can sometimes be off the wall but I have grown to love him. He has always been consistant and will respond promptly if I should email him..
I was just watching the House Dems' hearing being broadcast live on CNN, and Rep. DeFazio mentioned that many credit unions have come to him and told him:
a) They are doing fine, have plenty of money to loan, being based on deposits and not 'financial instruments' b) They are now getting new customers, large companies that, although solvent with plenty of assets, have been working with large commercial banks, who can no longer use their credit lines because c) their commercial banks told them that the FDIC told THEM to freeze all credit lines...
His question: Are the Feds trying to solve the problem, or are they trying to make the problem more of a crisis, to get the solution they want?
Credit unions still sell the loans that they originate to corresponding lenders like Well Fargo, Countrywide (or BofA now), Suntrust, Citi and US Bank.
A small bank like a credit union does not hold the loan for more than 30 days max. The goal is to sell it before the first payment in order to get the best price and also to free up the money to lend it to other people.
Now what will happen if nobody will buy those loans from credit unions? If they are forced to keep on the books 100 loans averaging $200,000 that's $200,000,000 that is tied up and they cannot lend anymore. And really, I doubt any credit union has that kind of cash on hand to lend.
I've dealt the past 3 years with a lot of credit unions in IA and MO. I worked for one of those correstponding banks that were buying the loans... some of them could not originate more than 5 loans at a time and were begging me to review their loans as soon as possible and wire the money same day.
People do not understand how the financial world really works.
I was just watching the House Dems' hearing being broadcast live on CNN, and Rep. DeFazio mentioned that many credit unions have come to him and told him:
a) They are doing fine, have plenty of money to loan, being based on deposits and not 'financial instruments' b) They are now getting new customers, large companies that, although solvent with plenty of assets, have been working with large commercial banks, who can no longer use their credit lines because c) their commercial banks told them that the FDIC told THEM to freeze all credit lines...
His question: Are the Feds trying to solve the problem, or are they trying to make the problem more of a crisis, to get the solution they want?
Credit unions still sell the loans that they originate to corresponding lenders like Well Fargo, Countrywide (or BofA now), Suntrust, Citi and US Bank.
A small bank like a credit union does not hold the loan for more than 30 days max. The goal is to sell it before the first payment in order to get the best price and also to free up the money to lend it to other people.
Now what will happen if nobody will buy those loans from credit unions? If they are forced to keep on the books 100 loans averaging $200,000 that's $200,000,000 that is tied up and they cannot lend anymore. And really, I doubt any credit union has that kind of cash on hand to lend.
I've dealt the past 3 years with a lot of credit unions in IA and MO. I worked for one of those correstponding banks that were buying the loans... some of them could not originate more than 5 loans at a time and were begging me to review their loans as soon as possible and wire the money same day.
People do not understand how the financial world really works.
Understood. My main point there was, what is the role the FDIC is playing in this?
There may very well be a good reason, but at the same time they may not exactly be helping 'us', as much as 'them'. I hope that doesn't make me a CT now...
I was just watching the House Dems' hearing being broadcast live on CNN, and Rep. DeFazio mentioned that many credit unions have come to him and told him:
a) They are doing fine, have plenty of money to loan, being based on deposits and not 'financial instruments' b) They are now getting new customers, large companies that, although solvent with plenty of assets, have been working with large commercial banks, who can no longer use their credit lines because c) their commercial banks told them that the FDIC told THEM to freeze all credit lines...
His question: Are the Feds trying to solve the problem, or are they trying to make the problem more of a crisis, to get the solution they want?
Credit unions still sell the loans that they originate to corresponding lenders like Well Fargo, Countrywide (or BofA now), Suntrust, Citi and US Bank.
A small bank like a credit union does not hold the loan for more than 30 days max. The goal is to sell it before the first payment in order to get the best price and also to free up the money to lend it to other people.
Now what will happen if nobody will buy those loans from credit unions? If they are forced to keep on the books 100 loans averaging $200,000 that's $200,000,000 that is tied up and they cannot lend anymore. And really, I doubt any credit union has that kind of cash on hand to lend.
I've dealt the past 3 years with a lot of credit unions in IA and MO. I worked for one of those correstponding banks that were buying the loans... some of them could not originate more than 5 loans at a time and were begging me to review their loans as soon as possible and wire the money same day.
People do not understand how the financial world really works.
Understood. My main point there was, what is the role the FDIC is playing in this?
There may very well be a good reason, but at the same time they may not exactly be helping 'us', as much as 'them'. I hope that doesn't make me a CT now...
FDIC guarantees the first $100,000 in an account. When banks fail, FDIC takes over and settles all accounts under $100,000.
If you had more than $100,000, you get the whole $100,000 plus pennies on the dollar on the rest depending on how much debt the bank has and how much money is left over.
When Indymac failed, FDIC gave people 50 cents for every dollar over $100,000.
And think about this for a moment, Kap. Assets that are not easily liquid are sometimes assets that aren't worth what someone claims they're worth.
Exactly - like art pieces - which I have several that I'd like to liquidate but can't due to finding a buyer who'll pay me what I at least paid for them many, many years ago.
YES definitely! I have a couple of art pieces done by Ed Ruscha and Jim Ganzer. Both are key historical figures in post modern art, especially from the 1950's and 60's. They're appraised in the high five figure range but there is no way I will ever see that in my lifetime because, believe me I tried and since these paintings are from a disastrous first marriage I'd feel better with them out of here and me with a pocket full of money.
These are definitely "illiquid assets" even thought it's nice to have them hanging on the wall. Jeff H in Occupied TX
Speaking of the bailout, I've decided to turn off CNN AND FOX News permanently. Both are engaged in a nonstop fear campaign which is racheting up by the minute.
Funds now sitting on record levels of cash; they'll need it, as investors could head for the exits
(Reuters)—Hedge fund managers are bracing for a massive wave of redemption requests with another quarter of miserable performance coming to a close and no end in sight for the global financial crisis. Hedge funds are sitting on record levels of cash in expectation investors will ask for their money back by Sept. 30, the deadline for most funds offering monthly and quarterly redemptions, industry executives said on Tuesday Asian funds are especially vulnerable given steeper losses than their U.S. and European counterparts and the flight to safety by big global investors.
Speaking of the bailout, I've decided to turn off CNN AND FOX News permanently. Both are engaged in a nonstop fear campaign which is racheting up by the minute.
But CNN(Live) did have the press conference after the Dem's hearing... but I can't find a recording. It was really informative, and I think cut through all the B.S.
So, why isn't it featured?
Or, did I answer my own question?
If anyone can find it, or has any suggestion where to look on CNN for earlier CNNLive pieces, please reply either here or PM... Thanks...
You obviously don't know how the financial world is financed. Everything is based on credit.
Kap, isn’t that the main problem we face—frozen credit markets and not necessarily mortgages gone sour?
If a money market fund loses money, that's called "breaking the buck." It's simply not supposed to happen. Except that it did, last week. On Monday, the Reserve Fund broke the buck. And people freaked out.Breaking the buck causes a little bit of panic. Frightened investors raced to escape money market mutual funds. It so happens that the main thing money market mutual funds own is commercial paper, the same financial short-term loans that make ordinary businesses possible. The system essentially shut down for about 12 hours.
The run on money market mutual funds is why, no matter how safe and trusted a company was, they couldn't borrow money last Wednesday. The people who usually loaned those companies money — meaning the many ordinary people with money market mutual funds — had hauled too much of their money out of the system.
This chain of events is part of what convinced Paulson and Bernanke that the situation had gone too far. If the panic had continued for more than a day, they reasoned, the wider economy would start to shut down. What would happen is nobody would be able to borrow money, and how does capitalism work if you can't borrow money? You're back to bartering, pretty much. The extension of capital almost came to a halt — just ended, period.
I think a continuation and magnification of this is the biggest fear of Paulson et al. Whether US citizens like the system or not, it’s the system we have and it is currently in very real danger without willing creditors able to lend money, and large amounts quickly.
I was speaking with two stock investment firm friends last evening and they warned me that the real "bailout" was going to take the form of a simple change in the accounting rules.
Quote
All year, many bankers have asserted that it was unfair that accounting standards required them to value mortgage securities they own at market value. The frazzled market, they said, was unrealistic about the long-term worth of those assets.
Markdowns of mortgage assets have, of course, devastated the finances of leading banks.
Some in Congress who agree with the banks now want to suspend mark-to-market accounting altogether and give lenders much more leeway in valuing mortgage securities at levels that, in theory, more realistically reflect what the assets will return over time.
Accounting purists say a rule change would raise the risk that the banks would resort to fantasy accounting -- "mark-to-make-believe" -- that would overstate the value of their assets to investors. Remember Enron Corp.?
Accounting purists say a rule change would raise the risk that the banks would resort to fantasy accounting -- "mark-to-make-believe" -- that would overstate the value of their assets to investors. Remember Enron Corp.?
If thay does happen Phil we are indeed toast. We need more transparancy, not more smoke.
Upon closer reading of the article I do agree valuing those securities accurately is indeed difficult, as I was saying earlier. They are worth something and the market is currently valuing them at next to nothing since they are illiquid due to panic.
At the same token I am sure the bankers want to overvalue them since that is certainly in their interest to do so. And that is a big fear among many bailout detractors. They fear the government will overpay for them in their eagerness to make this crisis go away. Also, many people want to keep housing prices from falling further. As painful as that is, that needs to happen. Housing prices only got as high as they did because of four years of a free money giveaway.
Housing prices need to fall to a level where people can afford them with the wages they earn and they need to be financed in a way that requires a chunk of money from the buyers out of pocket. That is why I keep arriving at 2003 values—values that existed before all the lending shenanigans began.
I was reading about the likelihood of that change too, Phil, but it didn't quite compute in my not-too-savvy internal calculator until I read your post from the LA Times.
AHA!
An aha! moment occurred.
Of course! The ultimate solution to the whole mess. Just pretend the worthless instruments have value.
Ken, this is a much broader issue than what the government would pay in a bailout. Essentially if this rule change goes into effect, there wouldn't even need to be a bailout. The bank assets would appear to be sufficient for capitalization purposes and the problem just disappears.
Damn, I didn’t realize the problem was so simple to fix. That’s great. No worries…now I’ll go buy that Hummer I’ve had my eye on, and that 7,000 sq. ft. house on top of the hill.
Mortgage Back Securities right now cannot be priced due to a lack of market for them.
LOL, they can't be priced because they're s***!
If I look at a crumbling clapboard four room hovel on Broad Street in Mansfield, with 50 amp two wire knob and tube electric service and corroded plumbing and the realtor tells me this joint is appraised at 102 thousand dollars it doesn't take a genius to know that somewhere somebody is holding a chunk of the mortgage backed securities on this POS, knowing they have s***.
I know it's s***, they know it's s*** and the banks know it's s***. Because it IS s***.
There will NEVER be a market for this run down four room pit because there is no way it will ever fetch a hundred grand. Price it at what it's worth, maybe twenty for the land and the bank would have a fit!
So it is EXACTLY like my art pieces, maybe more so.
Simply put, the Fed has decided it is time to destroy the dollar. Watch as they "recalibrate" your bank accounts and leave you with ten cents on the dollar and sneak away with the other ninety percent to give to the banksters. One morning you will wake up, and instead of $22,789.00 you will see $2,278.90.
Think it can't happen? It's happening all over the world right now!
Simply put, the Fed has decided it is time to destroy the dollar. Watch as they "recalibrate" your bank accounts and leave you with ten cents on the dollar and sneak away with the other ninety percent to give to the banksters. One morning you will wake up, and instead of $22,789.00 you will see $2,278.90.
Think it can't happen? It's happening all over the world right now!
The recalibration however, will be in the opposite direction, hyperinflation will force them to issue larger and larger denominations of the currency, of course, while it may look like a great deal of money each dollar will buy a fraction of a cent instead of purchasing 5 cents like each of those dollars purchases now. So, a dollar bill will turn into a hundred dollar bill, a 5 dollar bill will turn into a 500 dollar bill, and so on and so forth. Even at that your $22,789.00 may buy you a roll of toilet tissue.
The next step of this panic could be the mother of all bank runs, i.e. a run on the trillion dollar-plus of the cross-border short-term interbank liabilities of the U.S. banking and financial system, as foreign banks start to worry about the safety of their liquid exposures to U.S. financial institutions. A silent cross-border bank run has already started, as foreign banks are worried about the solvency of U.S. banks and are starting to reduce their exposure. And if this run accelerates--as it may now--a total meltdown of the U.S. financial system could occur.
At this point, there is clearly insufficient credit expansion to support inflated asset markets....
We are today witnessing the acute stage of bursting credit bubble dynamics. It's an absolute debacle, and there's little our well-intentioned policymakers can do about it other than try to slow the collapse.
[SNIP]
The "Freidmanites" thought they understood the (post-crash) policy mistakes that led to the Great Depression. They believed the Roaring Twenties was the golden age of capitalism. The great bust could have been avoided with a simple ($5 billion or so) banking system recapitalization. As we are witnessing today, the issue is not some manageable amount of new "capital" to replenish banking system losses. Instead, the predicament is the massive and unmanageable amount of new credit necessary to, on the one hand, sustain a mal-adjusted bubble economy and, on the other, the trillions more required to accommodate a gigantic speculative de-leveraging. I have a very difficult time seeing a way out of this terrible mess.
I disagree with the "well-intentioned policymakers" bit, but you know those Asians: courteous to a fault. _________
Federal Reserve Chairman Ben Bernanke warned Tuesday that the financial crisis has not only darkened the country’s current economic performance but also could prolong the pain.
The Fed chief’s more gloomy assessment appeared to open the door wider to an interest rate cut on or before Oct. 28-29, the central bank’s next meeting, to brace the wobbly economy.
Bernanke said the Fed will “need to consider” whether its current stance of holding rates steady “remains appropriate” given the fallout from the worst financial crisis in decades.
International markets were still in turmoil. The Dow lost 508 points to close at 9447. The S&P fell below 1000. Bernanke spread gloom by saying that the crisis could extend to the end of next year. (I think he is being optimistic)
WASHINGTON - Calm gave way to fear in financial markets Thursday, turning a relatively steady day into a rout that pushed the Dow Jones industrials below 9,000 for the first time in five years. Investors, who had begun the day somewhat optimistic that the government was taking extraordinary steps to contain the financial crisis, turned gloomy under an onslaught of worries about the economy and corporations. On the anniversary of its closing high, the Dow shed more than seven per cent, or almost 700 points, to 8579.19. The Dow has lost 5,585 points, or 39 per cent, since closing at 14,198 a year ago. The S&P 500, which also fell more than seven per cent to 909.92, is off 655 points, or 42 per cent, since recording its high of 1,565.15 a year ago.
In the month after October 24, 1929, the Dow had lost about 48% of its value. We are seeing losses approaching those of 1929 and a month has not yet passed since "Black Monday" September 15, 2008! Turmoil and losses in world markets guarantee that Friday will be another day of horror. ____
President George Bush appeared in the White House rose garden in an attempt to reassure American voters and investors.
"We are a prosperous nation with immense resources and a wide range of tools at our disposal," he said. "Fellow citizens, we can solve this crisis. And we will."
Oh, now we are "fellow citizens," are we, rather than "consumer units?"
In the month after October 24, 1929, the Dow had lost about 48% of its value. We are seeing losses approaching those of 1929 and a month has not yet passed since "Black Monday" September 15, 2008!
Quote
Markets tanked Thursday, extending the Dow's losses over the last seven sessions to 2,271 points, or 20%, as panicked investors ditched stocks across the board.
Even a loss of 1% could be said to be "approaching". Yet I think it is also fair to say we have a long way to go before we are in a worse position now than we were in 1929.
Bush Calls for Calm Amid Global Stock Market Panic- Reuters
Warning that "anxiety can feed anxiety," U.S. President George W. Bush implored Americans to remain confident on Friday and promised to restore stability in the face of a global stock market panic.
He certainly is an expert in the way fear works. He's somewhat less adept at restoring stability though.
Here is an article by Paul Craig Roberts, asssistant secretary of the treasury under Reagan. He is a conservative (old-style), but do not let that put you off. He is honest and has a good head on his shoulders.
Let’s begin with the fact that the financial crisis is more or less worldwide. The mechanism that spread the American-made financial crisis abroad was the massive US trade deficit. Every year the countries with which the US has trade deficits end up in the aggregate with hundreds of billions of dollars. Countries don’t put these dollars in a mattress. They invest them. They buy up US companies, real estate, and toll roads. They also purchase US financial assets....
If the US current account was close to balance, the contagion would have lacked a mechanism by which to spread.
[SNIP]
In place of a liquidity problem, I see an over-abundance of debt instruments relative to wealth. A fractional reserve banking system based on fiat money appears to be capable of creating debt instruments faster than an economy can create real wealth. Add in credit card debt, stocks purchased on margin, and leveraged derivatives, and debt is pyramided relative to real assets.
[SNIP]
The explanation of the Great Depression was not known until the 1960s when Milton Friedman and Anna Schwartz published their Monetary History of the United States. Given the stupidity of our leadership and the stupidity of so many of our economists, we may learn what happened to us this year in 2038, three decades from now.
He is well worth reading on a number of topics. He is a conservative, but unlike so many conservatives, he is not a worshipper of authority and can see through the propaganda. __________
I don't know if anyone else has posted this, as I have only read bits and parts of this 27 page spead thread... but for a bit of comic relief I offer this tidbit.
Global stock markets have seen mixed trading, with Wall Street showing volatility while European markets fell for a second day running and Tokyo suffered its worst loss in two decades.
Although US stocks climbed on a late rally, news that US industrial output has suffered its worst fall in more than three decades spelled gloom for the wider economy.
The Dow Jones index of leading US shares closed higher by 400 points, or 4.7 per cent, at 8,979 on Thursday.
Guess what is going to happen tomorrow! ____________
(Reuters)—The Chicago Board Options Exchange Volatility Index, Wall Street’s main barometer of investor fear, surged to new highs on Thursday, in a sign investors remain cautious and anticipate more market turmoil. The widely-watched VIX vaulted to an unprecedented high of 81.17 before retracing to 78.62, up 13.68%. “We are seeing the VIX enter new historic levels as investors and traders continue to seek out protection and hedges at an apparently more frantic pace,” said Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital in New York. The index blew past last Friday’s record highs of 76.94 and is now in uncharted territory based on the modern VIX format which only goes back to 1990.
Some interesting quotes from history...by the "experts" of that day:
"We will not have any more crashes in our time." - John Maynard Keynes in 1927
"I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future." - E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928
"There will be no interruption of our permanent prosperity." - Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928
"No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding." - Calvin Coolidge December 4, 1928
"There may be a recession in stock prices, but not anything in the nature of a crash." - Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929
"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months." - Irving Fisher, Ph.D. in economics, Oct. 17, 1929
"This crash is not going to have much effect on business." - Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929
"There will be no repetition of the break of yesterday... I have no fear of another comparable decline." - Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929
"We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices." - Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929
"This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years." - R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929
"Buying of sound, seasoned issues now will not be regretted" - E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929
"Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom." - R. W. McNeal, financial analyst in October 1929
"The decline is in paper values, not in tangible goods and services...America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin." - Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929
"Hysteria has now disappeared from Wall Street." - The Times of London, November 2, 1929
"The Wall Street crash doesn't mean that there will be any general or serious business depression... For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before." - Business Week, November 2, 1929
"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..." - Harvard Economic Society (HES), November 2, 1929
"... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall." - HES, November 10, 1929
"The end of the decline of the Stock Market will probably not be long, only a few more days at most." - Irving Fisher, Professor of Economics at Yale University, November 14, 1929
"In most of the cities and towns of this country, this Wall Street panic will have no effect." - Paul Block (President of the Block newspaper chain), editorial, November 15, 1929
"Financial storm definitely passed." - Bernard Baruch, cablegram to Winston Churchill, November 15, 1929
"I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress." - Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929
"I am convinced that through these measures we have reestablished confidence." - Herbert Hoover, December 1929
"[1930 will be] a splendid employment year." - U.S. Dept. of Labor, New Year's Forecast, December 1929
"For the immediate future, at least, the outlook (stocks) is bright." - Irving Fisher, Ph.D. in Economics, in early 1930
"...there are indications that the severest phase of the recession is over..." - Harvard Economic Society (HES) Jan 18, 1930
"There is nothing in the situation to be disturbed about." - Secretary of the Treasury Andrew Mellon, Feb 1930
"The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity." - Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930
"... the outlook continues favorable..." - HES Mar 29, 1930
"... the outlook is favorable..." - HES Apr 19, 1930
"While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us." - Herbert Hoover, President of the United States, May 1, 1930
"...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..." - HES May 17, 1930
"Gentleman, you have come sixty days too late. The depression is over." - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930
"... irregular and conflicting movements of business should soon give way to a sustained recovery..." - HES June 28, 1930
"... the present depression has about spent its force..." - HES, Aug 30, 1930
"We are now near the end of the declining phase of the depression." - HES Nov 15, 1930
"Stabilization at [present] levels is clearly possible." - HES Oct 31, 1931
"All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S." - President F.D. Roosevelt, 1933
Commercial real estate will bottom out in 2009, flounder in 2010 and begin a slow recovery in 2011, according to a report on emerging real estate trends released today.
“Commercial real estate has only just begun to correct, it’s way behind everything else,” Jonathan Miller, a partner at real estate consultancy Miller Ryan, said during a conference call regarding the report, which was put out by the Urban Land Institute and PricewaterhouseCoopers.
Mr. Miller noted that the housing, stock and bond markets have already entered into corrections, while commercial real estate has remained relatively unscathed.
"Corrections," ha! Bloody lumps on the slaughter-house floor!
Markets were not only absolutely wrong, they were absolutely wrong on so many things on such an unprecedented global basis. Now things are blowing up. In the thick of it all, confidence in the securitization, "repo" and derivatives markets has been broken.
As a result, Wall Street simply no longer has the wherewithal to apportion ample finance for securities speculation. Without speculative demand for high-yielding loans and securities, bubble economies are starved of sufficient finance. And with asset markets bursting everywhere, this has quickly evolved into history's biggest margin call.
Scores of derivative structures used to speculate in the asset bubbles have collapsed - because of counterparty issues, illiquidity, or the structures just didn't make any sense to begin with.
Moreover, the whole notion that derivatives would provide an effective hedging mechanism is proving a fallacy. Again, counterparty issues and illiquidity are the culprits. Markets can't hedge themselves, as there is no one with the wherewithal to take the other side of the trade (especially during devastating bear markets). In particular, the credit default swap structure is proving an unmitigated disaster - for bond, equities and currency markets. Hopefully this period of liquidation and deleveraging will be over very soon.
Hah! The obligatory (and false) bit of optimism at the end!
It's going to be a long and bumpy ride down the hill.
This article is five pages long. It is well worth-while to glance over some of the detailed reports contained in it.
Alan Greenspan, the former US Federal Reserve chairman, has publicly admitted that the US free-market ideology that he and others have championed for decades is flawed.
Greenspan, who headed the US central bank for more than 18 years, said on Thursday that he had "found a flaw ... in the model that I perceived is the critical functioning structure that defines how the world works".
[SNIP]
Greenspan said he was shocked at the banks' inability to self-regulate....
Greenspan also said that the current crisis had "turned out to be much broader than anything that I could have imagined"....
He admitted he had also been "partially" wrong in opposing the regulation of derivatives in recent years.
I don't believe that lying S.O.B. for an instant.
But if what he says were true, it would mean that all our lives, fortunes and sacred honor are in the hands of unutterable morons!
"But he is an expert"
Big deal! When are people going to wake up enough to know that they cannot trust the experts and the authorities?!!
Herr Professor Doctor Greenspan deserves a big boot up his arse! He and his ilk should be wearing dunce caps and made to write at the blackboard, "I will not do it again," about ten trillion times!
Not only is the credit crisis forcing more companies into bankruptcy, it's making it harder for them to climb out of it.
Troubled businesses that in years past might have been able to restructure are increasingly being forced to liquidate, because skittish lenders are pushing for fire sales to recoup what they're owed as soon as possible.
Changes made to the bankruptcy laws three years ago have also accelerated the bankruptcy process, putting pressure on debtors to wind down if they don't immediately turn out a viable restructuring plan.
Meanwhile, the dreary credit markets are making it tougher for borrowers on the skids to line up what is called debtor-in-possession financing, or credit lines used to finance a business through the bankruptcy process.
....the burden on foreigners and on world savings of having to finance American consumption, the US government’s wars and military budget, and the US financial bailout is increasingly resented.
This resentment, combined with the harm done to America’s reputation by the financial crisis, has led to numerous calls for a new financial order in which the US plays a substantially lesser role. “Overcoming the financial crisis” are code words for the rest of the world’s intent to overthrow US financial hegemony.
[SNIP]
The Chinese are expressing other thoughts that would get the attention of a less deluded and arrogant American government. Zhou Jiangong, editor of the online publication, Chinastates.com, recently asked: “Why should China help the US to issue debt without end in the belief that the national credit of the US can expand without limit?”
Zhou Jiangong’s solution to American excesses is for China to take over Wall Street.
China has the money to do it, and the prudent Chinese would do a better job than the crowd of thieves who have destroyed America’s financial reputation while exploiting the world in pursuit of multi-million dollar bonuses.
Kinda nice to have this thread alive. It's interesting to look back at developments.
Here's one little blip of news that made me wonder how American Billionaires are faring in the wake of current developments.
Gotta confess that I'm a little surprised at the $$$ wealth accumulation of investors in other countries.
Quote
ov. 13 (Bloomberg) -- Mukesh Ambani and Lakshmi Mittal led India's richest in losing $200 billion this year as the global financial crisis triggered a plunge in stocks and property values, Forbes Asia said.
The combined wealth of India's 40 wealthiest people slumped 60 percent to $139 billion, the magazine said today in an e-mailed release. Mittal, 58, lost his top position to Mukesh Ambani of Reliance Industries Ltd. Mittal lost $30.5 billion after the world's biggest steelmaker ArcelorMittal extended production cuts. The net worth of Mukesh Ambani, 51, dropped 58 percent after demand for petrochemicals made by Reliance Industries slumped and oil refining margins shrank.
There are 27 Indians with a net worth of $1 billion or more, compared with 54 last year. The key Sensitive index declined 53 percent this year and is set for its worst annual performance on record. At the same time, there are 456 million Indians who live on less than $1.25 a day, according to the World Bank.
(Aside) If my numbers are right, those 40 billionaires could have redistributed their last years' wealth, and increased the annual income of 456,000,000 poor Indian citizens by 74%. Wow! What would you have done?
An unrepentant Henry Paulson told irate Democratic lawmakers that the administration’s $700 billion rescue is starting to work and that it’s just a matter of time before lending resumes.
“We’ve turned a corner in terms of stabilizing the system and preventing a collapse,” the Treasury Secretary told the House Financial Services Committee today. “I am confident in a successful outcome.”
"There is nothing in the situation to be disturbed about." - Secretary of the Treasury Andrew Mellon, Feb 1930
I think the market is now trading where it should have been all along, were it not for the hyper-inflated values of so many stocks, based largely on "engineered profits" - e.g., false reporting by the majority of reporting companies.
Americans are beginning to understand how much of their economy depended on the housing bubble. The collapse of housing prices has led to a collapse of consumer spending, which leads to a rise in unemployment, which in turn erodes the value of commercial property - and so the destruction of wealth spreads. Barack Obama will take office as the most powerful peacetime president in US history - he will be the only man in town with a checkbook.
President-elect Barack Obama is the only man in town with a checkbook, and by virtue of the Treasury's near-monopoly of financial power, will take office as the most powerful peacetime president in US history.
The financial trampoline act continues... Dow Close: 8,047.93 +495.64 (6.56%)
NPR is saying the big surge is due to the naming of Tim Geithner as Secretary of the Treasury...they're also saying Hillary Clinton has agreed to be Secretary of State and Bill Richardson will be the new Secretary of Commerce.
WASHINGTON (MarketWatch) -- The economic data this week is expected to take a dramatic turn for the worse, with weak durable-goods sales, consumer spending, and housing data, analysts said. "I really can't see anything to hope for out of this set of numbers that might be construed as being positive," said Nigel Gault, chief U.S. economist at HIS Global Insight. There is a clear sense among economists that things are getting worse and the recession will last longer. "The economy has suffered a heart attack. It needs careful attention," said Mohamed El-Erian, co-chief executive officer of Pimco. Economists at Goldman Sachs and other top firms are steadily revising down their growth forecasts and hiking their unemployment expectations. "Things are deteriorating all the time," Gault said.
Obama hasn't even been sworn in yet, and already the Wall Street cheerleaders are celebrating his first great triumph. According the pundits, the stock market staged a surprise 494 point rally on Friday because--get this--it was announced that Timothy Geithner would be appointed Obama's Treasury Secretary.
Timothy who?
What nonsense. The sudden turn-around in stocks had a lot more to do with short-covering than anything else, but don't let that get in the way of a good story. Even so, the last minute surge on the NYSE couldn't stop another week-long bloodbath that ended with the Dow and S&P 500 tumbling another 5 percent. That's not to say that Geithner is not bright and talented guy. He is; and so is his White House counterpart, Lawrence Summers. But the media hype is way overdone. Geithner doesn't drive the markets and he isn't "change you can believe in". In fact, he's a protege of Henry Kissinger, a member of the Council on Foreign Relations, and has the same political pedigree as his predecessor, Henry Paulson. They're both part of the ruling fraternity and their views of the world are nearly identical. There's no doubt that Geithner will be more competent and effective than Paulson but, then again, who wouldn't be? Paulson may be the biggest flop at Treasury since Andrew Mellon steered the country onto the reef during the Great Depression.
Sorry, numan, but your source has a flaw in its analysis. If that were an accurate assessment, there would have been a countervailing subsequent loss, and that didn't happen. It may be speculation, but the timing of the market rise is more consistent with NPR's analysis than the Chimpshot.
I have probably mentioned it, but the market is currently trading about where it ought to be, without the ridiculous speculation that has been driving it. It may go down farther, but there are adults in the room, for a change. I don't know how much good they can do - the entrenched interests are mucho resistant - but at least there is a countervailing force, which hasn't existed for at least 8 years.
I am just curious if a total economic collapse is comming. And, if so, what will be the timing of the event... or, will it be similar to the end is near prognostications?
the market is currently trading about where it ought to be
I don't think that is true. Look at the dividend yield of some of the strongest companies these days. For example, Bank of America is paying around 8.6% in dividends. They said they didn't need any bailout money, thank you very much, but were asked to take it anyway just so the other guys wouldn't be embarassed!
Now why would the value of their stock be "fairly priced" with that kind of income generation? Especially considering they just bought Wachovia, their future income stream will be even higher than when they were just paying a dividend yield about 1/3 of that a year ago!
Or how about Apollo Investment: A couple of months ago their price was around $16/share and they were paying $2.08/share in dividends per year. (They are one of those tax-exempt investment companies that has to pay at least 90% of their income in dividends.) Yesterday their stock price slipped under $6/share, but their next dividend payment scheduled for December is unchanged at $0.52/share. (They have no exposure to sub-prime home loans, and there is no information out there that suggests their income stream will decline.) This represents a yield of over 34% per year! Obviously, the stocks of many strong companies are being valued as if they have no future value at all.
When Bank of America stock reaches a price yielding under 3% and Apollo reaches a price yielding under 13%, then I will agree that the market is fairly priced. For now, prices reflect total panic.
I tend to agree with the Smirking Chimp's assessment of the Geithner appointment. I don't see why the failure of the market to stage a "countervailing subsequent loss" proves any more about the appointment than the initial surge. I think we all recognize that the fate of the financial markets is tied more to "trust" and "confidence" than to any tangible factors, and given that, it seems to me, if the media had hyped Mr. Geithner in the manner that the Chimp did - pointing out that he is cut from exactly the same cloth as Mr. Paulson and that his economic views, and actions, have historically been very similar - it could well have thrown a blanket over the rally.
My conclusion is that whatever Geithner is or isn't, it's the perception of the significance of his appointment that makes the difference.
In the same vein, I see the media fawning over Mr. Obama, treating him as if he were already President, creating an image of him that is much larger than the President-elect is typically afforded. It is this image of the oncoming economic Savior that is essential to instill in the public enough confidence to go out and spend money for the holidays, that will ultimately lay a steadying hand on the teetering economy, not any specific appointment he may make or action he may suggest.
the market is currently trading about where it ought to be
Obviously, the stocks of many strong companies are being valued as if they have no future value at all.
When Bank of America stock reaches a price yielding under 3% and Apollo reaches a price yielding under 13%, then I will agree that the market is fairly priced. For now, prices reflect total panic.
We're mixing metaphors, my friend. I was talking "aggregate" market. With regard to individual stocks, I agree. I think that in the relatively near future, volatility will settle some, as individual stocks begin to be valued more closely to their underlying fundamentals. I was just trying to say the 16,000 Dow was 100%+ over where share prices should have been. When the Dow is 4 times the annual GDP of the US, something is wrong with the numbers.
I'm not sure, Steve, that we fundamentally disagree. Your conclusions are actually closer to mine than to the Chimp article. It was actually arguing that there was no impact on the market from the appointment, which I think is not borne out by the market affect. I agree that perceptions do matter, and the perception is that the adults are coming to play. The market is responding to that. I also think that the descriptions of the players are deliberately misleading, but that is the point of the smirking chimp: smirking. I just don't like sloppy analysis, and that is my perception of the article.
With all respect, there is no "proper value" of the stock market. It is frequently the case that prices rise when people say the market is over valued... and fall even when there is an opinion the the market is undervalued. Stocks are worth exactly what you can sell them for.
I questioned your claim that the market would have had a "countervailing subsequent loss" if the Geithner appointment were not responsible to Friday's gains. That's a mysterious concept to me, and one that you have not elucidated any further.
Also, you seem to be stating that the market was responding to the perception that the Geithner appointment was a harbinger of economic rescue, but I don't buy that either. I agree with the Chimp that the market was making a normal adjustment after a week of precipitous decline, just as it did the previous Thursday. I meant to suggest that analyses such as the Chimp's, had they been widespread in the Librul Media, would have put a damper on the rally, but I did not mean to suggest that their absence was responsible for the rally.
I don't think that is true. Look at the dividend yield of some of the strongest companies these days. For example, Bank of America is paying around 8.6% in dividends. They said they didn't need any bailout money, thank you very much, but were asked to take it anyway just so the other guys wouldn't be embarassed! Now why would the value of their stock be "fairly priced" with that kind of income generation? Especially considering they just bought Wachovia, their future income stream will be even higher than when they were just paying a dividend yield about 1/3 of that a year ago!
Wait... when did Bank of America buy Wachovia? I work for Bank of America and I was never told of this!!!!!
Bank of America bought Merrill Lynch. Wachovia was bought by Wells Fargo.
With all respect, there is no "proper value" of the stock market. It is frequently the case that prices rise when people say the market is over valued... and fall even when there is an opinion the the market is undervalued. Stocks are worth exactly what you can sell them for.
While that is true, there are a variety of pricing models for stocks that will show which stocks are selling for a price lower than the intrinsic value of the assets minus liabilities.
Those models go out the window in a time of panic or in a time of unexplained boom (anyone remember the tech boom?).
But why do you think that proven investors like Warren Buffett are now buying a ton of stocks??? Because today those prices are lower than they've been in a long time and they plan on holding those stocks long term.
I questioned your claim that the market would have had a "countervailing subsequent loss" if the Geithner appointment were not responsible to Friday's gains. That's a mysterious concept to me, and one that you have not elucidated any further.
I don't want to belabor the point, because it is somewhat off-topic, but my point is simply that "the market" responds to a lot of forces that are not always rational. In this case, there was a direct timing link to the Geithner appointment which was inconsistent with the Chimp's analysis. The Chimp piece (sorry, I don't remember the author and don't care to go back to look for it) tried to argue that it was a normal bounce, but that doesn't comport with the facts. Were that the case, there would have been a reciprocal response - a dip - that reflects the cyclical nature of stock sales following a run-up as investors (speculators, mostly) "take profits." Instead, there has been a steady rise all week, despite otherwise dim economic news. The Chimp piece/analysis does not explain this discrepacy. THAT is all I am trying to say. It is sloppy analysis based more upon its own opinion than empirical evidence.
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I meant to suggest that analyses such as the Chimp's, had they been widespread in the Librul Media, would have put a damper on the rally, but I did not mean to suggest that their absence was responsible for the rally.
It does for me, as I hadn't taken it that way. I think, truly, any anthropomorphic explanation for the behavior of the market is mostly speculation anyway. Analysts, including me, try to make behavior fit their perceptions equating coincidence with causality.
On the broader theme, I expect that there will be a significant retrenchment within the market, and the smart money will follow the smart analysis of individual stocks. The overall problem with the market has been the willingness of analysts to follow expectations rather than sticking to the fundamental soundness of the underlying businesses. But then, that is the inherent stupidity of stock markets in general. Stocks are supposed to represent fractional shares of assets of a going company, not an exchange based upon daily marginal fluctuations of perceptions. Until we get away from that idiotic thinking, speculative bubbles will persist.
Consumer confidence is at record lows because the public has lost faith in their institutions. The fear-mongering and the deception of the last 8 years have taken their toll; the pessimism is palpable. But market-based systems require confidence to function properly, otherwise people withdraw their savings and hoard their money. And that is exactly what is happening. We have entered a period of extreme risk aversion where there's been a steady run on the financial system; investors have pulled their money out of commercial paper, structured investments, money markets, corporate bonds, and securities. The markets are in a state of panic. Investors are moving into safe havens like Treasurys while consumers are cutting back on spending. The whole system is contracting. The same thing happened during the Great Depression. The similarities are stunning. In Jason Zweig's "1931 and 2008: Will Market history Repeat Itself" the author says:
"Over the two weeks ended Nov. 20, 2008, the Dow Jones Industrial Average fell 16%. Over the two weeks ended Nov. 20, 1931, the Dow fell 16%.
If you think that is scary, consider this: In the final five weeks of 1931, the Dow fell 20% further. Then it went on to lose yet another 47% before it finally hit rock-bottom on July 8, 1932.
These are important parallels, numan, and more relevant to the overall question. The error, of course, is that in 2008 we have had the experience of a Great Depression and have some idea what caused it and how to respond. I am not excusing the abhorrent behavior of many market participants, nor the dire consequences of not acting properly. What is most important in this crisis is to not lose our heads. We are in for probably the severest economic times in my lifetime, but there is a resiliency underneath that will prevent, in my view, the darkest days of the Depression. Some of us have learned something, and hopefully that will be enough. Many safety nets exist now that did not exist in 1931-32, including unemployment insurance, the FDIC, and Social Security. Are the worst actors chastened? I doubt it, but I am hopeful that the worst actions can be countered.
Trade protectionism is re-emerging, but the irony is that it is being driven not by the poor economies that have been hurt the most by the globalized neo-liberal trade regime, but by the wealthy economies, especially the US.
PART 2 Dollar hegemony against sovereign credit
Twentieth-century history showed that economic fundamentalism can have devastating results. Early in that century, rigid adherence to the gold standard was exacerbated by sterling hegemony, ultimately leading to the Great Depression and World War II. Now a new bunch of fundamentalists are in charge.
PART 3 Trade in the age of overcapacity
Neo-liberals have created a false dichotomy between so-called command economies and market economies. With the CNOOC-Unocal controversy, ideologue fantasy is once again clashing with harsh reality as the US on the one hand relies on China to relieve its overcapacity problem while on the other it fears for its national security.
PART 4 Scarcity economics and overcapacity
The myth of scarcity is as old as the story of Adam and Eve, who were driven out of the garden of plentitude by a jealous god bent on preserving his pre-eminence - rather like today's wealthy capitalists. But the myth is unsustainable, as even the concept of employment is becoming obsolete.
PART 5 Intellectual property rights: Bad TRIPS
Society benefits in the long term when intellectual propert protection encourages creation and invention. However, under the provisions of a WTO rule produced by the Uruguay Round in 1986, the wealthy countries and giant corporations have manipulated this principle for their own short-term gain. But the developing economies are fighting back.
PART 6 Trade wars can lead to shooting wars
The rapid rise of China as a major economic force has provoked US policymakers to wonder whether free trade is still in the US national interest; after all, "free" trade always favors the strong. Now that the US has gotten its way and China has unpegged the yuan, its ill-considered policies will come home to roost, making for desperate times - for everyone. This is the final article in this series.
Wait... when did Bank of America buy Wachovia? I work for Bank of America and I was never told of this!!!!!
Bank of America bought Merrill Lynch. Wachovia was bought by Wells Fargo.
Oops, sorry about that. The acquisitions are happening so fast, it's like the pantheon of Hindu Gods. I can't keep all the "begats" straight anymore!
But I think my point about Bank of America yielding >8% is still valid. When the stock price rises to give a yield under 3%, then it will make sense. (Unless inflation jumps upwards of 10%, but we seem to be seeing deflation these days.)
But then, that is the inherent stupidity of stock markets in general. Stocks are supposed to represent fractional shares of assets of a going company, not an exchange based upon daily marginal fluctuations of perceptions. Until we get away from that idiotic thinking, speculative bubbles will persist.
But why do you think that proven investors like Warren Buffet are now buying a ton of stocks??? Because today those prices are lower than they've been in a long time and they plan on holding those stocks long term.
Kap... Some people say stocks are still headed for the toilet. Some people say that this is ... or is near the bottom and that we can expect a traditional bull market rebound. Some people expect stocks to wallow around the current valuations for a an extended period of anemic consumer demand and belt tightening.
Everyone has an opinion... and taken together... those opinions constitute the market price.
I thinking Warren Buffet a great guy and tremendous investor, If your statements about him are correct... then it would seem that he feels that the current market is not fairly priced.... which is the post I was responding to.
Further, Buffet put about 5 Billion into GE when it was trading at $20 per share. It is now trading at $16... which is a 20% discount off the price he bought in at. No doubt he will get his money in the long term.... and dividend payments in the mean time.
I personally interpreted the end of world posting on this board as an indication that it was time to buy stocks... and did so. So, ultimately I agree with Buffet's opinion. But it is no more or less than an opinion about the future.
But, returning to the central point I was making, the price of a stock is determined by a lot of factors. If Buffet was really a flawless pricing genius, he would have sold his entire portfolio 12 months ago... because as NWP indicated, stocks were hugely over valued. But he did not do that... why? It is not because he lacks genius. It tuns out that there is no simple pricing equation. All we can say for sure is that stocks today appear to be somewhat below typical price to earnings ratios. So, they may be a bargain. Or, on the other hand, we may face a total economic collapse... in which case stocks are still over priced.
In general, a Key factor in pricing stocks is the market expectation of what the future holds. And that turns out to be a largely speculative calculation... which leaves stock prices highly vulnerable to bubbles and crashes. But, in any case, since we do not know the future, we do not know the correct price for a stock. And so all we really have is our op[inion about the future and the actual market price today.
These are important parallels, numan, and more relevant to the overall question. The error, of course, is that in 2008 we have had the experience of a Great Depression and have some idea what caused it and how to respond.
There are many aspects of the present situation which are unprecedented and unique. Do we know how to respond to them? Up to now, apparently not.
Originally Posted by NW Ponderer
Are the worst actors chastened? I doubt it, but I am hopeful that the worst actions can be countered.
The vampires who run the system are prepared to make profits out of any economic situation, good or bad ---- whether the rest of us are turned into hamburger meat or not. Countered by whom? The vampires who make the laws?
I remember a story I heard about a high government minister in the Guomindang government of China ----- the one before the Communists took over. He wanted to have a party at night, with his extensive gardens lit by innumerable electric lanterns. To save money, he ran a line out to the power poles near his mansion, so that he got free electricity.
The very same minister sank all his wealth into Guomindang government bonds, and lost everything when the Guomindang fell.
The irony is that if this man and others like him had had enough public spirit not to chisel and be corrupt in small matters, the Guomindang might have survived and they might have remained wealthy.
This is why I never look at this stuff; a few weeks ago someone posted a link where you could check the soundness of your bank. I did, and mine looked very strong.
I clicked on Bob's link, and the name of my bank leapt out at me.
Turned out to be a small, regional bank with no connection (that I can see) to the large bank I use. But - it did stop my heart for just a second.
Recently, the US government has continued its bailout of stricken financial institutions, even as it mulls a wider rescue of incorrigible corporate entities such as US automakers.
[SNIP]
....those looking for the bailout of G-7 economies to follow Keynesian practices are also barking up the wrong tree. This is because the experience of Japan in the 1990s is more useful, namely that firms with negative net worth will continue to repay debt even if interest rates go to zero, rather than invest in new projects carrying operational risk. The same is true of US homeowners and various others elsewhere in the world.
Debt reduction will in turn continue to cut the global economy's output. This is the "cold turkey" treatment of debt being withdrawn from habitual borrowers, much like taking away drugs from crack addicts. The rest of the world has no reason to support the efforts of the G-7 in keeping their debt addicts in the habit; indeed it has now become economically unviable for Asians to support these borrowing habits across G7. That is what I called the Fukuyama moment in finance (Asia Times Online, October 18, 2008), the idea that the history of financial markets is largely irrelevant now, particularly with respect to the building blocks such as what constitutes a risk-free asset.
The only way out is for G-7 countries to support infrastructure building and government spending in Asian countries, such as China, India and Southeast Asia. These countries have the demographics and the profit potential to repay today's borrowings, and certainly would provide a bigger boost to the global economy than whatever can be achieved by throwing money at folks with negative net worth in the US and elsewhere.
Not to mention for us to support infrastructure building and government spending in the United States. Most important ---- cut military spending. The military-industrial conspiracy can be deeply wounded now, even if it cannot be killed quite yet.
What a country calls its vital economic interests are not the things which enable its citizens to live, but the things which enable it to make war. ---- Simone Weil
In October, the CBC reported on the “exceedingly polite protest” in Iceland as the bankers looted the country. A placard at a demo outside of Iceland’s parliament in Reykjavik stated: “Stay calm while we rob you.” CBC asked: “How long will these people stay polite about their losses?”
It now appears they are no longer polite, even for Icelanders. Last Saturday, protesters angry over the 50 percent devaluation of the Krona and the impending third worldization of their small country clashed with police. “Police clashed with hundreds of protesters...."
According to the Associated Press, the “demonstrators blame the government for having failed to adequately oversee the banking industry.” In fact, many Icelanders blame the government not for overseeing the banking industry but working in a cahoots with it to loot the country. Iceland’s politicos are no different than their counterparts in Europe and the United States: they are sock puppets for the global elite who are determined to crash the global economy country by country and buy up goodies for pennies on the dollar.
[SNIP]
Debt is an efficient tool for leveling economies and decimating living standards. Monetary and fiscal austerity, privatization, and financial “liberalization” — as in neoliberalization — is no longer strictly for Africa and the third world, it is a prescription that will be imposed on first world nations as well. Iceland is a harbinger of things to come in New York, London, Berlin, Los Angeles, and elsewhere in the developed world.
On the day the grocery stores in America are as bare as they are in Iceland, the ensuing riots will be anything but polite.
if you will cast your minds back to those comments made by some on the cause of the crisis being that the govt forced banks to lend to low income, more risky people......
WASHINGTON – The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.
"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way
looks like the banks didnt mind being forced at all.
Shlack the way I heard it was that the Democrats forced Fannie and Freddie to loan money to the high risk borrowers and are thus responsible for the meltdown.
That is the Republican Way - blame the Democrats for a misdemeanor, make out like it is a serious crime, commit a felony while everyone is looking the other way, then make off with the loot. Works every time. My brother still swallows this stuff being pedaled by Rush Limbaugh and others. Even though it has been debunked eight ways to Sunday.
Shlack the way I heard it was that the Democrats forced Fannie and Freddie to loan money to the high risk borrowers and are thus responsible for the meltdown.
It is true that Fanny, Freddie, and the democcrats were all culpable to some degree.
It is also true that none of the "toxic" morgages we hear about involved fannie and freddie... they carry their own paper... and since these mortgages are backed by the governmnet, they are by definition not toxic.
The CRA argument is three quarters of it's own label - cra*. There is nothing there for the argument to hang on, it is distraction pure and simple, and deceptive to boot. First, the CRA was passed in... 1977 and essentially ended when George Bush took office. So this "bubble" had to have lingered for an incredibly long time. Second, the percentage of bad loans under the CRA is lower than the rate in the subprime market by nearly 100% (indeed, 87% of the subprime loans are still being paid, and over 92% of the F&F loans are solvent). Finally, it is obvious to any rational observer that the timing and impact of the housing bubble are much more aligned with the deregulation than regulation pattern. Indeed, as Obama's advisor Austan Goolsbee notes:
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The traditional causes of foreclosure, even before there was subprime lending, were job loss, divorce and major medical expenses. And the national foreclosure data seem to suggest that these issues remain paramount. The latest numbers show that foreclosures have been concentrated not in places where real estate bubbles have supposedly been popping, but rather in places whose economies have stagnated — the hurricane-torn communities on the Gulf of Mexico and the industrial Midwest states like Ohio, Michigan and Indiana, where the domestic auto industry has suffered.
Nigel Gault, chief US economist at Global Insight, described the unemployment numbers as "horrendous".
"This is an economy that is in absolute free fall right now," Mr Gault said: "Confidence has collapsed."
More than 1.5 million Americans have been made redundant in the past six months.
Following the steeper-than-expected decline and a $1.43 fall in the price of oil to $42.24 a barrel, the Dow Jones industrial average lost 224 points or 2.6 per cent, to 8,153.... [yo-yoing, unstable Dow-Jones Index]
The US car industry is also expected to lay off thousands of workers, taking the unemployment rate to an estimated 8 per cent by the end of the year....
Ian Shepherdson, chief US economist at High Frequency Economics, said: "This is almost indescribably terrible. In the past six montsh, the US has lost 1.55 million jobs, almost as many as were lost in the whole 2001 recession, which included 9/11 and the two months after. The pace of job losses is accelerating alarmingly."
I am still wondering if anyone is willing to make a hard and fast prediction that the economy will collapse into a quivering mass of protoplasm--- along with a general time frame for this to happen.
As I recall, at least one intrepid poster was willing to predict that the bail out would not work and would be seen to fall apart around the first of the year.
As a business owner my prediction has been for the economy to bottom out right about now and after Obamas inauguration to begin a slow upturn. By the end of the first quarter and halfway through April(tax time)we should start seeing an upswing towards whatever the new normal is going to be. If that doesn't happen and If commerce continues to dive bomb after that and into the second and third quarters of next year then it's Katie Bar the Door and possibly a full on depression.
As a business owner my prediction has been for the economy to bottom out right about now and after Obamas inauguration to begin a slow upturn. By the end of the first quarter and halfway through April(tax time)we should start seeing an upswing towards whatever the new normal is going to be.
Sounds about right to me. I am not sure how much of an up turn we will see, my guess is that the new "normal" will be somewhat lethargic.... there are not a lot of new young consumers coming along to replace the aging boomers... and there will be less artificial pumping up of the economy... etc.
China, faced with factory closures and slowing export growth as the global economy slows, is apparently prepared to weaken the value of its currency against the US dollar in defiance of a key policy goal of the United States, even as US Treasury Secretary Henry Paulson visits Beijing this week.
A weaker yuan, which would signal an about-turn by Beijing after three years of appreciation, will help to hold down prices of China's exports, raising the likelihood of further increases in its already contentiously high trade surplus with the US. At the same time, a lower yuan will make imports to China from the US more expensive at a time when American workers are fast losing jobs....
[SNIP]
Paulson's leverage on the issue is considered limited as China is already the biggest foreign holder of US Treasuries, surpassing Japan. In the event of a dispute, a strong move by China to reduce its Treasury and US corporate debt holdings could severely undermine already weakening global confidence in the US financial system. It would also threaten an end to the dollar standard system from which the US has benefited since the start of the 1944 Bretton Woods regime.
[SNIP]
"The impact of China's currency devaluation should be very big, ... It [could] lead to international competition by currency devaluation - a beggar-my-neighbor policy."
Competitive devaluations have been cited by some writers as a key cause of the Great Depression that started in 1929, leading eventually to the onset of World War II.....
The US trade deficit with China widened in October to a monthly record $27.8 billion.
Caravans of cash-rich Chinese in Hummers and Lincoln Navigators have been weaving through American neighborhoods in recent months, looking for foreclosures and other bargain properties to buy.
With housing prices crashing in the U.S., home-buying trips to America are becoming one of the more popular tour group packages in China. New U.S. visa rules for Chinese tourists and a loosening of foreign investment policies by China have made it easier for people such as Zhao Hongjun of Beijing to go house hunting across the Pacific.
From the latest Atlantic Magazine, hopefully the link will work:
In his first interview since the world financial crisis, Gao Xiqing, the man who oversees $200 billion of China’s $2 trillion in dollar holdings, explains why he’s betting against the dollar, praises American pragmatism, and wonders about enormous Wall Street paychecks. And he has a friendly piece of advice:
DOHA, Dec. 1 (Xinhua) -- The United Nations released here Monday a report recommending a massive economic stimulus packages to counter the global economic downturn.
The report, entitled the Global Outlook Report, is part of UN's assessment of the world economic situation in 2009....
In the report, the UN recommends that massive and COHERENT economic stimulus must take place soon to counter the global economic downturn.
According to the report, the U.S. dollar and world per capita income will decline further next year, while export growth and capital inflows will fall and borrowing costs for developing countries will increase....
The world body also recommends stronger regulation of financial institutions, an overhaul of the international reserve system and a more inclusive global economic governance.
"Day by day, we are getting closer to the pessimistic scenario"
The United Nations says the world economy faces its worst downturn since the Great Depression.
It expects world economic output to shrink by as much as 0.4% in 2009, due to a slump among developed countries - particularly the US and in Europe.
This would mark the world economy's first year of contraction since the 1930s, the UN said.
The report added there had been complacency about the impact of the financial crisis on poorer countries.
"It seems inevitable that the major countries will see significant contraction in the immediate period ahead and that recovery may not materialise any time soon, even if the bail-out and stimulus package succeed," it says.
[SNIP]
The UN expects developed economies to shrink by up to 1.5%, while developing nations should expand by at least 2.7%.
But because of higher population growth in developing countries, income per capita for the world as a whole is expected to fall in 2009.
Even as global economies unravel before our eyes, there's been growing speculation equity markets have bottomed.
Permabears like Robert Shiller and Steve Leuthold argue that stocks have been driven down to levels that are historically cheap. I wish I could believe them, but I don't....
....as I wrote here last week, I believe that the world economy will not be a hospitable place for equities for some time. A long, deep recession, massive debt liquidation, fiscal strains on governments around the world, and a new frugality among consumers could produce sub par economic growth well into the next decade.
And by some key measures, stocks aren't very cheap at all.
At its recent closing low of 7,552, the Dow Jones Industrial Average had lost nearly half its value from last October's closing peak above 14,100. The Standard & Poor's 500 Index was down nearly 52% from its all-time closing high of 1,565.15.
But even at those lows, stocks don't reflect the bargain-basement valuations we've seen at the bottom of other bear markets....
....according to S&P's senior index analyst Howard Silverblatt, the S&P 500 now trades at above 19 times reported earnings for the 12 months ended Sept. 30.
That's much lower than it was in the fourth quarter of October 2002, the last bear market's nadir, when it changed hands at nearly 32 times reported earnings. That period featured substantial write-offs across corporate America, seriously depressing earnings.
But it's also much higher than the 14 times reported earnings at which the S&P 500 traded in the third quarter of 1990 (that bear market's bottom) and the incredible seven times earnings at which the S&P changed hands in the third quarter of 1974, the end of that ferocious bear.
in the long term, things are not so rosy; over the next 15 years, Americans and Europeans may suffer a worse fall in their living standards than during the Great Depression, albeit played out agonizingly slowly.
Benchmarking first: According to Bureau of Economic Analysis statistics, GDP declined 26.6% between 1929 and 1933.... In terms of living standards, real per capita personal consumption expenditures did not recover to their 1929 level until 1941, giving American consumers 12 years of living standards lower than they had become used to.
[SNIP]
Today, however, globalization has gone so far that US self-reliance would be economically impossible except at inordinate cost. All kinds of global supply chains and product relationships would have to be unwound....
A second factor intensifying the decline in US living standards is the appallingly low US savings rate and the reduction in the US capital pool that has resulted from over a decade of excessively low interest rates....
In a time of tight credit such as we are now experiencing and are likely to continue experiencing for some time to come, that borrowing crowds out other more productive uses of capital....
The speed of globalization and the balance between factors tending to mitigate its adverse effects on the US and Western Europe and those tending to intensify those effects is unclear. Nevertheless, the probability of a long-term decline in US living standards comparable to if not deeper than the Great Depression must be rated as fairly high. It will take the form, not of a single catastrophic collapse as in 1929-33, but of a series of sharp unpleasant recessions, interspersed with feeble unconvincing recoveries in a downward saw-tooth pattern. The result will be the same, albeit over a longer period.
The last cited article is so good, I'm putting it here again, hoping that others will take the time to read it.
The "Bear" is as usual far ahead of his time, and this time is no different. Realistic looks at the future, with some historical and analytical basis, are SO much better than the trite airhead talk on some of the financial cheerleader shows... aka ... Fox Business News, CNBC, and often Bloomberg News.
The globalization argument, with the effects of GDP in other countries is good and mostly logical... and probably more correct. I believe that the Bear missed the cumulative effect of our advanced infrastructure in his calculations, but this may be inherent in our economy as stated. The second part of my disagreement is the fact that he ignored the effect of class warfare in our own country, which I think will happen, and advance the equalization process.
In any case, an excellent article. Sadly, most who read it will not take the time to absorb the full meaning. In a way, probably just as well, as US confidence levels are low enough already.
All in all, most financial theories won't embrace any of the scenario presented, as they were built when the world was much bigger, and less sophisticated.
On the part about the positive effects of a broad based Obama recovery plan... we can only hope that it happens. I'm hoping that the idea of productive borrowing is correct. I don't understand it, but if the Bear says it can work, I'm joining the team.
The last cited article is so good, I'm putting it here again, hoping that others will take the time to read it.
The "Bear" is as usual far ahead of his time, and this time is no different. Realistic looks at the future, with some historical and analytical basis, are SO much better than the trite airhead talk on some of the financial cheerleader shows... aka ... Fox Business News, CNBC, and often Bloomberg News.
The globalization argument, with the effects of GDP in other countries is good and mostly logical... and probably more correct. I believe that the Bear missed the cumulative effect of our advanced infrastructure in his calculations....
I agree with most of your comments, Cousin It.
Don't count too much on our "advanced infrastructure," though. Sadly, it is not as "advanced" as it once was. Also, entropy is our enemy. Complicated structures tend to fall apart much more easily than simple ones, and never in history has a society been as unnecessarily and dangerously complicated as American society.
As is usual with economists, the article did not deal with the catastrophic effects of the inevitable environmental degradation and ecological collapse which will become evident in the near future.
One is looking at the future with rose-colored glasses if one imagines we are facing another Great Depression. We should be so lucky. We are facing something much worse than that.
There is one part of "the Bear's" analysis that just does not compute for me:
Quote
Today, however, globalization has gone so far that US self-reliance would be economically impossible except at inordinate cost. All kinds of global supply chains and product relationships would have to be unwound, as the US consumer reverted to buying sweatshirts made in North Carolina rather than China or Vietnam. Emerging market manufacturing capabilities would not be lost, and emerging market living standards not much affected. Thus, the main effect of US protectionism would be to reduce US living standards still further.
It seems to me that he is making a couple of assumptions here that are unfounded. First, that the only way to stem the flow of capital away from the US is through "protectionism", and second, that the future American will suffer economic hardship due to the lack of foreign made goods at the low end of the cost continuum - offering as an example textiles.
It seems to me that much greater suffering would come about due to the lack of foreign made goods at the high end of the cost continuum, which would include items like electronic goods and automobiles. And it further seems to me that, rather than stemming flow of capital to foreign lands, a more favorable outcome would be developing new industries here in the US that would generate more capital flow, the bulk of which would stay in the US.
I think that's what the President Elect's economic policy is leading toward, and am therefore more optimistic than the Bear, or our colleague numan.
And it further seems to me that, rather than stemming flow of capital to foreign lands, a more favorable outcome would be developing new industries here in the US that would generate more capital flow, the bulk of which would stay in the US.
Market now factoring in much greater chance of default on Uncle Sam's debt.
Quote
People are only really willing to lend or invest in what they truly know, and as we each individually or as institutions know very little, we will invest very little and at, for the economy, ruinously high rates. The U.S.’s benchmark status as a “risk free” borrower is based on the idea that it is the best available credit, a solid gold borrower that will not default. And of course as Treasuries are denominated in dollars and as the state ultimately can raise taxes or print money to fulfill its obligations, that is correct. But investors clearly are becoming increasingly spooked that the United States’ difficult situation and its absolutely huge borrowing plans are making it a less certain risk. It now costs 60 basis points a year to buy a five-year credit default swap insurance policy against U.S. sovereign default, up from about 15 basis points in August and 100 times more than in January 2007 when it was 0.6 basis points. Clearly, somebody thinks risk free isn’t so risk free any more.
Eliot Spitzer argues Steve's thought on imports in his first article on Slate here: Slate article
Quote
Last month, as the financial crisis and the government rescue plan dominated headlines, almost everyone overlooked a news item that could have enormous long-term impact: GE Capital announced the acquisition of five mid-size airplanes—with an option to buy 20 more—produced by CACC, a new, Chinese-government-sponsored airline manufacturer. Why is that so significant? Two reasons: First, just as small steps signaled the Asian entry into our now essentially bankrupt auto sector 50 years ago, so the GE acquisition signals Asia's entry into one of our few remaining dominant manufacturing sectors. Boeing is still the world's leading commercial aviation company. CACC's emergence—and its particular advantage selling to Asian markets—means that Boeing now faces the rigors of an entirely new competitive playing field and that our commercial airplane sector is likely to suffer enormously over the coming decades. more....
Majority of professionals got the timing of the economic downturn dead wrong; why is this?
BLOOMBERG: ECONOMISTS MISSED ALL THE SIGNS OF A COMING RECESSION
Quote
Which of two groups—economists or the general public—came closer to predicting the recession? Surprisingly, it looks like the Joe Six Packs of the world were better economic prognosticators than the elbow patch set.
In November 2007, a Gallup public opinion poll found 54% of Americans believed a recession would probably or definitely occur in the next 12 months.
By comparison, a Wall Street Journal survey of 52 economists conducted two weeks later found that, on average, the professionals put the chances of a recession at 38%.
In reality, the longest recession in at least 26 years began in December 2007, almost immediately after the two surveys were conducted.
A majority of the public got it right. Many economists did not.
“This recession, economists have done even worse than usual,” said Franklin Allen, co-director of Wharton Financial Institutions Center at the University of Pennsylvania. “They muffed predicting the crisis.”
[SNIP]
Even more galling to some observers, though, was the failure of the Bush administration, including Mr. Bush himself, to acknowledge the downturn well into this year.
“They did not awake to the recession risk until it was well underway,” said Lakshman Achuthan, managing director of the Economic Cycle Research Institute.
None of these guys "missed the signs" at all. They responded the way nearly all Americans respond to tough news these days, like kids respond to "going to the dentist".
Don't miss this article... Probably best to take some Prozac, first. On Kicking Millionaires
Now THAT article pisses me off! It is not so much that I didn't know it already, it is just almost too much to consider in one piece. Of course Rich is correct. We have know it from almost the beginning. I keep going back to Naomi Klein and the Shock Doctrine. It's all, every word, becoming reality. Americans are indeed so stunned by the sudden undeniable truth that we are immobile. We don't know what to do to stop it. Suddenly we have realized that we are powerless and soon to be penniless and there is nothing really that we can do about it.
I keep going back to Naomi Klein and the Shock Doctrine. It's all, every word, becoming reality. Americans are indeed so stunned by the sudden undeniable truth that we are immobile.
Setting conspiracy theorist Klein aside for the moment, what is being observed is the btch-slapping of the world's economies by that thing which a number of folks claimed did not exist -- the Invisible Hand of the market (i.e., economic laws). Up jump the Debil!;-) Yours, Issodhos
I keep going back to Naomi Klein and the Shock Doctrine. It's all, every word, becoming reality. Americans are indeed so stunned by the sudden undeniable truth that we are immobile.
Setting conspiracy theorist Klein aside for the moment, what is being observed is the btch-slapping of the world's economies by that thing which a number of folks claimed did not exist -- the Invisible Hand of the market (i.e., economic laws). Up jump the Debil!;-) Yours, Issodhos
It would seem that there is disagreement about whether the "market" = economic laws.
I sense an almost breathless sense of excitment in the reporting of bad economic news on this thread. I am curious why that might be?
I think you misinterpret.
It is actually the gasp you make when you reach the top of the roller coaster and you look down and see that the end of the track is hanging over an abyss.
You know things are really tanking when even the New York Times says that the System doesn't work.
-
I sense an almost breathless sense of excitment in the reporting of bad economic news on this thread. I am curious why that might be?
I can't speak for anyone else but as for me I'm not breathlessly excited in the least. Ms. Mickey and I had plans for Paris in March, that's gone. I had plans to retire one day, that's not looking as peachy as it was 6 months ago. I'm now working hard on a big garden because it may be we'll need it. All things considered so far I'm a lucky sumbitch - so far. That said, I'm losing sleep because I'm afraid that by the second quarter of next year I'll have to let some people go. One of my brothers was doing quite well until recently and now may have to file for bankruptcy. One of my children and her family are just barely hanging on. We have friends, a chef, a newspaper reporter, a business owner and more who are all unemployed. Arizona, where I think everyone on earth owned a second home, is in deep, deep debt, somewhere perhaps on the other side of 1.5 billion. I know of only one person who has sold a house here in the last year.
The bailout is a goddam scam beyond comprehension. I don't see things getter better for years. We haven't hit bottom yet in the US. That will happen sometime next year. I can't imagine. Like the lyrics to a Cowboy Junkies song I long for the days when "a quart of milk was still a dollar or even when a quart of milk was still a quart."
My guess, Ardy, is that many of us are doing what we can to cope and to prepare ourselves for the hard times to come. I will be absolutely giddy if I'm wrong about the future.
For the time being I'm trying to live in the moment. Hell, I'm not that materialistic a guy, though I have a lot more crap than I need. I've been "broker than hell" in my adult life, after a divorce many years ago. I made it. It was tough at times, but when things get like that you cowboy up and walk on. It took years but I made it. I'm not worried about me. I'm most concerned about the people I love and the dark horizon ahead.
yeah... well said... I pretty much feel the same way. I know bride and I will be fine, but we have the same sinking feeling about so many of our friends and the coming generations. We lucked out, in retiring 20 years ago during the good years of stability... We're part of the "Lucky Generation"... living between the extremes of war and extreme financial volatility. We live frugally, but with heads above water, barring catastrophic illness etc., and no debt. What we're beginning to see is the anxiety that comes to older persons, when realization sets in that there isn't any easy way to recover what they're losing. When you can't "go back to work", or even handle a minimum wage job. When that money market fund that was paying 8%interest has lost 40% of its' capital, and the $18,000 in Social Security represents 60% of the total income. I'd suggest that this is not an unusual situation. All in all, even that doesn't sound as bad as the fear of what future inflation will do. As we recover in two or three or four years, those who are still in the work force will grow with the inflation. Not so for those who are no longer able to work. When the $30,000 income of today turns into $15,000 or less, the average retired senior may be suffering more than ever imagined. No one knows what the future holds, but history teaches that the elderly suffer most in difficult times. I worry most about the people who around the 55 to 60 age bracket, where the money from the peak earning years usually goes into building the retirement fund. All incomes are relative, of course... and being "comfortable" means different things to different people.
As to the future... I can only hope that our government will provide safety nets as a first priority. Hard to talk about shelters and soup kitchens, but the alternative unimaginable.
Sounds hard to believe, but here in central Florida, most of the aid programs are being stretched already, with all funding, both public and private, falling far short of needs, and not much light showing on SM's dark horizon.
While we indeed did have a GOP dominated Congress, and the illustrious Phil Gramm at the top of the heap, Pres Clinton never should have signed that bill. There's plenty of blame to go around, now the job will be to do away with the finger pointing and all do what we have to to make sure things get back on track, starting with JOBS!! I'm all for Obama's tax credits for hiring American, without jobs there is no economy
Today on Bob Brinker, Bob's fill-in host John Flannigan blamed the repeal of Glass-Seagull in 1999 on "Clinton and his buddies."
I wanted to reach thru my radio and grab that guy by the throat and make him admit there was a Republican Congress at the time.
Actually, it was a rather bipartisan effort, rick -- especially with Treasury Sec. Robert Rubin behind getting rid of it.:-)
Quote
So who did away with the Chinese Wall of safety that Glass-Stegall provided for two-thirds of a century? Republican Phil Gramm was the primary sponsor of the bill but almost every legislator voted in favor and then-President Clinton was only too happy to sign it. Within a month of the abolition of Glass-Stegall, then-Treasury Secretary Robert Rubin, the former co-chairman of Goldman Sachs, became Sandy Weill’s top lieutenant at Citigroup (C), the bank that led the charge into using depositors’ money to speculate on sub-prime mortgages, algorithmic trading, and six-sigma derivatives.
What's so great about an economy? People want enough to eat, not to freeze, not to fry, and something to do with their time. While capitalists have certainly built an economy around those wants or needs, is an economy the only way to provide those things?
If Eco-aliens flew down in their flying saucer and offered to provide us all those things in exchange for us giving up our "economy" because it is killing the long-term livability of our planet, what should our answer be?
Yes, thank you for saving the world.
or
You can have our economy when you pry our melted credit cards from our crispy roasted hands.
What's so great about an economy? People want enough to eat, not to freeze, not to fry, and something to do with their time. While capitalists have certainly built an economy around those wants or needs, is an economy the only way to provide those things?
If Eco-aliens flew down in their flying saucer and offered to provide us all those things in exchange for us giving up our "economy" because it is killing the long-term livability of our planet, what should our answer be?
Yes, thank you for saving the world.
or
You can have our economy when you pry our melted credit cards from our crispy roasted hands.
Probably the second. Humans, as a race, value independence over everything else (although it might not seem at times).
And what if one day those "eco-aliens" decided that the best way to save the planet is to do away with the humans all toghether. We already gave away our economy, our means of production. Then what?
I think you should keep these "what-if" scenarios about aliens to thier own thread.
Re: Glass Steagall The subject of who voted to support what bill is fascinating. In my more naive early days of learning about politics, I spent much time following the voting habits of Congress... and looking for the "heroes" who agreed with my own point of view.
In real life, it doesn't work that way.
My personal observation is that bill passage and things like earmarks more often come as a result of vote trading rather than study, understanding or even conviction.
The idea that the U.S. economy is going to recover in the next six months is given little credence at a gathering of top academic economists here over the weekend.
A pickup sometime after June is still the Federal Reserve's quasi-official forecast. And leading institutional forecasters surveyed by the Blue Chip Economic Indicators are optimistic.
But that forecast seemed woefully out of touch to many experts who spoke at the annual meeting of the American Economics Association.
[SNIP]
Despite all these efforts, the U.S. economy, hit by an oil shock, a credit crunch and the global downturn, seems to be on a steep slide.
Some argue that the recession has just begun, despite the formal ruling by the business-cycle-dating committee that it began in December 2007.
Alan Blinder, a former vice chairman of the Federal Reserve, said the recession began only in mid-September when Lehman Brothers collapsed.
"We are in a horrible mess. I believe it is very young and it is going to be long and deep," he said. Even in the first quarter of 2010, the economy will likely be weak enough to need macro stimulus, he said.
Martin Feldstein, the prominent Harvard University economist, said there was no longer any basis for believing the recovery could start in the third quarter.
"I think we'll be lucky if by this time next year we see the economy hit the bottom and start turning up," Feldstein said.
"In terms of the level of activity, the end of 2009 is going to look lower than it is today," he said.
Somehow I find numan's link a tiny bit more credible than yours, Ardy.
Excellent Steve... but riddle me this...
We heard over and over again about the 54 TRILLION... that is 54 Trillion Dollars tsunami of derivatives that was going to swamp this economy. Given the enthusiasm of the reporting of that tsunami, I am sure it was real and threatening. But I am wondering what happened to it. I mean, a 54 Trillion dollar tsunami has got to go somewhere. So where did it go.
As regards the other link... the economy is struggling and will take a while to recover... and it may never again return to the previous level of exuberance. Anything else of note === other than a 54 trillion dollar missing tsunami
"a [trillion] here, a [trillion] there; pretty soon you're talking about real money" allegedly uttered by Senate Minority Leader Everett McKinley Dirksen.
As best I can tell, the derivative resolutions were never resolved, but accepted in toto... much as the same way the underlying assets of Freddie and Fannie have never been "resolved". I believe that the decision not to buy the risk assets that would have stabilized the economy came when the government realized what Warren Buffet told them about in 2002 was really true.
After all of the hullaballoo about derivatives, the nation has pretty much forgotten about them again. The market ignores the problem and there has been no effort... anywhere, to determine what happened or how to fix it.
Maybe Tsunami wasn't the way to describe the situation. Perhaps likening the problem to the potential earthquake that lies under California would be more appropriate.
It is virtually impossible to unravel the derivative swaps, and the longer the financial community can stall, the more responsible parties will disappear into the bushes. As Hedge funds and brokers declare bankruptcy or simply close down, the money that underlies the "securities" becomes even more opaque.
I would suggest that the world has thrown in the towel, and the question: "How will the financial crisis develop" will only be answered over a period of many, many years... a period of depression and stagnant economies.
I cannot find a single rational economist who will predict where the world community will find a stable base on which to build any new economy.
Here's the reasonable question that no one can answer. How does one work through a single derivative swap to determine the actual underlying value.
The $54 Trillion number came up at the time that the Lehman accounts were to be resolved. The counterparties who were party to the settlement resolved the process, by agreeing to accept the assets as stated, rather than unwinding the transactions to go to the underlying assets.
I'll listen to other theories on this subject, but at this point, I cling to my original surmise that derivatives are just a variation on the Ponzi Scheme... where the underlying capital that is supposed to be asset base for Freddie, Fannie, Pension Funds, Endowments, Municipal Funds, Insurance Companies, Foundations, Charities, and Brokerage and Market Funds... exists only as shadowy numbers...
...and that those "shadowy numbers" are only given credence as long as they are not required to be converted to cash.
Just as Madoff was never questioned as long as his funds paid off in cash when needed, so too does the financial community continue to perpetuate the derivatives bubble by accepting the assets of the community members.
The single most feared event for the entire world, is what would happen if there was a "run on the bank"... and that extended to all of the economic ties that we all live with.
BTW, has anyone tried tying the stock market numbers to the swings in George Bush's IQ as posted continuously on those "So and so has a xxx IQ, are you smarter than they are" ads? Yesterday Bush's IQ was 125, today it's 118, it's never been 92 or 96, not yet anyway.
I'm just wondering if there is a causal relationship, it's gotta be better than getting advice from Wall Street economists.
An interesting development reported today. Suggests Citigroup may be giving some thought to consumers, and suggests there are some on Capitol Hill who may be more interested in fixing the mess than grabbing headlines. Fascinating that this has gotten so far with so little attention splashed in the media.
Yeah... 37 Trillion... Unwindable derivative instruments. Notional value, true, but with no way to link to the underlying value, the point is moot.
The point did not seem to be moot when you were predicting a financial catastophe as a result of these derivatives.
I am still looking for a clear answer...
What will be the impact of these trillions of dollars of derivatives? Up to this moment, I have understood from previous postings that they would bring about the collapse of the economy... yes...no
Honest, Ardy, I don't know the answers to your questions. One thing I do know -- we didn't get wiped out by a 54 Trillion Dollar Tsunami this past October. We got smacked upside the haid with a 54 Trillion Dollar Two By Four, yes. Reeling, but not drowned.
What will come may be a lot worse. I believe, from what I have read, especially what I have read here, that it will be worse. I think a few select people got obscenely rich off of the 54 Trillion Dollar Shell Game, and that it was the biggest baddest scam in the history of fiat currency.
But hey, I'm not an economist. I don't really understand a lot of this stuff. That's why I read a lot more than I write on these economics threads.
Honest, Ardy, I don't know the answers to your questions. One thing I do know -- we didn't get wiped out by a 54 Trillion Dollar Tsunami this past October. We got smacked upside the haid with a 54 Trillion Dollar Two By Four, yes. Reeling, but not drowned.
So, my point here is that, aside from everything else, there has been some pretty adventurous hyperbole on this thread.
I think one does not have to be a professional economist to understand that we have some serious economic problems; and that these problems are likely to get worse before they get better. I personally think that eventually things will get sorted out. Although I also suspect that the American economy will never return to its former dominance.
It also seems clear to me that there are a lot of structural economic issues that need to get sorted out. Among other things, we need to get over our uncritical adulation of the free market. There is no doubt that markets are important and that they should have a good deal of freedom. It is also clear that free markets by themselves are insufficient.
There are fundamental issues that need to be rationally discussed. As far as I can see there is limited benefit from wallowing in the latest dire predictions.
Never the less, there has always been a macabre fascination with "the end is near" pronouncements. I suppose it most likely this thread will continue to careen in that direction.
And, not meaning to curtail the inherent pleasure of that adventure... still, I would point out that there is even now some good news.
Consider the TED spread. Some economic cognizanti consider this an interesting number because the TED spread is an indicator of perceived credit risk in the general economy.
In a nutshell... the TED spread is the difference between the interest rate for treasury bills and the interest rate for extremely high quality commercial lending. Ideally you want a small difference indicating that people think commercial lenders are almost as reliable as the US government. A large and expanding difference indicates that people are suspicious of commercial lenders and prefer to stick with government debt.
So with that introduction, here is a link to a chart of the TED spread on Blomberg. link
And, if you look at the chart, you see that the chart went crazy back in October, and has gradually come back down.
Now, the truth is that this TED spread indicator is still too high. But the current levels indicates that some sanity is returning to the commercial lending market. And that is a good thing.
And, while we most likely consider that the big bail out was an enormous waste of money. The evidence on this chart is that the "bail out" did achieve what was intended to some degree. And while we can expect the credit crunch to have lingering pernicious effects, we may also begin to see that there may be some still faint light at the end of the tunnel.
OK
I am sorry not to have something more inflammatory to post... let get back the "discussion".
On a more serious note, I read that the Southern California Porn industry has been hit so hard by the recession that many of the male actors are now delivering real pizzas!
What will be the impact of these trillions of dollars of derivatives? Up to this moment, I have understood from previous postings that they would bring about the collapse of the economy... yes...no
We've been through this a number of times, and I guess we'll have to leave it at that, but when it comes to a collapse in the economy, I think we're there. Granted it doesn't happen in a 24 hour period, but an increase of what will surely be $3 Trillion in debt in less than 2 years, is a pretty good indication that we're funding the banks and brokers who cannot access the value of securities lying in the bottom of their asset base.
Still no indication that anyone is trading in the swaps, and that's the proof.
(Reuters)—When economists claims the current U.S. slump could never turn into another Great Depression, most point to one thing: one of four Americans was out of work in the 1930s.
But since the definition of joblessness has changed over the years, this expert assessment might be too rosy.
As many as 25% of Americans were unemployed during the days of bread lines that symbolized the Depression. That figure is more than three times the current 6.7% unemployment rate, the economists say. Even the most pessimistic estimates only foresee the rate rising barely above 10%.
“We are in a very, very different place than the U.S. economy was in the 1930s,” James Poterba, president of the National Bureau of Economic Research told a recent Reuters Summit.
Or are we? Figures collected for Reuters by John Williams, from the electronic newsletter Shadowstats.com, suggest that, while we are not there yet, the comparison is not as outlandish as it might initially seem.
By his count, if unemployment were still tallied the way it was in the 1930s, today’s jobless rate would be closer to 16.5%—more than double the stated rate.
“I expect that unemployment in the current downturn, which will be particularly deep and protracted, eventually will rival, if not top, the 25% seen in the Great Depression,” Mr. Williams said.
Asian stocks finished mixed on the week but appeared ready to resume their march downwards at a moment's notice.
[SNIP]
Conceivably a false recovery even could continue a bit longer, if investors lose their skepticism (and longer-term memory) and read into the present weak recovery their hopes for a general amelioration. Should that happen, however, the subsequent downturn would likely be relatively sharper; and indeed, that may be necessary for a selling capitulation that would mark the end of the first phase of the decline that began over a year ago.
For this, let us recall, is only the start of something big. There is much more bad news to come and wealth to be destroyed before it becomes evident that the second half of 2009 will not mark the beginning of the turnaround or even low-growth recovery upon which significant current investment strategies remain, for the time, predicated.
Ardy... In the interest of fairness, and re: our longstanding discussion of derivatives, and CDS's, here's an article that leans toward your contention that the CDS's are not the megamonster that they have been pcitured to be... About Lehman and CDS's
I thought you might be interested.
That being said, however, I confess that I really didn't understand the mea culpa intent of the author. The position taken seems to be that the industry is/was capable of regulating itself, and that the settlement of the Lehman accounts was a relatively simple thing. My thought is that if this is truly the case, why hasn't someone... anyone... been able to bring these instruments to a settlement, and if it is true that the $500 Billion was actually settled @ about $5 Billion, then why didn't the Fed go through with buying the securities that were supposedly in question when the $750 Billion was requested. If the derivative swaps could be settled with a fraction of the notional value, at Lehman, then why not at the other Banks and Brokers?
As to the wording of the article, either it's obfuscatory or I've lost my ability to understand the written word.
There's definitely a wide gap between Notional, and Actual Value, that occurs when the same security is insured and then reinsured, and each teansaction is counted into the cumulative total, but I understood that the problem was caused by the failure or inability to retrace the path back to the source. According to what I read in the article, the transactions would seem to be under control.
Somehow, the explanation smells fishy to me, but am posting the link in the interest of full disclosure.
A few weeks ago when the US Federal Reserve announced a strategy designed to bring down long-term interest and home mortgage rates through unlimited Treasury bond purchases, government debt staged a spectacular rally.
To the unschooled market observer, the spike may be difficult to understand. After all, why would the value of Treasury bonds rise while their underlying credit quality is deteriorating faster than Bernie Madoff's social schedule? The move is actually a perfect illustration of the tried and true Wall Street strategy of "buy the rumor and sell the fact".
If it is well known that the Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.
The downside of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties, but rather flip them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.
This is precisely what will happen with Treasuries.
here's an article that leans toward your contention that the CDS's are not the megamonster that they have been pcitured to be...
An analogy I often use in explaining the effect of CDS's and other derivate derivatives is the simple lever. Just as a lever increases physical leverage, derivatives increase financial leverage, allowing a small amount of money to effective control a much larger one. They thus act as amplifiers of market conditions.
Derivatives certainly amplified our current crash to some degree -- possibly small, probably large -- but they in no way engendered the crisis, nor even precipitated it, no more than a lever can, by itself, move a large boulder.
The crisis is a textbook case in government market meddling, just as was the Great Depression. You artificially suppress interest rates long enough, and you coalesce a large number of small business cycles into one massive one.
here's an article that leans toward your contention that the CDS's are not the megamonster that they have been pcitured to be...
An analogy I often use in explaining the effect of CDS's and other derivate derivatives is the simple lever. Just as a lever increases physical leverage, derivatives increase financial leverage, allowing a small amount of money to effective control a much larger one. They thus act as amplifiers of market conditions.
Derivatives certainly amplified our current crash to some degree -- possibly small, probably large -- but they in no way engendered the crisis, nor even precipitated it, no more than a lever can, by itself, move a large boulder.
The crisis is a textbook case in government market meddling, just as was the Great Depression. You artificially suppress interest rates long enough, and you coalesce a large number of small business cycles into one massive one.
I can't believe I'm gonna say this... but I agree with you 100%.
What did the economy in was the prolonged low interest rate. But how else can you get the country behind an unpopular war? You make the economy seem to be great.
here's an article that leans toward your contention that the CDS's are not the megamonster that they have been pcitured to be...
An analogy I often use in explaining the effect of CDS's and other derivate derivatives is the simple lever. Just as a lever increases physical leverage, derivatives increase financial leverage, allowing a small amount of money to effective control a much larger one. They thus act as amplifiers of market conditions.
Derivatives certainly amplified our current crash to some degree -- possibly small, probably large -- but they in no way engendered the crisis, nor even precipitated it, no more than a lever can, by itself, move a large boulder.
The crisis is a textbook case in government market meddling, just as was the Great Depression. You artificially suppress interest rates long enough, and you coalesce a large number of small business cycles into one massive one.
If the Credit Default Swaps are not at the heart of the problem, and if they are indeed legitimate financial instruments, based on some reasonable justification, then why prithee, have they not been unwound according to the contractual agreements.
I believe that the uncontrolled risk management formulas served the greed for marginal profits well, and that the lack of any regulation or an honest rating system provided the opacity that compounded the eventual total... even as much as the way Madoff handled the pyramid/Ponzi scandal.
Warren Buffet learned (then forgot) the lesson early on, much to his dismay.
Nowhere except in the CDO's and later the CDS's (and other Acronymic instruments) was there a way to slice and dice the underlying values, and to extend the call dates.
I would suggest that rather than government "meddling" being the cause, that it was the total lack of regulation. The markets buried themselves, though the perps walked and left the people with the bill.
The question then... Why can't the derivative market be unwound?
If the Credit Default Swaps are not at the heart of the problem, and if they are indeed legitimate financial instruments, based on some reasonable justification, then why prithee, have they not been unwound according to the contractual agreements.
I believe that the uncontrolled risk management formulas served the greed for marginal profits well, and that the lack of any regulation or an honest rating system provided the opacity that compounded the eventual total... even as much as the way Madoff handled the pyramid/Ponzi scandal.
Warren Buffet learned (then forgot) the lesson early on, much to his dismay.
Nowhere except in the CDO's and later the CDS's (and other Acronymic instruments) was there a way to slice and dice the underlying values, and to extend the call dates.
I would suggest that rather than government "meddling" being the cause, that it was the total lack of regulation. The markets buried themselves, though the perps walked and left the people with the bill.
The question then... Why can't the derivative market be unwound?
You're putting words in my mouth. Read again what is being said. It's not that derivatives have not made this recession worse... they have made it worse. But they were not the cause of the recession. The relatively cheap credit was the the culprit and the derivatives have made a recession that could have passed in 6 months in 2005 to possibly a recession that could last years starting in 2008.
Dunno... maybe, but getting to the heart of "cheap credit"; had the banks maintained the collateral, as was intended with Glass Steagall, there would have been less liquidity... less to loan.
The Credit default Swaps were the last step in the Ponzi scheme.
If the repeal of GS is the meddling, then I'll agree, but the problem grew out of the change in banking rules in 1999. I think the FED's part in the interest rates was a result of trying to fix what the bankers and brokers had abused.
If the Credit Default Swaps are not at the heart of the problem, and if they are indeed legitimate financial instruments...
False dilemma. The question of legitimacy has nothing to do with with what caused the crisis. If one defines derivatives as being a wise and long-term viable activity, then I'd agree they're not legitimate. They still didn't cause the subprime credit meltdown.
The government has no business setting interest rates. Just as when the government tries to control prices, such action invariably leads to market distortions and loss of efficiency. In the case where interest rates are artificially held low - rather than rising in step with risk as they should - a bubble is invariably created. Investments begin to be judged not on their own merits, but on the irrational exuberance that the long, unbroken stream of past profits has granted.
People keep investing and investing, risk keeps growing and growing, and no one is properly worried about what happens when the music stops -- and why should they be, when the government (through Fannie Mac) is picking up most of the risk?
We knew for years the subprime mortgage market was a time bomb, and that housing was a bubble. Home prices doubling every few years in some areas? Million-dollar McMansions on every street corner? Thousands of fly-by-night banks popping up, then instantly selling all their paper, leaving the taxpayer to foot the bill? EVERYONE knew this was coming. But thanks to the Fed and Congress, no one took action.
In any free market, the interest rate on all those houses would have started to go up years earlier. The bubble never would have formed at all. The market would have cooled off, then continued to grow when sanity returned.
RT: We're coming at the problem from the same direction. A failure of Government. Yes. I can go that far.
I have a problem with the term "Free Market", because the term has been twisted in many prior discussions,(pre RT) to mean that markets should indeed be free... free of regulation. I can't buy that.
Maybe when you get a chance, you could address the level of "freedom", and we could get on the same page.
In any free market, the interest rate on all those houses would have started to go up years earlier. The bubble never would have formed at all. The market would have cooled off, then continued to grow when sanity returned.
a true free market relies on self-regulation and a common sense approach to adjusting for mishaps. yet it cannot protect against simple greed. as It has stated, regulations are required to protect to protect not only the consumer, but the system itself.
Maybe when you get a chance, you could address the level of "freedom", and we could get on the same page.
In this particular case, the problem would be solved by allowing interest rates to float naturally, just as prices do. Remove this ability from the Fed, and allow banks and financial institutions to judge their own risk. When they're risking their own money, they'll do a much better job than the government will.
This would, of course, also require pretty much dismantling Fannie Mac and the FHLBs...but that would be a good thing as well.
Sometimes it helps to realize how we got to where we are in order to figure out where we are apt to go. I know it is all the rage to do the party partisan thingie and blame it on "the other party" in the hope of scoring voter points, or to pretend that a free market was in operation and somehow "ran amok", but both are borne of willful ignorance or intentional attempts to deceive the populus -- again for political gain.
It is not difficult to see what steps were taken to transfer power from the people to the government (that is to say those who control government and those who government serves) and how that resulted in the culmination of the current economic situation.
In 1913 the government passed income tax legislation that put its hand into the pocket of almost every worker in America. Government now had access to a reliable source of funds that could not be easily denied to it by the populus.
Also in 1913 the government created the Federal Reserve and a fractional banking system. It now had the power to create money without relying on an increase in worker's taxes. It now had a magical money machine.
In 1933 President Roosevelt and the hagfish of the New Deal made it illegal for Americans to own over 100 dollars in gold coin or bullion, confiscating any amount over that limit. This of course, completely stripped the people of the power to control government-created paper by demanding redemption of the paper currency in gold. The great slide toward today had begun in ernest.
The culminating achievment in this monumental transfer of power from the people to a centralized and colossal federal government happened in 1971 when the government went off of the gold standard that was still in place relative to foreign governments. The transition to a completely fiat, credit-based money was completed.
The ability to access funds in conjunction with Keynesian economic policy (vs actual economics) meant that throughout much of the 20th century the people were subjected to a hidden tax in the form of inflation, increased government distortion of various markets (especially housing and other forms of real estate) through subsidies, selectively directed tax advantages, and industry-specific favorable regulations. The resultant distortions that resulted were then countered by the government through the implimentation of Keynesian theory, preventing market forces from quickly correcting for years of government created imbalances.
A really, really bad thing about government pumping money into the system to counteract these periodic corrections is that the corrections were never allowed to complete their work, meaning that each attempted market correction simply accumulated, thus ensuring that one big recession would be eventually followed by an even bigger recession resulting in even bigger countermeasures taken by the government. The formula with a fiat money system is simple -- flood the market with money, the few who can afford to get in at the front end and make a killing prior to the onset of the next round of inflation which is absorbed by the majority on the back end of the ride.
The latest cumulative mess has as its source a government that pumped out massive amounts of fiat money, artificially reduced interest rates, and made huge somes of money easily available. Add to this the "too big to fail" collectivist crap that was a tacit acknowledgement to those so designated as such, that they could get away with stupidities and risks that they would never have attempted under a system in which market forces were allowed to operate without hinderance, and you have the inevitable bubble-based market we have enjoyed repeatedly over the decades. People will follow their human nature -- especially when induced to do so by government action.
Believe it or not, things really are that simple.It only gets complicated when folks try to rationalize their positions or actions or when they inject political bllhst.;-) Yours, Issodhos
I suggest that all who have come to be addicted to this thread, might enjoy this perspective... Whether you agree or not. The Bernie Madoff Solution
The article covers a lot of what's going on today, and ends with this:
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But at least if they're going to do the wrong thing, you might as well do it well. It is a documented fact that neither the present U.S. Secretary of the Treasury - Hank Paulson - nor the incoming man - Tim Geithner - had a clue about what was happening last year. They didn't seem to understand how America's system of imperial finance - the system that undergirded expanding world trade - actually worked. They seemed completely surprised when it began to crash. Clearly, neither is competent to manage such a system.
So we have a suggestion. Why not turn to a man who does know? In all the world, there is one man who has proven that he knows better than anyone, not only how it works…but how to work.
That man is Bernie Madoff. Instead of putting him in jail, put him at the Treasury.
ISS... now you've done it... I'm into the Fed, and after reading the entire Government document... I agree with you, and RT.. That this is a giant game that is unnecessary and counter to the interests of the country and, indeed, the world.
To say that the Federal Reserve System down't work isn't really true. As you say, it works for those who get in on the beginning of whatever the latest crisis is... whether the S&L, or any of the other bubbles. It's always the banks and brokers and the rich that get bailed out, leaving the people to pick up the debt.
So now, we're into the next... and the very biggest bubble of them all. I Trillion already gone, and the second trillion to follow. And NOW... according to some scuttlebutt on the "street", the actual cost to make the system whole, may total 5 Trillion. (MSNBC panel discussion).
The whole problem that we're facing now boils down to the problem with collateralizing debt, and as I believe, having the debt lose it's identity. This happened when CDO's were treated as cash... (my analogy)... When the CDO's were split, and lost their identity.. AND, when the traders accepted a risk rating as collateral... then, the game was over. Add to that, the problem created when traders tried to insure their bets with "insurance" Credit derivatives... then compounded the nonsense by re-insuring the risks by swapping the insurance...
THEN you have the impossible mess we're into today.
We're worried about 50 billion and Mr. Madoff...
How about a possible 5 Trillion and the heads of our government, 535 Gongressmen, and who knows how many thousand lobbyists, and banks and corporations and rich people who have kited their fortunes on the backs of Americans.
And so... you are right:
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Sometimes it helps to realize how we got to where we are in order to figure out where we are apt to go. I know it is all the rage to do the party partisan thingie and blame it on "the other party" in the hope of scoring voter points, or to pretend that a free market was in operation and somehow "ran amok", but both are borne of willful ignorance or intentional attempts to deceive the populus -- again for political gain.
Now to the next question. With the new government poised to spend the next Trillion... how long do you think it will take the people to catch on?
Now to the next question. With the new government poised to spend the next Trillion... how long do you think it will take the people to catch on?
Ah, there is the rub (with apologies to Willie S.).:-)
The Establishment's propaganda machine is going full speed to keep the people focused away from the politician's complicity and the state's heavy hand at the root. Blame will be directed at the result (people doing what people do when opportunity avails itself and the path is smoothed) rather than at the cause. Yours, Issodhos
Most experts will tell you that Barack Obama needs to move quickly to contain the multitrillion-dollar market that turned low-quality mortgages into high-priced derivatives, the Wall Street innovation now widely blamed for the credit crisis. Shiller says the opposite. He argues that unless the central issue of risk is addressed, all the money that governments are pouring into financial rescues won't prevent another, potentially worse financial crisis down the line. In Shiller's view, derivatives "are a risk management tool much the same way insurance is. You pay a premium and if an event happens, you get a payment." His radical answer to our problems is that trying to leash financial innovation is hopeless, and that we should instead push forward into a brave new world where derivatives become as common as cash.
What separates Shiller from the majority of economists is his lack of faith in the "efficient-market hypothesis." That belief, which also guides the hand of most money managers, holds that the market will price assets according to their fundamental value and that those prices reflect all pertinent information. Shiller instead follows those, like John Kenneth Galbraith, who hold that market prices reflect "animal spirits" and popular passions, not perfect information.
Phil: I totally agree that derivatives are, or should be a good thing. The problem, that Shiller (at least as shown in the NW article), didn't address four major problems... the ones that brought down the market.
1. Transparency - As soon as the mortgages were collateralized, they lost identity. Risk models have been proven to be wrong. The is just no reasonable way to backtrack derivatives.
2. Leverage - Actually two parts to leverage... First, the percentage... 10% down to 2%... Encourages day trading which excludes the market, and leaves the profit/loss in the hands of speculators. Speculation is ok and good, but when it's used to play roulette, the results return to the Enron Model.
3. Regulation. This is, and has been purely political. Any economic model can be said to be workable, but it's when there are rules, that it can be successful. (IMO)
4. I believe that Shiller sees the concept of insurance as being viable. I would agree. But the derivative market was, by law, limited to those with extreme wealth. We hear the term "phantom banking". Part of that means that the assets that have been pledged to "back" leveraged bets, aren't liquid. That's where the entire derivative problem arose. When the time came to settle the derivative "swaps", there were not enough liquid assets to pay out. As long as the traders were content to "swap" debt, everything worked fine. The crash came when the counterparties refused to pay obligations with liquidity.
Long and short... free markets are fine, but as long as not everyone can play... as long as the rules are made by the players as they go along, as long as the deals are made in dark rooms, as long as leverage encourages speculation, then there will be abuse.
I think that derivatives came as an extension of the commodity futures market... which stabilized so many industries, and was good for business and the country. Credit derivatives (mainly housing) skipped the collateral step... then as the string played out, credit derivative swaps topped off the re-inflation of the Enron and the Internet bubbles.
We can have all of these financial instruments, but only with regulation. Trust in Free Markets per se, will be a long time coming.
I don't believe that we'll go anywhere in fixing the economy until honest people write the rules. (and that means someone other than politicians and bankers).
Another small (at least for now) note on the status of a promised plan to set up a system for clearing the 35 Trillion dolars (notional value) of derivatives.
I haven't been following this since the original proposal, but now see that there are actually 3 firms trying to get approval. Maybe it's just my suspicious nature, but I can't believe that they are doing this as a public service.
The DOJ is apparently checking in to the background as a matter of course. My problem with this is that ICE is the company trying to get approval. ICE is the company that took derivative trading to Europe, so as to avoid the margin requirements in the US.
Confusing I suppose, but it looks like the fox is trying to get a job as security for the henhouse. Derivatives Clearing Plan
Shiller instead follows those, like John Kenneth Galbraith, who hold that market prices reflect "animal spirits" and popular passions, not perfect information.
Values are subjective and subjectively set in a market by the process of voluntary exchange or multiple voluntary exchanges. So, yes, if human action (decisions) are "popular passions" and "animal spirits" then that is a good description of value determinants. And, perfect information does not exist and is not and has never been necessary to a free or kinda, sorta, somewhat free market. Yours, Issodhos P.s. "Fundamental value" is a myth that participants and actors in the world of finance/investment/speculation/commerce pretend to subscribe to or unknowingly subscribe to. It is popular with bean counters -- 'nuff said.:-)
Confusing I suppose, but it looks like the fox is trying to get a job as security for the henhouse.
Speaking of assigning foxes in guard the henhouse....
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Geithner, Summers and Orszag have all been followers of the economic formula that came to be called Rubinomics: balanced budgets, free trade and financial deregulation.
What we are now seeing is the beginning of an inevitable downward adjustment in American living standards to conform with our actual place in the world. As a nation of consumers, and not producers, with little to offer to the rest of the world except raw materials, food crops, military hardware and bad films (none of which industries employ many people), we are headed to a recovery that will not feel like a recovery at all. Eventually, productive capacity will be restored, as lowered US wages make it again profitable for some things to be made here at home again, but like people in the 1930s looking back at the Roaring 20s of yore, we are going to look back at the last two decades as some kind of dream.
It would be better if the new administration would be honest about this, because with honesty, we could have a recovery program that would actually address the real critical issues facing the country--the decline of our educational system, the irrationality of official promotion of home ownership that has led to the proliferation not just of suburbs but of exurbs, the over-reliance on the automobile for transportation, the unprecedented waste of resources, the pillaging of the environment, not to mention the decimation of the retirement system and the creation of a vast medical-industrial complex that is sucking the life-blood out of families and businesses alike.
With honesty, we could also confront the other big obstacle to national recovery--the nation's obsession with militarism and foreign wars. The honest truth is that the US is technically bankrupt and in a state of chronic decline, and yet the nation persists in spending a trillion dollars a year on war and preparations for war, as though America were in mortal danger from foreign enemies.
The truth is that we are not threatened by Communism, by drug lords, or by Muslim Jihadists in any serious way. Rather, we have become our own worst enemy.
What we are now seeing is the beginning of an inevitable downward adjustment in American living standards to conform with our actual place in the world.
snip
The truth is that we are not threatened by Communism, by drug lords, or by Muslim Jihadists in any serious way. Rather, we have become our own worst enemy.
Nassim Nicholas Taleb, the author of “The Black Swan: The Impact of the Highly Improbable”, has a simple proposal to as he puts it, “save capitalism and free markets from the banks.”
Nationalize the banks, limit the rewards to those who work in what he calls the “utility” part of the system and have a completely uninsured second leg that can take all the risks it wants and lose its shirt, he said in an interview in Davos at the World Economic Forum.
“They rigged the game. We pay them for their profits, there is no clawback so their incentive is to hide the risk they are taking.”
“Which is why eventually as someone who loves free markets, a total nationalization of the part of the business that requires insurance and does clearing and payments needs to happen.”
“I am angry with U.S. policy. What we had is exactly the opposite of socialism, they got TARP to pay their bonuses and to take more risk.”
He describes his plan as Capitalism 2.0. It would have a barbell structure, with the insured utility-like part on one end and the free market bit with privatized risk on the other.
He describes banking bonuses as asymmetric because the banker gets the upside but does not share in the liability which ultimately may be funded by taxpayers, as we have seen.
Mr. Taleb, who as you may have noticed doesn’t mince words, is no fan of private equity.
“Private equity has absolutely no reason to exist. The private equity holder has all the upside and the banks all the downside.” He’d have no objection to a system where private equity funds itself via hedge funds, so long as neither party had any recourse to government insurance.
And a bit like an Old Testament prophet, Mr. Taleb is angry and wants those he thinks are responsible to suffer.
“I want them poor and they deserve to be poor. You can’t have capitalism without punishment.”
Oh, and another thing, he wants Bob Rubin, who trousered millions while chairman of Citigroup, to cough up. “I want Bob Rubin to return his $110 million dollars to the American taxpayer.”
In the fall of 2001 I attended a private investment conference in London to give a paper....The presentation documented my experience with a Washington-Wall Street partnership that had:
* Engineered a fraudulent housing and debt bubble;
* Illegally shifted vast amounts of capital out of the U.S.;
* Used “privitization” as form or piracy - a pretext to move government assets to private investors at below-market prices and then shift private liabilities back to government at no cost to the private liability holder....
Slowly, as the pieces fit together, we shared a horrifying epiphany: the banks, corporations and investors acting in each global region were the exact same players. They were a relatively small group that reappeared again and again in Russia, Eastern Europe, and Asia accompanied by the same well-known accounting firms and law firms.
Clearly, there was a global financial coup d’etat underway.
The magnitude of what was happening was overwhelming. In the 1990’s, millions of people in Russia had woken up to find their bank accounts and pension funds simply gone – eradicated by a falling currency or stolen by mobsters who laundered money back into big New York Fed member banks for reinvestment to fuel the debt bubble....
Several years earlier, I listened to three peasant women describe the War on Drugs in their respective countries: Colombia, Peru, and Bolivia. I asked them, “After they sweep you into camps, who gets your land and at what price?” My question opened a magic door. They poured out how the real economics worked on the War on Drugs, including the stealing of land and government contracts to build housing for the people who are displaced.
At one point, suspicious of my understanding of how this game worked, one of the women said, “You say you have never been to our countries, yet you understand exactly how the money works. How is this so?”
I replied that I had served as Assistant Secretary of Housing at the US Department of Housing and Urban Development (HUD) in the United States, where I oversaw billions of government investment in US communities. Apparently, it worked the same way in their countries as it worked in mine.
Just to tuck in a link to a more involved argument over the relative merits of backing up the banks vs. direct action. Link Dunno if I'm reading this right, but it sounds a little bit like binary economics.
Heavy reading and economic philosophy are not my thing, but the overall basis of this "Cook Plan" makes some sense to me. Cook Plan
Yes... you are correct... It won't happen, but two or three years from now, it could be the only answer, unfortunately, as devaluation of the dollar takes place. In the interim, the current plan looks to be a way of pushing the "bubbles" down the line.
Just tossing in a little known bit of info about the Great Depression, that makes some of the "History Repeats Itself Buffs" sound a little hollow.
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Change in Real GDP, 1929-1933 United States -29% Germany -10% France -9% Italy -3% United Kingdo -2% Japan 11%
Possibly indirectly related to this:
Internationally "breaking" news that I don't understand yet, but which will probably be gone by this afternoon 2/17... Red Alert
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8:17 CT 2/17/09
I do not know what is going on here, and I don't think I want to.
Someone, apparently someone in Asia, wants dollars. A LOT of dollars. There is a forced-liquidation event underway that is massive, it is against all asset classes and it is spreading.
It originated at approximately 7:15 CT this evening and originated out of Asia somewhere. All of the primary currency crosses got hit at once - Euro, Pound, Yen - all weakened dramatically against the dollar and it is still going on. The Asian stock markets got walloped at the same time in coordinated waves of forced selling.
At the same time the US futures markets got nailed as well, down some six handles on the /ES in a near-vertical drop. While this sounds "not that big" to move these markets in a coordinated fashion like this is a trillion-dollar enterprise - this is not some small company that went bankrupt, or even a large company.
There is no news coverage at the present time identifying the source of this but it is not small and contrary to some reports it is not "automatic selling"; this is forced liquidation.
Probably nothing, but then possibly a market shattering event. Just to keep the pot boiling.
Just when you thought it was safe to go into the water. ........................................................
Now, without starting a separate thread, Here's something to chew on, that I haven't seen discussed on these pages.
What if the US wasn't the center of a world wide depression? We tend to think of ourselves as being the center of world economics, but what if we were still better off than ALL of the rest of the world, and the other countries ended up being even worse.
I can't get my mind around this possibility and haven't seen any serious discussion on the internet, but there seem to be a number of world events in other countries that might foretell a sea change in governments. North Korea, Iran, Venezuela, Great Britain, China, Poland, Russia, and the Balkans in general are showing evidence of unrest that is less political than symptomatic of a resistance to government policies.
Maybe it's something that we should be paying more attention to.
My concerns are that we live in a world so vastly different than during the Great Depression. We have enmeshment with nations around the world unlike any time in our human existence. We're not just each other's vacation get away, we're all interdependent in every social way. Our cultural differences don't shelter us from our dependence on each other.
During the Great Depression...it was an antiquated time in comparison to this era. Auotmobile industry was in its infancy, our national infrastructure was hardly a microscopic speck compared to what whe have today. Oil wasn't discovered in Saudia Arabia until 1938...so we weren't a nation that had a profound attachments both finanically and use during the G.D.. We have communication means that weren't even dreamed of. We have medical and science technologies that were virtually non-existent...not even conceivable. We can now even see our presidents' faces as they've spinned their tales to us on TV and the Internet.
I can go on and on, but my point is that we are genuinely connected to the hips of our sister nations around the world. We're like Siamese siblings and when one is injured...well, we all are.
Cousin It...I think you have incredibly valid concerns. We are in a complicated situation like never before seen by any nation. America's centricities...are not good.
You're right...we need to be aware of other nations and their problems.
Just tossing in a little known bit of info about the Great Depression, that makes some of the "History Repeats Itself Buffs" sound a little hollow.
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Change in Real GDP, 1929-1933 United States -29% Germany -10% France -9% Italy -3% United Kingdo -2% Japan 11%
Not sure I understand the significance of this. Do you mean to point out that the US economy did not feel the effects of economic deprivation in Europe until it was almost over?
Effects of depression in the United States[54]: 13 million people became unemployed. In 1932, 34 million people belonged to families with no regular full-time wage earner.[55] Industrial production fell by nearly 45% between the years 1929 and 1932. Homebuilding dropped by 80% between the years 1929 and 1932. In the 1920s, the banking system in the U.S. was about $50 billion, which was about 50% of GDP.[56] From the years 1929 to 1932, about 5,000 banks went out of business. By 1933, 11,000 of the US' 25,000 banks had failed.[57] Between 1929 and 1933, U.S. GDP fell around 30%, the stock market lost almost 90% of its value.[58] In 1929, the unemployment rate averaged 3%.[59] In 1933, 25% of all workers and 37% of all nonfarm workers were unemployed.[60] In Cleveland, Ohio, the unemployment rate was 60%; in Toledo, Ohio, 80%.[55] One Soviet trading corporation in New York averaged 350 applications a day from Americans seeking jobs in the Soviet Union.[61] Over one million families lost their farms between 1930 and 1934.[55] Corporate profits had dropped from $10 billion three years ago to $1billion in 1932.[55] Between 1929 and 1932 the income of the average American family was reduced by 40%.[62] Nine million savings accounts had been wiped out between 1930 and 1933.[55] 273,000 families had been evicted from their homes in 1932.[55] There were two million homeless people migrating around the country.[55] One Arkansas man walked 900 miles looking for work.[55] Over 60% of Americans were categorized as poor by the federal government in 1933.[55] In the last prosperous year (1929), there were 279,678 immigrants recorded, but in 1933 only 23,068 came to the U.S.[63][64] In the early 1930s, more people emigrated from the United States than immigrated to it.[65] The U.S. government sponsored a Mexican Repatriation program which was intended to encourage people to voluntarily move to Mexico, but thousands were deported against their will. Altogether about 400,000 Mexicans were repatriated.[66] New York social workers reported that 25% of all schoolchildren were malnourished. In the mining counties of West Virginia, Illinois, Kentucky, and Pennsylvania, the proportion of malnourished children was perhaps as high as 90%.[55] Many people became ill with diseases such as tuberculosis (TB).[55] The 1930 U.S. Census determined the U.S. population to be 122,775,046. About 40% of the population was under 20 years.[67]
The bursting of bubbles causes credit contraction, forced liquidation of assets, deflation, and wealth destruction that may reach catastrophic proportions. In a deflationary environment, the weight of accumulated debt can sink the banking system and push the economy into depression. That is what needs to be prevented at all costs.
It can be done by creating money to offset the contraction of credit, recapitalizing the banking system, and writing off or down the accumulated debt in an orderly manner. For best results, the three processes should be combined. This requires radical and unorthodox policy measures. If these measures were successful and credit started to expand, deflationary pressures would be replaced by the specter of inflation, and the authorities would have to drain the excess money supply from the economy almost as fast as they pumped it in. Of the two operations, the second is likely to prove both technically and politically even more difficult than the first, but the alternative--global depression and world disorder--is unacceptable. There is no way to escape from a far-from-equilibrium situation--global deflation and depression--except by first inducing its opposite and then reducing it.
The size of the problem is even larger than it was in the 1930s. This can be seen from a simple calculation. Total credit outstanding was 160 percent of GDP in 1929, and it rose to 260 percent in 1932 due to the accumulation of debt and the decline of GDP. We entered into the Crash of 2008 at 365 percent, which is bound to rise to 500 percent or more by the time the full effect is felt. And this calculation does not take into account the pervasive use of derivatives, which was absent in the 1930s but immensely complicates the current situation. The situation has been further aggravated by the haphazard and arbitrary way in which it was handled by the Bush administration. The public and the business community suffered a shock in the aftermath of the Lehman Brothers default, and the economy has fallen off a cliff. The next two quarters will show rapid deterioration.
To prevent the economy from sliding into a depression, President Obama must embark on a radical and comprehensive policy package that has five major components:
1. A fiscal stimulus package 2. A thorough overhaul of the mortgage system 3. Recapitalization of the banking system 4. An innovative energy policy 5. Reform of the international financial system
U.S. stock indexes fell to their lowest levels in more than 12 years as one of the world's most prominent banks and an icon of American manufacturing traded as penny stocks....
Not even after five consecutive declines did traders want to own stocks overnight, said Joseph Saluzzi, co-founder of Themis Trading.
"Nobody wants to get in the way as the freight train comes down the embankment," he said.
The Dow Jones Industrial Average fell 281.40 points, or 4.09%, to 6594.44, its lowest close since April 1997. The Nasdaq Composite fell 54.15, or 4.00%, to 1299.59. The broad Standard & Poor's 500 index shed 30.32, or 4.25%, to 682.55, 56% below its bull-market peak in October 2007. That's the biggest drop for the market since the 1930s.
One emblem of that decline: Citigroup fell 11 cents, or 9.7%, to 1.02 after dipping below $1 for the first time ever earlier in the session. In May 2007, Citi was the biggest bank in the U.S. by market capitalization and traded for more than $55. Since then, the collapse of the mortgage securitization business and the slide in value of other assets has necessitated the rescue of Citigroup and other financial institutions, raising the specter of nationalization.
"If you had told me in the summer of 2007 that [Citi] would dip below $1, I would have said 'you're crazy'," said Saluzzi. "They have so many liabilities, so much bad stuff, they wouldn't even be trading if they weren't being supported by the government.
"The banks are a disaster."
[SNIP]
As in the 1930s, nothing seems to stop a contagion of confidence crises from spreading from one part of the financial sector to the next.
"It's just a never ending spiral," said Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund.
When ya can buy a share of Citi or GM for less than the cost of accessing your own money in an ATM... then all bets are off.
FYI, I have built a little portfolio of some of the stocks in the news lately... Here is a screenshot of the portfolio as of March 5, 2009. March 5 Portfolio
When you read the spreadsheet, the purchase price is the highest price the stock traded at in the past year. Each stock is a single share.
As the spirit moves, I'll update periodically... though it's hard to believe that it will get much worse.
This whole market thing is out of control... ie. the VIX
Almost every Wall Street "Charter" has been wrong... Your local financial advisor is either in the Bahamas, the Drunk Tank, or curled up in the fetal position in an institution...
Various efforts by the US to resolve the country's financial crisis by selling ever more debt to pump money into the financial system are raising concern that this will drive up inflation and pull down the value of the US dollar, which would cut the value of debt held by China, the largest creditor of the US.
[SNIP]
"We are very concerned about the economic developments in the US economy," Wen said....
Wen called on the US government to ensure that the value of Chinese assets in the US is maintained amid the crisis.
"We have lent a huge amount of money to the United States and of course we're concerned about the security of our assets and, to be honest, I am a little bit worried"....
[SNIP]
As the global financial crisis sends asset values plunging, mainland leaders are under growing pressure at home to diversify the country's foreign exchange reserves.
TRANSLATION:
"China must get rid of its dollar assets as quickly as possible, but without precipitating a collapse of the US dollar." Good luck with that!
When the dollar collapses, what happens to US treasuries? If no one touches our treasury bonds, where do we get the money for all our grandiose spending? We may find that we have champagne tastes for spending on a beer budget. On the bright side, that would also include spending on the pentagon and the military-industrial complex --- the main cancers on our body politic, as President Eisenhower predicted.
The only answer would be re-tooling the US for an emergency command economy.
I predict that those who have been shrieking about "socialism" for decades will be the biggest and most fervent supporters of centralized planning --- they will be too worried about saving their butts to be concerned with ideology.
Various efforts by the US to resolve the country's financial crisis by selling ever more debt to pump money into the financial system are raising concern that this will drive up inflation and pull down the value of the US dollar, which would cut the value of debt held by China, the largest creditor of the US.
[SNIP]
"We are very concerned about the economic developments in the US economy," Wen said....
Wen called on the US government to ensure that the value of Chinese assets in the US is maintained amid the crisis.
"We have lent a huge amount of money to the United States and of course we're concerned about the security of our assets and, to be honest, I am a little bit worried"....
[SNIP]
As the global financial crisis sends asset values plunging, mainland leaders are under growing pressure at home to diversify the country's foreign exchange reserves.
TRANSLATION:
"China must get rid of its dollar assets as quickly as possible, but without precipitating a collapse of the US dollar." Good luck with that!
I saw his comments today. I don't think it has anything to do with a concern over their dollar holdings. They would have seen that situation developing long before now. Besides, it way too blunt to be taken at face value. I think, sly wrascals that they are, that they are playing their one strategic strength in response to President Obama's sending a warship to the South China Sea as protection for a US intelligence gathering ship and a show of support for maintaining open sea lanes.
My translation: Don't make Beijing lose face by playing to your home audience or we will make things difficult for you in other areas. Have a nice day.:-) Yours, Issodhos P.s. Humorous aside: The name of the US destroyer sent to protect the USNS Impeccable? The USS Chung-Hoon.:-)
When it was teetering toward five grand land every right wingnut was eager to call it "The Obama Recession". If it shoots to ten grand tomorrow, or in a week, or a year, the same jackasses will attribute it to the sound fiscal policies of the GOP. I'll bet twenty bucks cash on it.
French President Nicolas Sarkozy concurred with Merkel when he said: "The problem is not spending more money, but putting in place financial systems of regulation."
....the United States is only moderately interested in this issue. Instead, Washington is pushing for a global initiative to stimulate demand with new government spending programs.
[SNIP]
But it is now clear that the economic situation on both sides of the Atlantic is only getting worse....
"A recovery should not be expected before the end of 2010, and even then it will not be strong," says Joachim Scheide, the IfW's chief economist.
The situation is no better in the United States, where the recession has driven unemployment in recent months to its highest level in 25 years. The outlook for this year is darkening from week to week, as major corporations announce one wave of layoffs after the next....
This [American] approach is based on the idea that the economy functions largely in accordance with the relatively simple laws of hydraulics: If demand declines somewhere, be it in the form of investment, consumption or export, the government will intervene with its billions. Whether the funds can even be spent effectively any more stopped mattering a long while ago.
Elsewhere in the article, reference is made pointedly to the American "claim to leadership," not to its "leadership".
I think it is healthy that different economies take different routes. Once the U.S. economy starts to recover, they will jump on the erfolgreiche Seite quickly enough, or be left behind.
I think it is, "If the US economy starts to recover...." Most people still do not realize the gravity of the present situation. Consider the following:
Increasingly ominous clouds are gathering in what could soon be the perfect storm against the United States dollar and against the present dollar-centric global financial order.
This is not shaping up to be a storm that anyone is trying to initiate, not even those who are actively driving for a new global financial order that is no longer centered on the dollar.
[SNIP]
The truth is that the potential for a global dollar panic is becoming greatly heightened, in spite of (and in part, actually because of) the dollar's recent significant gains as a refuge for investors....
For example, a number of experts warn that US Treasuries are increasingly taking on the characteristics of a bubble, and they remind us that bubbles inevitably deflate, and they rarely, if ever, do so in an orderly fashion. When this one deflates there could be uncontrolled, perhaps even chaotic, repercussions for the dollar.
[SNIP]
The bigger and hotter any bubble gets, the more prepared its devotees become to speedily abandon it in favor of the next one. That explains why investors have mostly piled into very short term Treasuries - they know they may well have to sell out even faster than they bought in.
Not sure who this person is, numan - the author of your cited article. What are his credentials? Does he have expertise, or is he merely an amateur naysayer?
I would like to read further comments on two of his claims that I think are central to his argument, but haven't passed my (admittedly amateur) smell test:
1. Investors have "mostly piled into very short term Treasuries".
2. "As the US government sucks all the air out of the global credit markets via the unstemmed growth of its latest in a series of dangerous asset bubbles, namely the Treasuries bubble, these other entities [emerging markets, their governments and banks, and US businesses] find it extremely difficult to issue debt (obtain credit) at feasible costs, if at all."
When it was teetering toward five grand land every right wingnut was eager to call it "The Obama Recession". If it shoots to ten grand tomorrow, or in a week, or a year, the same jackasses will attribute it to the sound fiscal policies of the GOP. I'll bet twenty bucks cash on it.
In the current fiscal year alone, the US is expected to issue somewhere between US$2 trillion and $2.5 trillion in new debt. It could conceivably exceed that amount if the crisis worsens....
[SNIP]
The huge deficit would not immediately lead to inflation, since banks were likely to curb lending as the financial system remained weak, Zuo said. "It might be two or three years before the huge deficit leads to serious inflation." Analysts noted that if the stimulus plan didn't accomplish its goal of restarting growth, the US government would have to ease its large fiscal burden by borrowing more and issuing more dollars, instead of relying on economic growth. Huge Treasury bond issues would exacerbate the depreciation of the US dollar and world wealth....
It certainly appears likely that as new Treasuries flood the market, the point could soon be reached where supply outstrips demand, causing yields to rise. The Fed is trying to keep yields as low as possible so as to attract big buyers that already have large holdings of Treasuries, such as China. For such holders of Treasuries, rising yields would ravage the value of their holdings, making the purchase of yet more Treasuries distinctly unattractive. Yet, lower yields tend to be less attractive for new buyers....
There is mounting evidence that China's central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones.
There is also...evidence that China's...campaign of capitalizing on the global crisis by making resource buys across the globe may be (1) helping its central bank to decrease exposure to the dollar, while (2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while (3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it.
[SNIP]
....the US is engaged in...dollar-debasing policies, making a loss of global confidence in the dollar...a virtual certainty. Even if the massive spending does restore economic growth, the US economy is likely to remain very weak for some time.
When the Fed attempts to tighten, the US economy will likely be plunged into a second-round recession or depression, with obviously awful effects upon the dollar. But if the Fed fails to tighten sufficiently and quickly, runaway inflation will ravage the currency anyway.
There is no question in my mind that the Fed and the central banks are in cahoots with the financial elite in a determined quest to destroy the dollar and destroy the American economy. Take the tin foil hats and stick em, I don't know what else could be on the minds of TPTB besides world government owned by corporations. It might be hard to prove, but I think it's harder to disprove at this point.
I'll see your tin foil hat and raise you another tin foil hat. I would argue that the multinationals already pretty much own the world, and have no need to engage in any risky attempts at global one-government unity. Furthermore, I would argue that the multinationals are interested above all else in protecting their investments in global resources, which flies in the face of all theories about the sudden plummeting of the US dollar coming about because of market forces that they control and manipulate.
Fed policy makers said yesterday they plan to buy up to $300 billion of U.S. government bonds and step up purchases of mortgage bonds, expanding the central bank’s balance sheet by as much as $1.15 trillion. The extra supply of dollars threatens to overwhelm investors just as the budget deficit swells.
[SNIP]
“Sell the dollar!”.... “This is huge, huge.... This is the last thing they have in the closet, and they used it a bit early.”
[SNIP]
“The Fed is basically financing our deficit by buying the debt issued by the Treasury,” she said. “If the Obama administration pushes through another stimulus package, the dollar is done.”
The U.S. dollar rebounded Friday but remained in line for a huge weekly loss against major rivals following the Federal Reserve's decision this week to massively pump up the supply of dollars in a bid to jumpstart the economy and avert a deflationary spiral.
That worm has certainly turned; the US in January, the last month data is available, was actually net drained of foreign capital, to the tune of $150 billion....
Obviously, the concern is that those with still the capital to lend to the US, primarily China, seeing the huge increase in US government demand for borrowed funds with its now huge and ever-burgeoning budget deficits being used to finance the economic crisis recovery programs, will fear that the US dollars they use to buy US debt will depreciate in value, devastating the value of their investments.
So Ben Bernanke decided to give America's Chinese and other foreign investors a good swift kick in the keyster as they headed out the door....
In other words - foreigners, we don't need your money; we'll print our own!...
[SNIP]
A key factor currently holding down inflation in the face of the incredible monetary expansion recently has been a decline in what is called monetary velocity, the rate of which money circulates in the economy. Nothing will ramp up velocity faster than a falling dollar....
A significantly worsening economic outlook forced the Federal Reserve's hand in mid-March, leading the Federal Open Market Committee to commit to buy up to $1.25 trillion in long-term assets to goose the economy and prevent a slide into deflation, according to minutes of the March 17-18 meeting released Wednesday.
The summary of the meeting indicates little debate among the FOMC members on the question of buying longer-term Treasurys, with the major disagreement coming over how much to buy.
[SNIP]
Almost all members of the policy-setting committee of the U.S. central bank said risks were rising that the economy would worsen more than forecast, and they all agreed that inflationary pressures would remain subdued for some time, according to the heavily edited minutes[Numan's emphasis].
It is clear that this is no ordinary recession....
While an emphasis on reviving banks and an injection of public spending are both important, the trouble is that neither one directly addresses the main source of global deflation, which is that global imbalances are no longer being recycled effectively. Because US households and banks are now bankrupt, the United States has lost much of its capacity to absorb and recycle foreign trade surpluses. That, in a nutshell, is the driving force behind the global deflationary trend.
[SNIP]
... this would involve figuring out a way to draw a wedge between the global dollars accumulated in foreign reserves and the domestic dollars that the US will be creating at a much faster clip. That way, the world economy can reinflate at the same time, since everyone would be able to devalue in relation to a stable monetary standard....
The real question is whether there will be the political will to carry out these proposals. Will the United States have the wisdom to decouple the world economy from the dollar?
The Chinese government's decision this month to let exporters in a small number of cities settle their overseas trade in yuan rather than in US dollars has far-reaching implications, according to economists, even though the immediate impact is minimal.
[SNIP]
China's move to extend use of the yuan comes as concern grows that increased US government spending to halt the financial crisis will reduce the value of the US dollar. That could reduce the amount of money earned by Chinese exporters if the yuan were to strengthen against the US currency. It could also reduce the value of US Treasuries held by the Chinese government.
It is estimated that of China's US$1.95 trillion in foreign exchange reserves at the end of last year, the largest in the world, 70% is invested in US dollar-denominated assets. Increased use of the yuan in international trade could help reduce countries' use of US dollars.
I'll try to explain my belief that dangerous Ponzi finance dynamics are in play with the current course of policymaking. First, I view panicked policymakers as seeing no alternative than to try to sustain the current (deeply maladjusted) economic structure. A more natural course of economic adjustment - from finance and consumption-driven bubble economy to a more balanced system - was going to be much too painful to endure. So a massive government inflation was commenced in desperation - with the grandiose objective of revitalizing securities markets, housing prices, and the overall US economy. I just don't see how this reflation goes much beyond stoking a susceptible artificial recovery.
[SNIP]
...it's the massive inflation of non-productive credit that ensures the unavoidable crisis of confidence. Can the underlying economic structure service the mounting debt load or, instead, is it the massively inflating debt load that is sustaining a vulnerable economy? And it is in this vein that I fear the government finance bubble is on track to destroy the creditworthiness of the entire economy. And this Ponzi dynamic is the greatest cost to what I fear is a continuation of unsound policymaking.
WASHINGTON—After nearly four months of frank, honest, and open dialogue about the failing economy, a weary U.S. populace announced this week that it is once again ready to be lied to about the current state of the financial system.
Tired of hearing the grim truth about their economic future, Americans demanded that the bald-faced lies resume immediately, particularly whenever politicians feel the need to divulge another terrifying problem with Wall Street, the housing market, or any one of a hundred other ticking time bombs everyone was better off not knowing about.
In addition, citizens are requesting that the phrase, "It will only get worse before it gets better," be permanently replaced with, "Things are going great. Enjoy yourselves."
Probably the best thing that could happen would be some kind of sex scandal in Washington. Would have to be pretty big, though... bigger than Clinton or Edwards ...
The nation is already hardened to news. You can see it here on RR... It''s just too exhausting. We've turned to the mundane things of everyday life. Where the intensity of the forums were politics and finsnce even as recently as a month ago, most of the current discussions are about anything but.
I'm guessing that people are tired of fighting, and hoping for some reasonable solutions, and have given over to accepting, and trying to make the best of a bad deal.
The idea that there could be a groundswell of outrage that might result in political change is not valid. The public has gone into shock and doesn't want to hear any more.
It has rubbed off on me. I have come to the point that I really don't care about housing, credit, or even whether the unemployment rate goes to 15%. It's my neighbor who is affected, and he doesn't care enough to even read his newspaper.
For the first time in years, I've lost interest in caring about what happens to others. I'm ok, my bride is ok, we owe no one, can pay our bills, and look to be reasonably secure for the present.
Now, I find myself able to watch Hannity listen to Rush Limbaugh or to Savage... (still can't abide Ann, though). It's kinda like reading history... even though the history hasn't yet been written.
I'll leave with a single question... One that I've posed at least 5 times in the past several months... One that no one here has thought important enough to answer.
"Name one honest man or woman in the three branches."
I'll leave with a single question... One that I've posed at least 5 times in the past several months... One that no one here has thought important enough to answer.
"Name one honest man or woman in the three branches."
No answer.
The 545 have won!
Do any of us really know any of the 545 well enough to answer the questions without speculating?
"Name one honest man or woman in the three branches."
If you mean honest by commonly accepted standards, or truthful, that would of course be Ron Paul.:-) Yours, Issodhos P.s. If you're feeling down, give a few bucks to the local Area Food Bank. It will perk you up.
If you mean honest by commonly accepted standards, or truthful, that would of course be Ron Paul.:-)
Not sure I totally agree with his views, but I'd agree that he's as close as anyone I've seen. I kinda Like Kucinich too.
As far as SCOTUS, I don't know enough, so maybe I should reduce the 545 5o 536.
I'm still having an internal debate on the Presidential position. On the one side, I see gawd awful decisions, but then wonder how anyone could stand pat on morality, and expect to get anything done. Am so happy to see ANY movement toward change, that I'd hate to stop the pragmatism that for the first time in many years offers some hope.
We've heard a lot of talk about the shape of this "recession", especially for the United States. The optimists think it will be V-shaped and that we are even now seeing the bounce upward toward growth again. Those somewhat more in tune with the deeply worrying fundamentals think it will be U-shaped, and they think we've probably hit the bottom, or nearly so, but we have some months to go before growth begins again. Then there are the pessimists, who insist on being called realists, who think it will be L-shaped, with America's economy stagnating perhaps for an entire decade, or even more after it reaches the bottom of this recession.
Finally, there are those relative handful of so-called "prophets of gloom and doom", who continue to advise that this isn't merely a severe recession, but is rather the opening phase of a full-blown crisis, a financial/economic collapse centered in the US in which the severe recession is merely one of many repercussions to come.
They predict the crisis will be shaped like a series of steps going downward - in effect, a series of collapses with deceptive plateaus in between, with economic growth returning very slowly and painfully in the US and the UK several years off from today. They insist that we haven't even remotely seen the bottom yet, but have only experienced the first few steps downward so far, and that there are several more to come. They also warn that the worst for the US and the UK, by far, is yet to come.
Standard & Poor’s yesterday highlighted the task facing the next finance chief, saying it may cut Britain’s AAA credit rating for the first time as debt heads to 100 percent of gross domestic product amid the worst recession since World War II.
[SNIP]
“Does this government in its current state have the steel and the authority to put through a painful program of tax increases and spending reductions and nurture the economy in a consensual way through a period of difficult economic adjustment?” said George Magnus, senior economic adviser at UBS AG. “No. The politics just aren’t right.”
[SNIP]
“Britain’s economic reputation is on the line,” said George Osborne, the lawmaker in charge of Treasury affairs for the Conservatives. “Unless Britain has a government with a credible plan to reduce debt, there will be a further downgrade, with all of the serious consequences for our prosperity that would entail.”
Debt and ratings concerns are already starting to affect other countries. Yesterday, U.S. Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating creditworthiness deepened.
Last time I looked, American and British high finance were joined at the hip, like Siamese twins.
Don't wanna start another thread on hyper-inflation, because most of our RR friends have lost interest, and moved on to other things. (for which I can't blame anyone... almost all news is ugly) ... but, here's an explanation that might help in understanding what will probably happen, and how. In my own opinion, the article is relatively optimistic... but this is a start. Brace for hyper-inflation
The article is limited, but the links linkto the more extensive explanations are worthwhile, because the extent of the effect on the economy can't be explained in a few sentences.
Quote
The bottom line is that the attempt to save bank bondholders from losses – to provide monetary compensation without economic production – is not sound economic policy but is instead a grand monetary experiment that has never been tried in the developed world except in Germany circa 1921. This policy can only have one of two effects: either it will crowd out over $1 trillion of gross domestic investment that would otherwise have occurred if the appropriate losses had been wiped off the ledger (instead of making bank bondholders whole), or it will result in a stunning and durable increase in the quantity of base money, which will ultimately be accompanied not by a year or two of 5-6% inflation, but most probably by a near-doubling of the U.S. price level over the next decade. As I've noted previously, the growth rate of government spending is better correlated with subsequent inflation than even growth in money supply itself, particularly at 4-year intervals. Regardless of near-term deflation pressures from a continued mortgage crisis, our present course is consistent with double digit inflation once any incipient recovery emerges.
As Nobel economist Joseph Stiglitz recently noted, the bureaucrats that designed this bailout are “either in the pocket of the banks or they're incompetent. It's a real redistribution and a tax on all American savers. This is a strategy trying to recreate the bubble. That's not likely to provide a long-run solution. It's a solution that says let's kick the can down the road a little bit. They haven't thought enough about the determinants of the flow of credit and lending.”
Not that anyone is listening, unfortunately.
Aside... The Hussman article (IMHO), represents a very strong argument for the concept of "finite wealth"... another subject that tweaks the hot button of some of our RR friends.
The Treasury does not have any power to create new money. It has to borrow from the credit market, thus shifting private debt into public debt. The Fed has the authority to create new money. Unfortunately, the Fed's new money has not been going to consumers in the form of full employment with rising wages to restore fallen demand, but instead is going only to debt-infested distressed institutions to allow them to deleverage from toxic debt....
Falling demand deflates commodity prices, but not enough to restore demand because aggregate wages are falling faster. When financial institutions deleverage with free money from the central bank, the creditors receive the money while the Fed assumes the toxic liability by expanding its balance sheet....
What we will have going forward is...a financial profit inflation in which zombie financial institutions turn nominally profitable in a collapsing economy. The danger is that this unearned nominal financial profit is mistaken as a sign of economic recovery, inducing the public to invest what remaining wealth they still hold, only to lose more of it at the next market meltdown, which will come when the profit bubble bursts.
The solution then is to make the working poor pay for the pain of inflation by giving the rich a bigger share of the monetized wealth created via inflation, so that the loss of purchasing power from inflation is mostly borne by the low-wage working poor and not by the owners of capital, the monetary value of which is protected from inflation through low wages. Thus the working poor loses in both boom times and bust times.
I think that all three of the articles in our posts are in agreement, that the debt is feeding the coffers of the rich... that no real gain is being realized, but that as accounts are eventually balanced, it will happen at the expense of middle America.
Keeping a 5 trillion dollar bailout for the wealth class, is well worth the few hundred million dollars of bribes.
Investors aren't shunning these assets because they're afraid, but because the banks want too much for them given their implicit riskiness.
...[asset] prices have collapsed because investors recognize the inherent toxicity of the assets themselves. The market isn't driven by fear, but by common sense. $.30 cents on the dollar is probably all they are worth.
Do people realize that the reason their home equity is vanishing, their 401ks have been slashed in half and their jobs are at risk is because Wall Street was gaming the system with leverage and financial innovation? The current downturn is not really a recession at all; it's more like a self-inflicted wound perpetrated by avaricious speculators who put a gun to the economy's head and blew its brains out. The banks and Wall Street have created a capital hole so vast that the entire economy is being sucked into the abyss. And it all could have been avoided.
Credit production is too important and too lethal to entrust to profit-driven vipers whose only motivation is self-enrichment. The whole system needs rethinking and public input before Bernanke wastes trillions more trying to revive the same crisis-prone business model. If "credit is the economy's life's-blood," as President Obama says, then it should be distributed through a government-controlled public utility. The real lesson of the financial crisis is that privatizing credit has been a disaster.
About timing: The following was (IMHO) an excellent comment on an article here: Foreclosures
The comment was more insightful than the article as it provides a time line for the expected continuation of mortgage problems .
Quote
If you think it's bad now, wait a year or more. The subprime adjustable rate mortgages have already peaked and bottomed. That's good. However, due to the longer initial low interest periods inherent in these groups, prime, Alt-A, and option ARM resets just started ramping up in April. For the next couple of months, these will rise and reach an intermediate plateau in June. This plateau will last for about a year and then will start rising again in May of 2010 peaking in August of 2010. They'll then tail off a bit until May of 2011 where they'll ramp up again but not as high as the 2010 peak. Finally, in October 2011, they'll start moving down again to hit bottom rates in early 2012. Contrary to what the pundits are saying, this has a long way to go. The number of ARMs among prime, alt-a, unsecuritized, and options are higher overall than subprime however, it's also more likely that prime and alt-a would have been able to refinance into fixed mortgages at the recent low rates. If they weren't able to, with rapidly rising mortgage rates, those ARMs are going to reset to much higher rates and defaults among those categories are likely to rise signficantly. Alt-a mortgages are better than sub-prime but worse than prime. Unsecuritized mortgages are a mixed bag. Some are so good that the mortgage originator wanted to keep them and didn't sell them into the securitization market (MBSs). The others though, are so bad that no one wanted them. Consider that at the time, the standards were pretty low for what the securitization market wouldn't buy. Option ARMs are a scary mix of mortgages and likely to suffer really high default rates. They're composed of those exotic mortgage types such as "interest only" mortgages and even those where the initial low payments were less than what the interest amounted to so the amount owed after several years is guaranteed to be more than what the home is worth even in cases where the home prices didn't go down. Sad times and we're paying the piper for the multi-year banquet and spending spree that the country just binged upon.
Reminder... along with the problems described above, an even greater threat comes with the reset of the commercial real estate financing which should begin in earnest toward the end of 2010.
Another uplifting bit of info from the "Good News Express".
A former Chinese central bank adviser says Global Crisis ‘Inevitable’ Unless U.S. Starts Saving.
Another global financial crisis triggered by a loss of confidence in the dollar may be inevitable unless the U.S. saves more, said Yu Yongding, a former Chinese central bank adviser....
The Obama administration aims to reduce the fiscal deficit to “roughly” 3 percent of gross domestic product from a projected 12.9 percent this year, Geithner reaffirmed today....
It may be helpful if “Geithner can show us some arithmetic,” said Yu. “We need to know how the U.S. government can achieve this objective.”
The U.S. needs a higher savings rate and a smaller deficit on the current account, which is the broadest measure of trade, or “another financial crisis triggered by a dollar crisis could be inevitable,” the Chinese academic said.
Referring to the Federal Reserve “as the world’s biggest junk investor,” and to Chairman Ben S. Bernanke as “helicopter Ben,” Yu said the Fed has dropped “tons of money from the sky since the subprime crisis.”
“The balance sheet of the Federal Reserve not only has expanded like mad but is also riddled with ‘rubbish’ assets,” he said.
Think back to Citicorp. I looked at the ticker today: the market capitalization of Citicorp is $17 billion. So the government could buy Citicorp for a fraction of what we've already obligated the taxpayer for. And in buying Citicorp, as an example—there could be one or two others—the government would announce in four to six months that it is going to sell the good assets of the bank back to the public. If the government bought Citicorp for, let's say, $20 billion, what would it be worth if the government sold the good assets back to the public? Surely, several times what it paid for it.
I don't mean selling these assets to hedge funds, although they can participate; but I would propose offering them to any American who wants to invest in this good bank the opportunity to do so.
[SNIP]
But there are only a few ways of resolving that debt problem: either you default on it as countries like Argentina did; or you use the inflation tax to wipe out the real value of the debt; or you have to raise taxes and cut government spending. And given the size of the deficits, over time that's going to be a painful political choice to make.
[SNIP]
One result was that the 374 people in the London office of AIG who were responsible for AIG derivatives destroyed a company that had 116,000 employees in 120 countries. Why? Because there was no regulation at all.
Aside... The Hussman article (IMHO), represents a very strong argument for the concept of "finite wealth"... another subject that tweaks the hot button of some of our RR friends.
--You're right, it does tweak the hot button of some of them, the ones that refuse to accept the REALITY that's been the same all along since the beginning of recorded history:
ALL WEALTH [size:20pt]ISFINITE AND ALWAYS HAS BEEN![/size]
This ridiculous concept of elasticity of money is am invention thought up by people who take delight in enabling the primary weakness of modern man, the wanting of crops without plowing up the ground. Real wealth is as durable as granite, not elastic. Most people in the modern world have never even been close to anything even remotely resembling real wealth, actual ownership of solid durable monetary assets. We've been so dumbed down that we actually snicker at people who believe in real wealth and call them kooks, gold bugs and hoarders, not realizing that these are the people who are the only ones left with any purchasing power when the central banksters and the government conspire together to screw up the money, which they have a propensity to do seemingly once, twice or thrice every century, and it always seems to be whenever their greed crosses paths with the upward mobility of credit happy bubblemeisters and the silent hopes of a beaten and harried middle class, drunk on the propaganda spewing out of their telescreens.
Aside... The Hussman article (IMHO), represents a very strong argument for the concept of "finite wealth"... another subject that tweaks the hot button of some of our RR friends.
--You're right, it does tweak the hot button of some of them,
I don't think it is a matter of it being a "hot button" for anyone, checkerboard. I think it is simply that Itstarted has consistently refused to explain what he means by it. I, for example, have googled it and not come across anything that I could use to evaluate its validity or even get a clear idea of what the term is supposed to mean. I have found references to it meaning that at any given moment in time there is a finite amount of wealth owned by people, and that an increase in one person's wealth is a decrease in another person's wealth (wealth is never defined). That strikes me as absolutely ludicrous -- perhaps because there is no definitional basis provided from which I can evaluate it.:-) Yours, Issodhos
I can see your dilemma, Issodhos, we can assume there is no such thing as infinite wealth, because we are, after all, just one tiny planet inhabited by a very finite number of Greedybeasts. What then does finite wealth really mean? I'm going to suggest it means 'limited', while there is an awful lot of it you could still divide it up and give everyone an equal share. If no more wealth were ever created then any time anyone increased his fortune then that of someone else would decrease. New wealth is being created every day though. Gold and diamonds, oil and iron are dug up and added to the wealth. Crops are grown, timber and other renewables harvested. So while all the wealth in the world is finite or limited we don't seem be be reaching the limits yet of how much wealth can be created. The limit we are running into is how many Greeedybeasts it will actually support.
“BRIC” is a new word that has appeared recently, consisting of the first letters of Brazil, Russia, India and China....
This first “BRIC summit” is held under the pretense of deep development in the international financial crisis....
There are two major things to watch for at the BRIC summit. One thing to watch is how the participating leaders will evaluate the dollar....
Officials from some countries suggest creating a super sovereign reserve currency by using IMF Special Drawing Rights as a basis. BRIC has already begun to increase IMF bonds to enhance the right of speech of emerging countries in the international financial system and to force the U.S. to be accountable for the dollar. As a matter of fact, in many countries’ bilateral and multilateral trade arrangements, the process of moving “away from dollarization” has begun....
In recent world history, any big economic crisis means the restructuring of the world’s economic model and financial order. This is unavoidable and it is independent of humans’ subjective will. People can only act along with it.
Stocks in Vietnam, Sri Lanka and Serbia have outpaced the rest of the world since April, with benchmark indexes for each rising more than 32 percent. That means it’s time to sell equities throughout the developing world, some of the biggest money managers say.
The last time the smallest emerging markets led a rally, in 2007’s fourth quarter, bullish investors predicted that developing economies would break free of the U.S. recession’s shackles. They were wrong.
[SNIP]
“You often see frontier markets outperforming at the end” of a rally, said Arjuna Mahendran, the Singapore-based chief investment strategist for Asia at HSBC Private Bank, which managed $433 billion at the end of 2008. “There’s a chance of a sharp correction.”
[SNIP]
Developing-nation equities already are slipping from this year’s highs after price-to-earnings ratios made them more expensive than any time since December 2007. Investors are pulling money from emerging-market stock funds for the first time since March amid concern that a global recovery will take longer than economists predicted....
A major systemic crisis became unavoidable after the revelation of GSE accounting irregularities ensured that mortgage guarantors Fannie Mae and Freddie Mac would no longer provide the mortgage/MBS marketplace a "backstop bid". Going back to 1994, the GSEs had repeatedly nurtured concurrent booms in mortgage lending and MBS speculation through their aggressive market turmoil-periods of MBS purchases and liquidity creation. Speculators had over the years become quite emboldened, but their source of liquidity in the event of trouble would be nowhere to be found in 2007.
I see ominous parallels to the mortgage/Wall Street finance bubbles with today's government finance bubble. First, the scope of "federal" government marketable debt issuance - approximately $2.0 trillion annually - has quickly reached massive proportions. Especially since little of this ("non-productive") debt is financing real economic wealth creation, there is a rapid deterioration in the quality of debt being sold. There are clear Ponzi finance dynamics in play.
Not a response to your post Numan, you're just the last one in the thread:
An interesting shift in thinking about the "bailout". Not sure how I feel about it until all details are known, but I like the fact that we're starting to move away from Wall Street and toward Main Street at least conceptually!
An interesting shift in thinking about the "bailout". Not sure how I feel about it until all details are known, but I like the fact that we're starting to move away from Wall Street and toward Main Street at least conceptually!
Interesting! Could it be that Obama has tricked the financial vampires into supporting the bailout package, and that now he is going to use the money to help the real economy?
In the words of the hunter in Jurassic Park:
Clever girl!
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The Obama administration is developing an initiative to take money from the $700 billion program for the banking system and make it available to millions of small businesses, which officials say are essential to any economic recovery because they employ so many people, according to sources familiar with the plan.
The new effort -- which would represent a striking shift from the rescue program's original mandate -- would direct billions of bailout dollars toward a program that aims more at saving jobs than righting the financial system.
A proposal being floated by senior Treasury Department officials calls for using the bailout funds to expand an existing government program that helps small companies borrow money from banks a low rates to keep their businesses going, the source said. These "working capital" loans would come with few restrictions and could be used for buying inventory, holding onto employees and paying off short-term debt.
We are in the first deflation since the Great Depression, albeit a mild one. In fact, raw materials prices have fallen just as far, but our consumption basket has shifted to items whose prices are slower to deflate.
[SNIP]
It seems quite plausible that the dollar will fall sharply against some other currencies, notably the Asians, and against gold and other commodities. That may not, however, interrupt the deflationary tendencies which predominate, for to have actual inflation, someone has to take cash and buy goods rather than (for example) securities. If everyone hypothetically wanted to buy securities rather than goods, prices of goods would crash.
Something like this is happening, of course. An aging population increases its purchases of securities and decreases its purchases of goods as it saves for retirement. Americans have saved nothing for the past ten years, and the capital gains that they considered savings-substitutes have vanished. That means that an enormous savings deficit accumulated over more than a decade has been exposed, and that Americans must attempt to correct it quickly and under the worst of circumstances.
That creates a deflationary shock that a few trillion dollars’ worth of stimulus cannot begin to mitigate. America may have the worst of both worlds: currency devaluation AND price deflation, as in the 1930s.
Back during Japan’s lost decade of 1990-2000 (the first lost decade, that is), Japan’s population had just began to age dramatically. In 1990 the elderly dependency ratio stood at 17%, but it had risen to 25% by 2000. As the Japanese aged their appetite for savings grew, and as their stock portfolios and home values crashed, they saved more and more. The more they saved, the worse the economy did....
Fast forward to America in 2010, with an elderly dependency ratio of 19%, right around where Japan was in 1990. By 2020, it will rise to 25%, almost as fast as Japan’s....
Savings are deflationary: we don’t spend on current good but on future goods (securities). The government may attempt to substitute for household spending but it never quite works, no matter how many public works projects the government sponsors (again, Japan poured more cement than anyone else)....
country with a preponderance of old people will show strong political pressures against inflation.... ...that’s why the Japanese never objected to deflation. As old people, they benefitted.
"Even as it weathers the worst economic downturn in decades, JPMorgan Chase said Thursday that it had made a $2.7 billion second-quarter profit as a result of stellar trading and investment banking results."
This was essentially the same story we got from Goldman. Neither bank made its money the old fashioned way -- by lending to worthy projects; they made their dough by "trading" and "investment banking." In other words, they made billions from speculation.
Anyone who takes this as evidence of a recovering economy should work for the government. Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question: whom were they trading against?
Speculating is a zero-sum game. No matter who wins, the economy is not a bit better off; it has not a centime more in resources. Goldman and JPMorgan report earning, together, more than $6 billion. Who was on the other side of that trade?
There is also something fishy about the whole thing. Trading is not only a zero-sum game, it's a game of chance. Traders lose money about as often as they make it. Of course, normally, the traders at the big banks have an advantage; they are not idiots. They make money by taking it away from the amateur traders, who are idiots. But what amateur traders put up $6 billion?
Our guess: the fix is in. They are taking advantage of the feds' stimulus programs...and trading against the biggest patsy in the world, the U.S. taxpayer.
The Fed’s reckless monetary policy has cost the US government trillions of dollars in bailouts for banks, the automobile industry, and homeowners. More precisely, on July 21, Neil Barofsky, the overseer of the Troubled Asset Relief Program (TARP), estimated in a prepared statement to a committee of the US House of Representatives that the total exposure of the US government to the financial crisis at US$23 trillion to $27 trillion. Fed policies set off commodity price inflation, most notably in oil prices, and exchange rates instability; it aggravated external current account deficits....
Recently two opposing views regarding the structure of the Fed have emerged: a group of academicians have circulated a petition that calls for preserving the Fed’s independence. The opposite view expressed by a group of US Congressmen calls for enacting central banking legislation and reining in the absolute powers of the Fed. Which is the best path for the US?
[SNIP]
he recent debate regarding the role of the Fed is not new and reflects two opposing views of central banking requiring a public debate. A national debate of Fed policies and its possible reorganization has become a pressing matter for the United States.
Gold and diamonds, oil and iron are dug up and added to the wealth. Crops are grown, timber and other renewables harvested. So while all the wealth in the world is finite or limited we don't seem be be reaching the limits yet of how much wealth can be created. The limit we are running into is how many Greeedybeasts it will actually support.
Basically, when you refer to gold, diamonds, iron and OIL, you're essentially referring to the same element that all of them connect to:
ENERGY.
Wealth is that which increases the quality of life, and since almost everything that increases QOL involves energy, basically ENERGY IS WEALTH. Gold and diamonds are objects of intrinsic value in that a certain amount of labor is required to make them available, but in reality they are just hard currency. If a barrel of oil was small enough to fit in one's pocket it would do just as nicely as a lump of gold, a gold coin or a diamond, because in the end most wealth buys the energy needed to increase QOL or it buys products that take a certain amount of energy to create.
Energy is NOT wealth! At present, it is liability, not profit!
As long as the Pashas of Petroleum and the road-construction contractors are fat and satisfied (curse their worthless hides!), then the Quality of Life is lowered, not increased.
Energy could be wealth, if it were used to build and maintain high-speed rail transportation and freight, and a well thought-out mix of public and private transport, and sensible urban planning.
Your argument has more to do with the type of energy currently in play, not with the concept of energy as wealth. The fact remains that anyone who has vast quantities of cheap energy at their disposal has wealth, because energy does WORK, and work is LABOR.
Owning the means over the ability to do lots of labor cheaply is what built the US into an industrial superpower. When muscle is replaced by machines, those who make things can make them more cheaply.
Energy is wealth. Oil is simply an abused and overly speculated form of energy, but if you own a lot of oil, you are wealthy.
Options traders are increasing bets that the steepest rally in the Standard & Poor’s 500 Index since the 1930s won’t survive September, historically the worst month for U.S. equities....
History shows that U.S. investors lose the most in September. The benchmark index for American equities fell 1.3 percent on average since 1928 that month, data compiled by Bloomberg show.
Mark Mobius said global stocks will drop as much as 30 percent following their recovery from last year’s rout as companies take advantage of the rebound to sell more shares.
“When you have these rapid increases almost without correction, you will definitely have a correction,” Mobius, who oversees about $25 billion as executive chairman of Templeton Asset Management Ltd., said in an interview.... “We can expect a lot of volatility.”
[SNIP]
“There is a real danger this is going to be a double dip and that after six months or so we’ll have some more bad news,” Feldstein, the former head of the National Bureau of Economic Research said....
Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends....
And the collapse of the commercial real estate market has yet to be dealt with....
Stocks tumbled around the world, led by China, while the yen, dollar and Treasuries rose as investors speculated that a rally in riskier assets has outpaced prospects for economic growth. Energy and commodity prices also slid.
The MSCI World Index of 23 developed nations sank 2.8 percent at 4:12 p.m. in New York, the biggest retreat since April. The Standard & Poor’s 500 Index lost 2.4 percent to 979.3 after China’s Shanghai Composite Index slumped 5.8 percent, the most since November....
“The stock-market reaction overseas has woken people up to the fact that it’s not going to be a straight line up,” said Myles Zyblock, chief institutional strategist at RBC Capital Markets in Toronto. “People are starting to question the strength of the recovery.”
MR. ZUCKERMAN: No, I don't believe it is. It is not falling off the end of the table. It is just rolling downhill at a slightly lesser pace in the last couple of months. But we are by no means through this recession and we are by no means through the problems created by higher unemployment. Homes where the mortgage exceeds the value of the home, which today is 25 percent of the homes -- Deutschebank predicts that in 2011, 48 percent of the homes will have mortgages that exceed the value of the homes. That is a huge, huge event in this country. It will affect everybody's sense of net worth and the consumption economy that we are relying on. So we're not out of the woods. I'm not saying it's going to be a depression, but we've still got a lot of problems ahead of us.
[SNIP]
[Cash for Clunkers]MR. BUCHANAN: It was $1 billion. That's about one-tenth of 1 percent of the stimulus program. One of the problems, John, is that the banks still have this big, cancerous tumor in their belly. All these bad toxic paper are being kept on the banks' books at 100 cents on the dollar. You're going to have commercial real estate crashing.
We have not revisited the total collapse of the world economy for a while
In the mean time, the wall street journal reports "WASHINGTON (
Quote
MarketWatch) - The U.S. economy expanded at a 3.5% annual pace in the third quarter, as massive government stimulus helped drag the economy out of the longest and deepest recession since the 1930s, the Commerce Department estimated Thursday."
After reading this (from RGE Monitor) it occurred to me that there are probably very few people who truly understand what is happening with underside of the economy.
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The Federal Open Market Committee (FOMC) decided at its November 2009 meeting to keep the Federal Funds Rate target range unchanged between 0% and 0.25% and reduced the size of the agency debt purchase program slightly to US$175 billion from the previously announced maximum of US$200 billion. The Fed will still purchase a total of US$1.25 trillion of agency mortgage-backed securities. The FOMC stated it "continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period." The FOMC made only a slight change in its statement to emphasize the importance of labor market slack to its decision.
The markets are going crazy. On Monday, the Dow-Jones in New York rose more than 200 points to its highest level in 13 months. Gold is more expensive than at any other time in history; the dollar continues to weaken and is almost at the level it was when the great financial crisis began last year. Dealers for banks and hedge funds are buying stocks and commodities as if they think a boom is imminent. They’re buying gold as if they feel they have to protect themselves from inflation and they’re selling dollars as though they expect interest rates in America to stay at zero forever.
None of this has anything to do with reality. American unemployment is rising faster than had been feared, meaning the next recovery will be far weaker than normal. Factories stand empty and payrolls are falling – both strong indicators for coming inflation. And of course it’s also clear that the dollar can’t keep sinking forever and that interest rates in the United States will have to rise again.
[SNIP]
The banking crisis has by no means been resolved. In Germany, the Bavarian State Bank has reported new losses amounting to billions of euros; in the United States, officials closed five banks on Friday to keep them from total collapse, an action hardly noticed by the public.
The logic of a financial transactions tax is simple. It would impose a modest fee on trades of stocks, futures, credit default swaps and other financial instruments. For example, the UK puts a 0.25% tax on the sale or purchase of shares of stock. This has very little impact on people who buy stock with the intent of holding it for a long period of time.
[SNIP]
Since the financial sector is the source of the country's current economic and budget problems it also makes sense to have this sector bear the brunt of any new taxes that may be needed. The economic collapse caused by Wall Street's irrational exuberance has led to a huge increase in the country debt burden. It seems only fair that Wall Street bear the brunt of the clean-up costs. A financial transactions tax is the way to make sure that this happens.
Today is Thanksgiving. After looking over the movement in the international exchange rates over the past three days, and going to some of the lesser known money sites, I have the feeling that we are in a pivotal period.
The statement by the Fed about maintaining low (near zero) interest rates is reaching the world markets. We may be at the beginning of the new "bubble". Uncharted waters. Japan has indicated that they may not buy US debt to support their own productivity. The Vietnam dong was devalued. Gold is in a very nervous mode. Oil is fluctuating wildly as the derivative market plays Russian roulette. Dollar down, oil surplus up. All in a low volume week.
Despite the gloom of a low employment, the U.S. has seemingly settled in to a period of nervous calm, as the people slowly catch up to the new way of life.
Since the Stock Market is a function of the investment community, the current rumblings of international monetary exchange may well trigger a tsunami of margin based trading, and an attempt to benefit from the changing money positions of the world community.
The word is "panic".
It could blow over, and we should hope it does. You may want to watch the money movement Here.
Today is Thanksgiving. After looking over the movement in the international exchange rates over the past three days, and going to some of the lesser known money sites, I have the feeling that we are in a pivotal period.
Somewhat surprisngly, I think I agree with you. Whether that pivotal moment come now, or two years from now, it is IMO inevitable.
The economic structure of the world economy was more or less based upon the US dollar. Which made sinse after WWII because the USA was far and away the predominant economy and there was no other source of liquidity for world trade. Because the US dollar was basically the accepeted international currency of exchange... we were able to... required to print up a money supply that would support this function of international global exchange.
But several realities have shifted. IE the USA is no longer such a predominant economy (as compared to rising Europe and Asia). And the current econmoic crisis has forced us to manipulate our currency in a way that is not acceptqable to people who are using the dollar for the purpose of international exchange. And so, sooner or later, the dollar will lose it's role as the defacto unit of international exchange. And when that happens, there will be less need for all the dollar reserves that were pumped into the world economy. And, at that point, the chickens will come home to roost.
Just a note to explain a little more about the current instability. The collapse of Dubai World is the immediate trigger to today's drop in the market, but the ripple effect well be much greater than suspicion about a the $60 Billion dollar "interest holiday" because the loan itself was a prime candidate for leveraged derivative creation.
(If you're unsure about the impact of derivatives, just consider that the actual amount of underlying value, can be traded up to credit default swaps that would be counted to a leveraged total from 100 times to possibly 1000 times. This means very little by itself, but add to the depth of the problem.)
The point to be made is that it is becoming increasingly difficult to smooth over large losses, because of the black box leverage.
Henry Liu has an ongoing narrative about the problem here: Henry C.K. Liu on Derivatives Here is an excerpt from the article that might point up some of the problems with leveraging that doesn't get into the news.
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On September 28, 2009, the Office of the Comptroller of the Currency report on banks derivatives trading activities showed that the estimated value of all derivatives held by US commercial banks was rising, increasing nearly 1% over the last quarter and 12% year to year, to $203.5 trillion (total includes interest rate, FX, credit and other derivatives).
Bank holdings of credit default swap (CDS) contracts remain greatly elevated. Although down from their peak in the fourth quarter of 2008, banks hold more than five times the amount in such derivatives than at the end of 2004, when the US economy was taking off. Banks exposure to derivatives, while falling slightly, remains alarmingly high. Bank of America’s total derivatives-related credit exposure relative to its capital was 137%; Citibank 209% and Goldman Sachs 921%.
Trading credit derivatives is once again highly profitable. After seeing huge losses on these instruments toward the end of 2008 and into first quarter of 2009, banks generated $1.9 billion in cash and derivative revenue in the second quarter of 2009. That is problematic because regulatory reform is still stuck in Congressional committees and subject to industry pressure not to spoil the party. As banks find it difficult to find credit worthy borrowers, they are using their fund to trade derivatives to drive profits. This asset new bubble built by Fed funny money, unlike the previous ones, does not even bother to create an illusion of prosperity, nor full employment.
Once again derivatives are being used not to hedge risk but to generate unsustainable trading profit. Soon it will be deja vue all over again. But first the world economy needs to recover from the current crisis which may not take hold until 2014. If history is any guide, around 2020 will be the time for the next global market collapse.
Bloomberg is hinting that the Dubai Problem may be worse than what we've already heard. The original $60 Billion debt may end up being much more. Bloomberg mentions between $80 an $90 Billion, when the off balance sheet debt is added in. Bloomberg news (Remember when the LTCM debt was originally $2Billion? It ended up rocking the market with about $100 Billion in settlements, and came very close to destroying the world financial system back in 1998?) Watch the money carry trade for indications.
Hopefully Abhu Dabai will step in and obviate this crisis, but it could be out of control.
The Dubai - Abu Dahbi story is quite interesting. Since the current Dubai World situation looks to be an ongoing story, it might help to understand what is and what has happened.
I found this blog to be extremely interesting. I would have entitled the story "The Rise and Fall of Dubai... and maybe Abu Dhabi too". Fantasy Island comes to an end
Here's a little reminder about what happened last year after the government bailed out CitiBank.
Seven days after CitiBank receive$25 billion from the government, they loaned out $8 billion dollars, NOT to home owners or small businesses, but to DUBAI. Those were American denominated dollars, not yuan, renminbi or yen. Enigmatically...(In a few more weeks, I'm guessing you'll be learning about the difference)
In an amazing feat of bipartisanship AND REPUBLICAN COMMON SENSE John McCain has joined forces with Maria Cantwell to resurrect GLASS-STEAGALL~!
Be still my heart!
I thought McCain had lost all his marbles when he picked Sarah Palin. But now I see it might have been temporary.
New respect for John McCain from a person who chucked his decision and decided to vote for Obama last year. John, I wish you had shown this sort of smarts last year.
In an amazing feat of bipartisanship AND REPUBLICAN COMMON SENSE John McCain has joined forces with Maria Cantwell to resurrect GLASS-STEAGALL~!
Be still my heart!
I thought McCain had lost all his marbles when he picked Sarah Palin. But now I see it might have been temporary.
New respect for John McCain from a person who chucked his decision and decided to vote for Obama last year. John, I wish you had shown this sort of smarts last year.
It will be interesting to see the groundswell of republican support for this idea.
Humm... maybe the difference with McCain is that now that he is not a candidate, he does not have to worry about republican support.
It is, of course, only a first step. But in Europe we can hardly measure how revolutionary a step is for the United States. On Friday, December 11, not only did the House of Representatives pass the most important financial reform bill since the 1930s - 1,279 pages, no less - but it included the creation of a protection agency for consumers. An agency in charge of regulating and observing financial products aimed at private consumers, from mortgages to credit cards, in order to better counter “predatory practices.”
From Brussels to Paris, this step could seem obvious. But on the banks of the Potomac in Washington, it constitutes a huge innovation, fought against as such by the Wall Street lobby and its partisans in Congress.
[SNIP]
Creating a federal agency in charge of the financial protection of consumers would...mean aligning with Canadian and European standards. “Socialist” standards, in other words, for the most extreme apostles of entrepreneurial freedom. This is the reason Barack Obama was forced to reach out to common sense on Saturday to justify his reform. It is the reason why the battle the president is about to embark upon with the Senate will be one of the hardest of his mandate.
On one hand, it is saying that there is some revolutionary activity happening... on the other hand, we all know that nothing is happening and Obama has sold out to wall street.
On the face of it, these seem mutually exclusive. So I presume that one or the other is mistaken.
When in Law school, one of my law review articles dealt with the court decisions that removed usury laws to most credit dealings.
It seems to me one way to deal with the financial mess is to impose usury laws on all credit transactions. In California that wold mean no interest rate higher than 10%.
On one hand, it is saying that there is some revolutionary activity happening... on the other hand, we all know that nothing is happening and Obama has sold out to wall street.
On the face of it, these seem mutually exclusive. So I presume that one or the other is mistaken.
There are other possibilities than either/or logic.
The first law of political power is, of course, to gather as much power as possible. The way to do that is rarely a straight path. The art of power is to surpass your opponents in deviousness. The game that Obama is playing is, for good or ill, far more complex than chess or go.
[b]The US workforce shrank by 652,000 in June, one of the sharpest contractions ever. The rate of hourly earnings fell 0.1pc. Wages are flirting with deflation.
"The economy is still in the gravitational pull of the Great Recession," said Robert Reich, former US labour secretary.
"All the booster rockets for getting us beyond it are failing.... The share of the US working-age population with jobs in June actually fell from 58.7pc to 58.5pc. This is the real stress indicator. The ratio was 63pc three years ago. Eight million jobs have been lost. The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. Jeff Weniger, of Harris Private Bank, said this compares with a peak of 21.2 weeks in the Volcker recession of the early 1980s.... The Fed is already eyeing the printing press again. "It's appropriate to think about what we would do under a deflationary scenario," said Dennis Lockhart for the Atlanta Fed.
Here's my attempt at putting a fine point on what's happening. As usuual, over simplified:
It was IBM punch cards that started me on this, and was followed by a "race" that I had with the fastest comptometer operator in our office in 1969 or 1970... I had the first Casio Handheld LED calculator. Won by a mile.
I then took over preparing budgets for 187 stores... A project usually handled by 5 girls in the accounting department, and usually taking about two weeks on the old spinning numbers electronic calculators. I completed the project alone, in 7 days using my casio.
Long and short?... Productivity.
Productivity... could work two ways.
#1. Reducing the Work week hours. Pay workers the same.
#2. Maintain work week hours, lay off excess workers, profits go to owners.
Simple.
(Casio at the time... $700 discounted to $499... No Kidding)
Here's my attempt at putting a fine point on what's happening. As usuual, over simplified:
It was IBM punch cards that started me on this, and was followed by a "race" that I had with the fastest comptometer operator in our office in 1969 or 1970... I had the first Casio Handheld LED calculator. Won by a mile.
I then took over preparing budgets for 187 stores... A project usually handled by 5 girls in the accounting department, and usually taking about two weeks on the old spinning numbers electronic calculators. I completed the project alone, in 7 days using my casio.
Long and short?... Productivity.
Productivity... could work two ways.
#1. Reducing the Work week hours. Pay workers the same.
#2. Maintain work week hours, lay off excess workers, profits go to owners.
Simple.
(Casio at the time... $700 discounted to $499... No Kidding)
Bob,
Clearly remember the days in which you speak. I use to use a comptometer to recap the numbers for rather complex bids.
Had I a casio at the time...hmmm, if they existed, I'd probably been put out of a job. There were several in my department that did what I did, but I was on the bottom of the seniority list.
Your comments about the Casio...it reminds me of seeing Gerald Ford's wife, Betty, give him a new gadget...a digital watch by Pulsar. At the time they sold for 2500.00. Now, a mere $1.25 on sale
...central banks have dropped their allocation to U.S. dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this "unexpected given the global environment." She adds, "over time we anticipate that reserve managers may reduce their holdings further."
What is surprising is that the managers of those central banks aren't buying traditional fall-backs like the euro, the British pound or the Japanese yen. Instead, she suggests they're putting their faith in other dollars - the kind that come from Australia and Canada.
The dollar has been in free-fall since 2007....And just last week, the United Nations released a report concluding that the dollar should no longer be the world's reserve currency because it is not stable enough. The dollar is down 5% over the past month, and even currency traders don't see it as a safe haven any more.
Global bond markets are flashing warning signals of a sharp slowdown in growth across the world and a possible slide toward a double-dip recession and outright deflation....The yield on two-year US Treasuries has fallen to a record low of 0.61pc in a flight to safety, a level not seen during the depths of the Great Depression....
Such levels are clearly incompatible with assumptions on Wall Street for 3pc growth in the second half of this year. “If the bond market is correct then this recovery could be dead in the water,” said Jim Reid, credit strategist at Deutsche Bank. The credit markets tend to sniff out trouble first and have acted as an early warning alert at every stage of the financial crisis over the past three years. Mr Reid said deflation has emerged as the dominant risk in the West and will force central banks to renew quantitative easing, the Americans “pre-emptively” and the Europeans “only when their backs are against the world”.
This growing supply of lender-owned properties could set back the nation's housing recovery but probably won't sink it completely if the nation's employment situation doesn't deteriorate further and the economy begins to pick up steam, experts said. Sales of homes have faltered nationally in recent months with the expiration of government tax incentives for buyers.
U.S. bank repossessions increased 38% in the second quarter from the same period a year earlier for a record total of 269,952, according to Irvine research firm RealtyTrac. That was also a jump of 5% from the previous quarter. If that pace continues through the year, the number of homes taken by banks is likely to top 1 million by the end of 2010, said Rick Sharga, RealtyTrac senior vice president.This growing supply of lender-owned properties could set back the nation's housing recovery but probably won't sink it completely if the nation's employment situation doesn't deteriorate further and the economy begins to pick up steam, experts said. Sales of homes have faltered nationally in recent months with the expiration of government tax incentives for buyers.
U.S. bank repossessions increased 38% in the second quarter from the same period a year earlier for a record total of 269,952, according to Irvine research firm RealtyTrac. That was also a jump of 5% from the previous quarter. If that pace continues through the year, the number of homes taken by banks is likely to top 1 million by the end of 2010, said Rick Sharga, RealtyTrac senior vice president.
I think this article belongs here. It's very wise, and brings together:
The Republican "trickle down" The Democratic "create jobs" The continued Bank stranglehold The long term lower job levels The need for safety nets
Unless and until there is a recognition of the macro, The "solutions" will come piecemeal, and will likely be doomed to failure.
I don't know if there is anyone in government with enough vision to skip the politics and offer a comprehensive resolution. Moving five years ahead, will we be a third rate nation, looking back to denounce the greed and intransigence of egoistic leaders, lost in their own tiny worlds?
The last paragraph:
Quote
Or alternatively, admit that full employment is no longer plausible, so we will build a strong social contract -- of training, guaranteed income, health care -- for those discarded from the workforce. Let's have the debate -- for the one choice that is socially ruinous is the one we seem to be drifting towards -- mass unemployment without a safety net.
I think this article belongs here. It's very wise, and brings together:
The Republican "trickle down" The Democratic "create jobs" The continued Bank stranglehold The long term lower job levels The need for safety nets
Unless and until there is a recognition of the macro, The "solutions" will come piecemeal, and will likely be doomed to failure.
I don't know if there is anyone in government with enough vision to skip the politics and offer a comprehensive resolution. Moving five years ahead, will we be a third rate nation, looking back to denounce the greed and intransigence of egoistic leaders, lost in their own tiny worlds?
The last paragraph:
Quote
Or alternatively, admit that full employment is no longer plausible, so we will build a strong social contract -- of training, guaranteed income, health care -- for those discarded from the workforce. Let's have the debate -- for the one choice that is socially ruinous is the one we seem to be drifting towards -- mass unemployment without a safety net.
Bob, I don't believe there is anyone in Gov with a degree of integrity muchless vision.
Imagine the the possible state of our nation without the burdens of the following:
On July 27, the U.S. Congress approved US$37 billion in funding for President Obama’s troop increase in Afghanistan. It took the Democrat-controlled Congress six months to pass the funding for the 30,000 extra troops being sent to Afghanistan. Additionally, the bill covers some expenses in Iraq and provides nearly US$4 billion for a related increase in economic aid to Afghanistan and neighboring Pakistan. The US$37 billion is in addition to the approximately US$130 billion Congress has already approved for Afghanistan and Iraq for 2010. Congress has approved more than US$1 trillion for the two operations since 2001. Link
Oh wait, I forgot, we've moved from an "oil" economy to a "war" economy. If the MIC's products and services were significantly reduced, our already fragile ecomony would most likely collapse here along with a few other major nations.
Or alternatively, admit that full employment is no longer plausible, so we will build a strong social contract -- of training, guaranteed income, health care -- for those discarded from the workforce. Let's have the debate -- for the one choice that is socially ruinous is the one we seem to be drifting towards -- mass unemployment without a safety net.
There are many reasons for most observed phenomena. IMO a big reason for this situation is that we have decided to outsource huge swaths of our economy. That all works out well for corproations... their profits swell. It is also nice for us since we can buy cheep products at WalMart.
It all seems wonderful in a bubble economy since there are lots of jobs... and the displaced workers have other jobs available. But when the bubble pops.... those jobs disappear... and the outsourced jobs are a distant memory
For those who follow this "stuff", some words on the "replacement bubble"... Municipal Bonds.
Has to do with how the banks recovered so quickly...and how the hopes for recovery in the economy may be being pushed back, maybe for years. Son of Subprime
To oversimplify... it's insuring then re-insuring municipal loans, taking the fees and overvaluing the securities... passing them off to investors, and walking away, leaving the investors holding the bag. The investors are YOU.
The new financial regulations, if they are ever passed, will do nothing to stop this. The Banks and their lobbyists have seen to that.
If you have children and want them to grow up financially secure, direct them towards the banking industry. It looks to be in control of the US for at least another decade, after which the bankers will all be living in Dubai.
Actually, except for moments of sheer terror, this stuff is quite boring.
if you’re a Wall Street bank and you engineer a “synthetic rate swap” deal.
Bob,
Just when we think that there is no higher level of insanity - or dishonesty...KABOOM.
Woe on all current and future penison participants everywhere.
The example of the municiple bond problem described in the article is what may be called just another small the "tip of the iceberg" related to underfunded pension systems.
The attempt to create legitimate reform has done nothing but initiate a reckoning by the banking and market institutions.
This thread needs to be brought roaring back thanks to the latest news from the Fed.
The Federal Reserve has finally answered several of my burning questions, chief among which, "why are they now secreting the M3 figures after 90 plus years of publishing them out in the open?"
Looks like my suspicions as to why have been confirmed. The Fed made the M3 figures secret because they didn't want anyone to know how much extra they were printing, but now it doesn't matter anymore, because the Fed has decided to turn the United States into Weimar Germany.
During the Ford administration we had those stupid WIN buttons (whip inflation now) and that was when inflation was at 21 percent and the economy was shrinking at a 6% per annum rate as a result. When this effort is even partially implemented (let’s say – just 20% of the National debt), it will lead to inflation of the order of 60-80%.
The monetization of the US Debt is in fact the single most important and dangerous act ever committed by a Government Agency. It will lead, through the necessary printing of unsecured currency (or Reserve Notes – which in fact are a form of unsecured debt themselves) to hyperinflation which will lead to the destruction of the economic foundations of this nation. This is the beginning of the end. Once this step is taken (something which every Fed Chairman in history – including Bernaenke – the current Chairman, has said should NEVER, EVER be done), we will have effectively started us on the same path as the Weimer Republic.
As another European country edges toward a multibillion-dollar bailout, a number of economists say there is only one way to make creditors share the pain: default. So far, Germany's guarantees of Irish and Greek debt have been cost free. German yields remain very low. But come the inevitable Greek and Irish defaults, Germany's bond market will also start to suffer. In Dublin, officials from the International Monetary Fund, European Union and United Kingdom are negotiating a rescue package that is likely to require the Irish government to further squeeze pensions and paychecks but pay off bondholders of Irish banks, whose debts the government guaranteed. Such a lopsided outcome—which has been repeated since the Latin America debt crises of the 1980s—enrages many voters and signals to investors that there is no price to pay for risky lending because international institutions will always bail them out. Instead, say economists, lenders should be required to take hits on their investments as a way to reduce a government's bills and to force lenders to be more careful about where to invest their money next time because they will realize the IMF and others won't guarantee they will be paid in full. "The most important effect is that (a country's) debts won't build up so much," said Harvard economist Kenneth Rogoff, who has chronicled centuries of sovereign defaults.
Now that the second charter member of the PIGS has turned into a reluctant recipient of EU-IMF largesse, the question is not whether there will be more bailouts, because they are inevitable. The whole Irish exercise is not about rescuing Ireland’s public finances, but restoring confidence in the bond market and saving the hides of all the European banks on the hook if the Irish banks go bust. Portugal will be the next domino. The surest sign came from Portuguese Prime Minister Jose Socrates himself, When he emphatically declared on Monday that his country doesn’t need a bailout....
What really worries the eurocrats is not small Ireland or Portugal, but much larger Spain. And anyone expecting these aid packages to soothe the bond vigilantes hasn’t seen anything yet.... Throw in the fact that the fiscal situation in Greece is actually deteriorating and the Greeks may not qualify for the next tranche of their financial aid, and what seemed like a serious threat to the euro zone’s survival turns out to be only the tip of the iceberg.
And Spain could turn out to be the sovereign equivalent of the Titanic.
The CEO of the world's largest bond manager said balance sheet issues will cause Europe to be "a slow-motion wreck" that will cause crises in "Ireland, then Portugal, then Spain, then Belgium, then Italy."
"The first rule of crisis management hasn't been met by the Europeans: and that is to get ahead of the crisis ... "As long as they're being seen as reactive, we're going to have a slow-motion wreck going on in Europe....
[b]The problems in Europe have roiled world markets and essentially counteracted the Federal Reserve's moves to pump money into the economy by buying Treasurys.
Instead of the dollar weakening that would be expected to follow the Fed's $600 billion quantitative easing action, the US currency has strengthened against the euro. That in turn has pressured US stocks, which opened lower Tuesday.
The head bone's connected to the neck bone, the neck bone's connected to the shoulder bone ... And that's the Way of the Lord!
If the US dollar loses its status as the world oil currency, it is so screwed!
Are you certain that 44 percent figure is correct?
For FY 2009 the US GDP was about $14 trillion. 44 percent of that is $6.2 trillion. The US government's budget for the same year was $3.5 trillion. I don't see how a deficit can exceed the budget. Particularly since the tax revenues were about $2.1 trillion.
The budget deficit for FY 2009 was about $1.4 trillion. As a percentage of GDP that comes out pretty darned close to 10 percent, not 44 percent.
I used the wiki article on US federal budget for all of the figures above except for the GDP, which I got from google search "united states gdp" and google obligingly gave me a nice chart for the very first hit.
Because working people are underwater on their mortgages, maxed out on their credit cards, and overdue on their bills. There's no reason to build more capacity when consumers are struggling just to stay afloat. But that creates a big problem for the economy, because new investment is crucial to keeping things running smoothly....
Consumers and households are still deleveraging, housing prices are falling and unemployment is stuck at 9 percent with 16.5 percent underemployed. Private sector debt is still at historic levels and will have to come down further. If that process is not eased by increasing the government's budget deficits, then economy will shrink even more and lapse back into recession.
Capitalism is between a rock and a hard place just as much as it was during the Great Depression.
Much better to see the assets of the Super-Rich go up in flames, rather than see the rest of us go down in flames.
...billionaire George Soros, who made $1 billion betting against the British pound in 1992, is perplexed.
“I find the current situation much more baffling and much less predictable than I did at the time of the height of the financial crisis,” Soros, 80, said in April at a conference at Bretton Woods organized by his Institute for New Economic Thinking. “The markets are inherently unstable. There is no immediate collapse, nor no [b][sic !] immediate solution.”...
The second question is whether the U.S. government is willing to boost its infrastructure spending at a time when Congress is struggling to cut the nation’s deficit, Gibbins said. A failure to spur growth will send stocks down in the U.S. and keep the dollar weak, he said.
Much better to see the assets of the Super-Rich go up in flames, rather than see the rest of us go down in flames.
fringe thinking a resultant from pressure of situation???
should i remind you that in 1948 our national debt stood at 125% GDP but after 25-30 years we brought it down to pre-war levels. the wealthy did indeed endure very high marginal tax rates but were not taxed into oblivion. while the current situation can not be adequately compared to that we are approaching difficult times. The economy is an organic intangible which morphs with each new need of the market. I see a long term plan of perhaps 50-60 years to bring the national debt into focus. Obviously just as the CBO scores plans if the economic scenery changes so does the plan i.e. short term if the economy improves revenues may increase which with appropriate budgetary cuts would bring the budget under control, long term debt relief will suffer from items which outstrip inflation and that has to be of short term concern if the fed doesn't address monetary policy appropriately, etc.
...while the current situation can not be adequately compared to that....
The key part of your posting.
In 1948, the USA was an economic and industrial powerhouse, the greatest creditor nation that the world has ever seen.
Now, the USA is the world's largest debtor nation, and more and more, an economic weakling.
All due to America's all-time greatest enemy, the Military-Industrial Conspiracy Complex and its minions---plus the Brainwashing Machine mass media which serve it.
Well done, all-belovéd and honored destroyer of America ! · · · ;)
...billionaire George Soros, who made $1 billion betting against the British pound in 1992, is perplexed.
“I find the current situation much more baffling and much less predictable than I did at the time of the height of the financial crisis,” Soros, 80, said in April at a conference at Bretton Woods organized by his Institute for New Economic Thinking. “The markets are inherently unstable. There is no immediate collapse, nor no [b][sic !] immediate solution.”...
The second question is whether the U.S. government is willing to boost its infrastructure spending at a time when Congress is struggling to cut the nation’s deficit, Gibbins said. A failure to spur growth will send stocks down in the U.S. and keep the dollar weak, he said.
Yes.. this is a sleeper for most people, but... Just like Soros, Speculators all over the world, are watching the goings on... Yesterday, the Indian (India) derivative exchange volume topped One Trillion Dollars... almost twice the previous record. When a tenth of a penny can bring huge profits (or losses) in the currency trade, not only the big traders, but now, the small investors are trading in currency derivatives.
We'll likely not hear about this, unless some trader gets in too deep... and then you can look for losses big enough to rattle the derivative market to the core.
World stock markets have fallen after measures announced by the European Central Bank failed to calm fears about the eurozone debt crisis and more weak economic figures from the US fuelled fears of a sharp slowdown. Stock markets in London, Frankfurt, Milan and Paris closed around 3% lower.
In the US, the Dow was down 511.93 points to 11,384.51 in closing trade, while the S&P 500 lost 4.8% to 1,200.18, while the Nasdaq Composite plunged 5.1% to 2,556.39.
Earlier, borrowing costs for Italy and Spain rose again to more than 6%. The ECB left its main interest rate unchanged at 1.5% and it bought eurozone government bonds. President of the ECB Jean Claude Trichet said it will also allow banks access to as much liquidity as they need until at least the end of the year. European Commission President José Manuel Barroso urged European Union leaders to reinforce their financial defences. Mr Barroso made his comments in a letter to EU leaders as the debt crisis threatens to engulf Spain and Italy.
[b]He warned that 'it is clear that we are no longer managing a crisis just in the euro-area periphery'.
' Being devoid of learning and of memory, most Americans are unaware of the Currency Reform in Germany on June 20, 1948, and how, on the following day, one of the dreams of socialism was achieved : everyone in the western zones was guaranteed an equal amount of money, and the rich and propertied had the value of their money voided or reduced to a tenth of its former value.
[b]"Overnight everyone’s money became worth only one tenth what it had been the day before. This applied to bank and other savings deposits as well as loans and mortgages, for obviously debts had to be scaled down at the same rate as the money with which they could be repaid. So that people with little money should not find themselves destitute, a minor exception was made with regard to cash. Everyone could exchange forty of their old Reichsmarks for forty of the new Deutschmarks and two months later another twenty marks at the one for one ratio.... Businesses were allowed sixty Deutschmarks for each employee on the same one for one terms. State, local and public authorities were given an allowance equal to one month’s income. The rest of their funds, however invested, were cancelled outright." (Crawley, p. 157).
Quote
Erhard also took action to dismantle the rest of the hated command economy, by abolishing most wage and price controls. Erhard acted as if his plan had already received full approval and endorsement by the Allied authorities—-a brilliant bluff that worked.
Erhard’s gamble amounted to blowing up a dam: The blocked productive capacities of the West German economy were able to flow freely again, to find their natural courses, once the crude irrigation system of controls and mandates had been cleared away. The wild flux would be guided by the price system once again and channeled only by the rigors of a strictly guarded money supply. Harsh measures—-with brilliant results, as historians Dennis Bark and David Gress relate:
"The day following...euphoria engulfed most Germans at the sight of goods and food items they could only dream about in the past. Bakeries miraculously produced and displayed delicious cakes; vegetables, butter and eggs appeared in abundance. Items that had obviously been hoarded secretly and had been available on the black market only, suddenly appeared in display windows." (A History of Western Germany, p. 205).
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Productivity leapt up by 30 percent in the following three months—-six times its increase a year before. West Germany would become once more the engine of prosperity for the Continent.
The political squabble in the United States over the federal debt ceiling has ended, but as the past few days have demonstrated, concerns about the health of the U.S. economy, the world’s biggest, have exacerbated, instead of calming down.... According to latest revisions, the U.S. economy shrunk by 0.3 percent in 2008, instead of the previously accepted “zero” growth. The contraction in 2009 was 3.5 percent, not 2.6 percent as estimated before. Throughout a long four years (2007-2010), the GDP contracted by 0.3 percent. Of particular note are the downward revisions for 2010’s last quarter (from 3.1 percent to 2.3 percent) and the first quarter of 2011 (from 1.9 percent to just 0.4 percent).
Evidently, the American economy, to which many other economies depend on, is in a much worse shape than previously thought....Reminding that Washington will be forced to cut spending as part of the debt deal, Dumas says: “This is the fiercest fiscal deflation applied to the U.S. economy since WWII, and comes at a time of zero interest rates when the offsetting impact of monetary policy is unavailable, and of likely sluggish world trade as China irons out its inflation and Europe deflates.”
“The fiscal crisis is further exacerbated by the compression of tax revenues resulting from decline of the real economy,” Michel Chossudovsky says in a recent article. “Unemployed workers do not pay taxes - nor do bankrupt firms. The process is cumulative. The solution to the fiscal crisis becomes the cause of further collapse.” I think this last sentence sums up the dilemma we are witnessing.
the market apparently understands what politicians don't: the debt deal is a death deal for the economy. Reducing government spending by $2.2 trillion over a decade, as Congress just agreed to do, will kill any hopes of economic recovery. We're looking at a double-dip recession.... ...that magnitude of spending contraction will result in 1.5 million to 2 million more jobs lost. That's also about all the jobs created since the trough of the recession in June 2009. In other words, the job market will be thrown back two years as well. We're not moving forward. We're moving backward.... The hand-wringing is all about the "debt crisis," but the national debt is not what has stalled the economy, and the crisis was not created by Social Security or Medicare, which are being set up to take the fall. It was created by Wall Street, which has squeezed trillions in bailout money from the government and the taxpayers; and by the military, which has squeezed trillions more for an amorphous and unending "War on Terror."
' Spengler's highly idiosyncratic view of the crisis. He is right about one thing, though---The hedge funds had to go. It is just possible that what was behind the recent charade was driving a stake through the heart of this vampire.
There is, however, a bubble in the world economy....evidence points to hedge funds as the bubble that has popped....investors are demanding their money back. The debt-ceiling cliffhanger in Washington may have provoked the redemption calls, and the S&P downgrade might provoke more. But the reason for the downgrades is that hedge funds have crippled out. Hedge funds can't earn the 15%-20% returns they promise investors in a world of 3% bond yields and 2% gross domestic product (GDP) growth. Investors desperate for higher returns, including pension funds, returned to the hedges during 2010 and 2011, and are now suffering spasms of buyers' remorse. That prompted an across-the-board liquidation of all assets, including commodities and emerging market equities most favored by the hedges. The nearly $2.6 trillion of hedge fund assets constitute the system's only real bubble: too much money chasing too few returns.... They are stampeding to get out.
"The chart below sums up a generation of valuation and equity returns."
[b]Equity risk premium vs S&P 500 price change
Quote
The last three big drops in the S&P are circled on the chart. All of them occurred when the Equity Risk Premium was negative - that is, when Treasuries offered more yield than stocks. When a safe asset yields more than stocks, investors have to clap their hands and say "I believe in earnings" in order to hold stocks.
[b]"The Dow recovered almost 430 points Tuesday, after the Fed said it would keep short-term interest rates low until mid-2013. But the Fed's surprise move also points to expectations for slow recovery."
Quote
In a sign the US economy faces stiff headwinds for at least the next two years, the Federal Reserve’s Open Market Committee, which sets short-term interest-rate policy, said Tuesday that it expects to maintain exceptionally low interest rates through the middle of 2013. Never in recent history has the Fed specified how long it intends to keep rates low. Apparently, Wall Street received the news with enthusiasm – the Dow Jones Industrial Average soared 429.92 points Tuesday, after dropping 634 points on Monday. However, the Fed's announcement was accompanied by a somewhat dark assessment of the economy, which it describes as “slower than expected” and as having greater “downside risks” in the future. The announcement is something of a two-edged sword. With short-term interest rates virtually guaranteed to remain close to zero for two years, companies know they don't need to worry anytime soon about the costs of borrowing. But the Fed, which has a mandate to keep the economy growing, is also sending a message to the unemployed: Don’t expect much improvement in the near future.
Now we will see if they keep their promises. · · ·
At this point, I doubt there are many that would downplay the integral role speculation plays in our dangerously unstable global markets.... The interplay between central bankers and the leveraged speculators (hedge funds, proprietary trading desks, etc) has been instrumental to the expansive global Credit Bubble. For the first time, global finance operates with no limits to either the quantity or quality of new credit creation. There is no gold standard; no Bretton Woods currency management regime; nor even an ad hoc dollar-reserve system to anchor Credit expansion.... Unconstrained finance is nirvana for speculation. Importantly, boundless Credit completely abrogates a system's capacity to self-adjust. I thought one positive outcome from the crisis would be a much smaller and less destabilizing speculating community. It was not to be. In less than two years, hedge fund assets surpassed a record $2.0 Trillion....Amazingly, global markets became more speculative and dysfunctional than ever....
Hedge fund de-leveraging was surely a primary factor behind last week's market tailspin. The community is again on the wrong side of rapidly moving markets, and they're being forced...to liquidate positions and rein in risk.... And now that de-risking and de-leveraging have begun in earnest - and with losses accumulating rapidly - the fear will be of de-leveraging begetting liquidity issues and only more de-leveraging....And there will be the issue of hedge fund redemptions, with the distinct possibility that industry fundamentals have recently taken a dramatic turn for the worse.
Asian equity markets continued their downward path from last week....
To summarize, as of late mid-afternoon Friday local time in Tokyo, the MSCI Asia Pacific Index had lost 3.2% on the week to 122.03 for a full loss of 10.8% over the last fortnight. Short-term indicators are steadily poor and not quite technically overbought. The analogous euro-denominated FTSE index shows similar technical features, including slightly improving if still thoroughly discouraging momentum.
...on August 11, the Swiss announced that they were discarding their monetary constitution that has prevented inflation in Switzerland and that has made their currency a safe haven for people everywhere who desired to protect their wealth, both small and large, from the predatory inflation practices of their own governments? Or is the Swiss announcement a result of America's financial irresponsibility, the behavior of a parasite?
The Swiss said that they are forced to violate their monetary constitution, because the irresponsible practices of the United States and European Union monetary authorities are driving so many dollars and euros into Swiss francs that the franc has appreciated to astronomical heights and is threatening Switzerland with the collapse of their export markets and Gross Domestic Product.
Obviously, Washington is threatening the world not merely with war but also with inflation.
[b]Robust growth in demand for Chinese exports looks set to withstand current tribulations in the American and European economies in the next few months, but the outlook thereafter is bleak. Exporters must find new markets to reduce the pain.
Quote
A slowing global economy on the back of debt woes in the United States and Europe will hurt China's exports in the long run - but not just yet, analysts and industry players say.
Evidence of robust growth in foreign demand for China's goods came on August 10...giving China its biggest trade surplus for two-and-a-half years, reaching US$31.5 billion in July from $22.27 billion in June.... "To ease the negative impact of the downgrading of the United States' credit rating, such as the constant rise of yuan, China should plan to diversify China's huge foreign-exchange reserves, a majority of which are invested in US assets and prepare more flexible macro policies." The most pressing task for Chinese exporters is to open more markets in emerging countries....
Translation : The era of America benefiting, by China keeping all her eggs in the American basket, is ending.
[b]We are currently seeing the “growth through low interest rates and high debt” economic model fail. It looks as if it will be an expensive “restart.”
Quote
Astonishingly, U.S. economic experts often respond to the question of how the world’s largest economy will find its way out of its debt trap with, “Muddling through.” With that, they do not mean relevant management theory (don’t laugh, it really exists), but rather a true muddling through. Have fun with that.... The United States has a debt ratio of around 100 percent of the GDP. Above all though: Only roughly 56 percent of government expenditures are currently covered by tax income.... Sorry: An economic austerity program that merely proposes debt reduction will unfortunately be too small. To get to a tolerable 60 percent of the GDP (that would be the famous Maastricht criterion), the U.S. would need to reach primary budget surpluses of 10 percent of the GDP until 2020. That means income would have to exceed expenditures (minus interest payments) by roughly $1.4 trillion. Every year. Does anyone believe that? Above all, does anyone believe this will succeed with muddling through? The U.S. is rapidly approaching the path where many euro countries already stand: behind the debt limit with no return....That’s not how one heals patients. At the beginning there is normally a proper diagnosis without self-deception. And it is: We are watching the “growth through low interest rates and high government debt” economic model fail. The debt is climbing higher and higher and growth is becoming slower and slower. The recognition that economic stimulus no longer functions above a certain debt level is, of course (at least officially), not yet political mainstream.... Without a restart, it will work neither in the U.S. nor in Europe. The question is who will push the button for the debt restart. And what this looks like. Several possibilities are open: simple cancellation of debt (improbable because of the potential for political conflict), currency reform (likewise improbable) and “inflationing” away government debt (very probable), to name only the most important.
The last might be the most charming for those in power; that is, if hyperinflation doesn’t get out of control, those asked to the cash register...will not truly realize their dispossession.
Since 1929, when Wall Street plunged, the president of the United States can only say one thing: "The fundamentals of the American economy are good." This sentence, with a few close variants, has been systematically used by all political leaders and central banks when markets tumble.... Today in Europe, as in the United States, the fundamentals are not good. Markets are not wrong. They are right.
The United States is short of ammunition to revive demand. Companies do not need cheaper credit, they need customers. Citizens do not need cheaper credit or lower taxes. They need jobs and higher wages.
We can no longer pretend to believe that American and European fundamentals are good. Thus, investors, anxious to preserve the value of their holdings, sell their shares and buy gold. They also buy Treasury bonds. But for how long?
Gold is useless. Gold does not produce anything. But the precious metal is seen as the best way of retaining the value of financial assets. And if inflation is the final solution, gold is the last defense.
Germany's inability to repay war reparations led to the breakdown of the multilateral system of free trade. The United States introduced tariff restrictions in the Hawley-Smoot Act, which further deteriorated the situation around the world....
The Germans blamed the banks....After the Nazis came to power, they used the foreign assets locked in Germany to induce Switzerland and Britain to adopt less hostile policies toward the new German government. Frozen debt (call it blackmail) turned out to be an effective tool in preventing the West from getting its act together....
...17th-century Spain offers another good example....By 1598, the King of Spain gave the church's hierarchy the role to renegotiate the debt. The king thought that only they could rationalize default by using theological arguments, making a financial issue sound like a moral one, which the lenders could not oppose.
In our time, read "homeland security" and "support our military" for: "theological arguments."
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By now, morality, ethics, or any notion of honor has lost their association with religion, race, or patriotism. Policies became rationalized by armies of subsidized academics and think tanks. Subsidies to universities and "academic" publications have turned the resulting output into what I often call "the sciences of political lies".,,,
What the US has to do is simple in principle -- which does not imply that it is easy to execute. It must create massive equity bottom up....
It seems clear that Germany has reached the limit of its patience with its feckless southern neighbors, who have taken the attitude that they might as well be hanged for a sheep as for a lamb, and seem unwilling to adopt the drastic austerity measures needed to stabilize their positions.
If Greece (and perhaps Italy and others) are allowed to go bankrupt, as I expect, and forced out of European monetary union, the result is deflationary. That seems to explain why gold is falling.
It's not what you may think. He cites the potential for a market crash, as millionaires cash out of income producing stocks with high paper profits, into hard assets, while grabbing on to the still existing 15% capital gains rates.
On a similar and more dire note, the buzz in the comment pages of many financial sites, is a possible rapid and catastrophic drop in the DJ to to as little as $4000... much worse than the original prediction cited in the first post in this thread.
This is scuttlebutt, if course, but be assured that it is not beyond the realm of possibility. Remember that the largest corporations now have about $2 Trillion in cash. Pressure from stockholders could flush these dollars out of company value, into the pockets of these same stockholders... rushing to get in on the 15% tax rate. As company values drop, the concurrent result is a market drop.
As inferred in the article, this could trigger the crash.
These are all "IFFY" scenarios, but for those who are at risk, should be a warning to watch for sudden changes. Instead of the slow decline in previous market adjustments, like the frog in the boiling water, the crash could be that of a lightning bolt.
At this point, it's all just speculation, but a cautionary point that you might want to store in the back of your mind.
...At this point, it's all just speculation, but a cautionary point that you might want to store in the back of your mind.
In my opinion, for some time the whole Wall Street scene has been just speculation. The difference is that the speculation is now warming to grabbing your money and running (I already did, 18% ago...)
The question I always had was, when in competition with the professionals at Wall Street gambling, what good will it do to store a cautionary point in the back of one's mind? It took me (admittedly a total novice) three full days to convert my mutual fund portfolio to cash and do the paperwork to have it transferred to a local bank. Part of the delay was bad "advice" given to me by the brokerage company employees in the first two days.
After that, my meager IRA funds went missing in the informational black hole of the transfer for five weeks! The sender said it was out of their hands and the bank couldn't find any way to track it, I thought it was gone... when it finally did show up it was another hundred bucks lighter because of the fee they charged me to use my money gratis for more than a month.
Anyway, my point is that if you wait for the crisis to become obvious, the burden of your speculative nest egg will probably be very much lighter by the time you get your non-electronic mitts on it. My advice is to abandon the casino asap and put your money to work in the real world, invest in something you know that has a triple bottom line of return; social, environmental, and financial.
If you are giving those big money bastards your money to use and abuse, just because it seems to make you some more money, then you are part of the problem.
Think of money as an addictive drug and the Wall Streeters as a drug cartel. That's our economy.
Though I don't know this for sure, I think that most prudent people who have 401K's or are just doing what they're advised to do... "save for the future"... are not very sophisticated in the actual investing. There is no way an individual today, can beat the electronic trading system. Fortunes are made and lost in a matter of minutes... sometimes, even seconds.
Now... as to when do you get out of the market, and where do you put that money? Several big important things happen here that have to be considered. For sake of argument, lets consider an example... your mileage will vary.
A 401K with $400,000. (Could be $25,000 or $1 Million+)
1. Taxes- Taking it out of the market completely... Even if the timing were perfect, and the market exit was at it's high... There are capital gains. If the gains are $100,000 then the tax would be $15,000.
2. Timing- As your example shows most of the time, you can't control the timing. (Your example of delay is probably very common for most people who don't work with a broker daily, and even at best, in a rapidly falling market... this type of investment will be transacted at the day's lows.)
3. Transfer the money to ?????- Here's where we differ. First of all, I would presume that most long tern IRA/401K accounts would be conservative in the first place. I was not talking about Speculation per se. So lets presume that the investment is in conservative funds, with low volatility. Typically, these funds follow the market. My "warning" was not about getting out of speculative stocks, but about stocks as a whole. What about a drop of the DJIA from $12,000 to $4,000? In the example above, with a $400,000 401K... the loss would bring the account to $134,000. During the last market drop, a good friend who had just retired, saw a paper loss from $800,000 down to less than $500,000. Because of the capital gains, and a broker that rode the market down slowly... he had to stay in, and spent three years of agonized worry as his account edged back to about $700,000.
4. The Main Point- Over the past 60 years, the market Mantra has been... "The Stock Market Always Comes Back". Perhaps... but then since the end of WWII, there has never been a situation where the total global finance system has been this bad, or unstable. Recovery from the Great Depression was not complete until the mid 1950's.
So back to my original post... The worry is a sudden market drop, as large investors withdraw their money as they try to avoid taxes. The warning is probably moot, since there isn't any easy way to beat the system... As Ty Darden suggested, the very rich would buy hard assets and move out of the country. Unfortunately no one that I know would be able to do that.
In a real depression, there aren't any investment "Safe Havens". Sadly, even Federal Bonds will not be an answer.
As they say, "When rape is inevitable, relax... "
signed,
Grinch
P.S. (aside) Don't think many people read this stuff here, but it's a great place to sort things out in one's own mind.
...P.S. (aside) Don't think many people read this stuff here, but it's a great place to sort things out in one's own mind.
Yes, there really is no obvious solution for beating the system and preserving one's personal wealth. Besides, beating the system actually means beating a whole lot of other people, without whom the system won't be very functional, anyway.
My thought vector is much less about preserving personal wealth than it is about making moves to a more progressive and possibly sustainable economic system. If the System (all systems, not just the economic system) is healthy, then it is more likely that we all will be healthy, though less likely to be financially wealthy.
I outlined an example recently, about making insulation locally from recycled materials. A few days ago we had a second meeting of what we are calling the Local Investment Forum, and the opportunity to invest money in creating a local, mobile insulation manufacturing operation was presented. One stumbling block for some is how to convert a retirement account into locally usable funds. Those with that problem will work together to find a work around that doesn't involve the conversion losses that you described, It. Perhaps the solution will be to change some laws, but that will take a good deal of time and popular support to accomplish. Many may lose far more than the conversion losses by waiting, though. One avenue might be through a credit union or other established financial institution that can act as custodian to satisfy the SEC and IRS rules.
One new slant on the insulation concept is that local government, which stands to benefit rather significantly as a result of creating a market for what is now a liability, should create a pool of money to pay the upfront costs of weatherization of homes and businesses, with repayment coming out of the savings in energy costs. Local government could pump up the pool using some of its new revenue stream (from NOT paying to have the material hauled off and getting paid by the insulation company). The energy savings realized by the home and business owners would become more money circulating in the local economy, tanker loads of fossil fuels wouldn't be burned in wasteful transportation and heating, jobs would be created, landfills would fill up more slowly, and people will make money.
That's a triple bottom line economy in spades! And it is just one example that can result from thinking differently about money and investing.
I’ve been saying for months that the European problem is not a crisis but a negotiation. On Sept. 14 China’s Prime Minister Wen Jiabao said, in effect, that China might want to buy some Italian bonds, provided, of course, that the EC opened up markets to China. Writing in La Stampa, Francesco Sisci, my favorite China-watcher, argued that Italy should allow Chinese companies to buy a chunk of Italian oil companies among other firms. Who really doubts that if Italy let China buy its best assets that the “crisis” wouldn’t disappear in a heartbeat?
The issues are: 1) How much and what assets will Italy give up? 2) How poor will its state-dependent parasites have to become? 3) Will the trade occur before or after Italy defaults on its debt?
At some point the US market is going to realize that the problems of three little countries don’t amount to a hill of beans in this crazy world.... It’s NOT, NOT, NOT 2008. Back when no-one knew who owed what to whom, because everybody had lied to everyone else....The only issue is at what price, and to whom, what assets will change hands.
Hong Kong led major Asian markets down last week with a more than 9% decline, its biggest weekly fall in more than three years, while Seoul is now down almost a quarter since the start of August. All significant short-term technical indicators are now negative, including the absence of an oversold signal.
My own opinion is that we are experiencing a worldwide adjustment downward. Baby steps back to reality after a series of booms, busts, bubbles and speculation.
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since much of the world is now even more unsettled than the US, the US has a window of opportunity to put its political and fiscal house in order and to become, once again, the civilization that emerging countries want to emulate.
since much of the world is now even more unsettled than the US, the US has a window of opportunity to put its political and fiscal house in order and to become, once again, the civilization that emerging countries want to emulate.
Stranger things have happened. Is your little Island well defended? Armaments in place to prevent the looting by thousands of hungry Americans storming your shores, raping and pillaging? If I were you I'd be hoping against all hope that America comes to it's senses and gets on with working, investing, producing, and governing.
' This royal throne of kings, this scepter'd isle, This earth of majesty, this seat of flow'rs, This other Eden, demi-paradise, This fortress built by Nature for herself Against infection and the hand of war, This happy breed of men, this little world, This precious stone set in the silver sea, Which serves it in the office of a wall, Or as a moat defensive to a house, Against the envy of less happier lands, This blesséd plot, this earth, this realm, this island....
Originally Posted by Greger
Is your little Island well defended? Armaments in place to prevent the looting by thousands of hungry Americans storming your shores, raping and pillaging? If I were you I'd be hoping against all hope that America comes to it's senses and gets on with working, investing, producing, and governing.
Well, there is certainly no hope that America will come to its senses---it never has in the past.
How typically American to think that we need guns to defend ourselves here. One month of Canadian passive-aggressive snide humour would send Americans shrieking back to the south.
Moreover, they woud never get here in the first place. How many Americans can read a map, or know what is beyond their limited ken? Canada is a great, blank void in the minds of most Americans, and long may it continue so ! And as for the few who discovered Canada, a great gulf of water sepaarates me from you. Moreover, if any Americans ever did escape from Victoria's tourist ghetto, all that is needed is to raise the Canadian dollar above the value of the American dollar in order to drive the buyers of shoddy trinkets screaming back across the borders !
Let them mourn for their own country, a land which once had such bright prospects for becoming truly worth while.
This land of such dear souls, this dear dear land, Dear for her reputation through the world, Is now leased out---I die pronouncing it--- Like to a tenement or pelting farm: Yankland, bound in with the triumphant sea Whose rocky shore beats back the envious siege Of watery Neptune, is now bound in with shame, With inky blots and rotten parchment bonds: That Yankland, that was wont to conquer others, Hath made a shameful conquest of itself.
The Alchemy of Finance is one of the greatest financial books ever written. In this 1988 classic, George Soros developed his thesis of how finance and the markets operate and then tested his analytical framework in real life market circumstances.... ...last week appeared to provide another critical global crisis inflection point. In particular, escalating market tumult and contagion effects afflicted the "developing" currencies and bond markets. To that point, they'd been fairly resilient. Yet global de-risking/de-leveraging dynamics seemed to lurch forward - and ever closer to the point of turning uncontrollable.... The consensus view holds that the developing economies and credit systems are robust and, as such, will prove resilient in the face of developed-world structural financial and economic woes. I fear that the "developing" systems have themselves become acutely vulnerable to the downside of bubble dynamics.
Fasten your seat belts: 2011 was far worse than expected. Our earlier predictions for America’s Worst Decade just got worse....So here’s an update of the 10 predictions of a chain reaction of events that are building to a critical mass....
[b]2011 --- Super Rich keep spending billions to control Washington
2012 --- Super Rich solidifies absolute power over our political system
2013 --- Global population bubble exploding, rapidly wasting resources
2014 --- Pentagon’s global commodity wars accelerate toward 2020 peak
2015 --- Gilded Age globalization explodes America’s Global Empire
2016 --- Reaganomics capitalism self-destructs, crashes, bank bankruptcies
2017 --- Class war and revolution: Rich class loses big, surrenders
2018 --- The Fed and Wall Street banks collapse, Glass-Steagall reinstated
2019 --- Global commodity wars spread, killing millions, wasting trillions
Just a little bump here, to share a fear of an acceleration of your timetable.
There's some jockeying going on in the Eurozone that makes me wonder if we might not be closer to a financial armageddon than anyone thinks.
It has to do with a bit of legerdemain in the ECB, whereby they may be reclassifying government bonds as collateral. I don't pretend to understand this, but the problem comes from the rolling over of Sovereign debt... this time, Italy. As I understand it, Government bonds are not classified as collateral... ie, material goods used to back promises in a credit transaction.
Because the European banks are in a liquidity crisis, the threat of a Bank Run is possible. If the banks have collateral, and can come up with money or goods to satisfy demand noted, then there is no likelihood of a "run". The Collateral is the key.
It appears that there may be an attempt to reclassify some long term bonds (government debt) as collateral, which would then allow the regulators to state that the capital requirements of(a),(the) bank would be met. this would effectively give a government stamp of approval on the risk.
Whether the public or the banking industry approves this may determine the surviveability of the entire system... Europe, the United States an basically the world.
IMHO, we could be closer to a financial crash and a full blown depression than anyone has even dreamed of. There aren't too many more ways to kick the can down the road.
As 2011 slithers to its end, none of the major problems that led to the crisis point three years ago have really been solved. Bank balance sheets still reek. Europe day by day becomes a financial black hole, with matter from the periphery being sucked toward the center until the vortex itself collapses. The Street and its ministries of propaganda have fallen back on a Big Lie as old as capitalism itself: that all that has gone wrong has been government’s fault. This time, however, I don’t think the argument that “Washington ate my homework” is going to work. This time, a firestorm is going to explode about the Street’s head—and about time, too.
It’s funny; the Big Lie has a long pedigree. A year or so ago, I was leafing through Ron Chernow’s indispensable history of the Morgan financial interests, and found this interesting exchange between FDR and Russell Leffingwell, a Morgan partner and Washington fixer, a sort of Robert Strauss of his day. It dates from the summer of 1932, with FDR not yet in office:
“You and I know,” wrote Leffingwell, “that we cannot cure the present deflation and depression by punishing the villains, real or imaginary, of the first post war decade, and that when it comes down to the day of reckoning nobody gets very far with all this prohibition and regulation stuff.” To which FDR replied: “I wish we could get from the bankers themselves an admission that in the 1927 to 1929 period there were grave abuses and that the bankers themselves now support wholeheartedly methods to prevent recurrence thereof. Can’t bankers see their own advantage in such a course?” And then Leffingwell again: “The bankers were not in fact responsible for 1927–29 and the politicians were. Why then should the bankers make a false confession?”
This time, I fear, the public anger will not be deflected. Confessions, not false, will be exacted. Occupy Wall Street has set the snowball rolling; you may not think much of OWS—I have my own reservations, although none are philosophical or moral—but it has made America aware of a sinister, usurious process by which wealth has systematically been funneled into fewer and fewer hands. A process in which Washington played a useful supporting role, but no more than that.
MetLife, the country’s largest insurance company, is closing its $20 billion mortgage operations and firing 4,300 employees. The mortgage division was closed after MetLife was unable to find a buyer for the business, according to Bloomberg.
MetLife, the country’s largest insurance company, is closing its $20 billion mortgage operations and firing 4,300 employees. The mortgage division was closed after MetLife was unable to find a buyer for the business, according to Bloomberg.
Bob, I found the following portion of the article of particular interest:
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The biggest nightmare in the minds of many bankers became a realty this week and many have been a deciding factor in MetLife’s decision to exit the mortgage business. The new Consumer Financial Protection Bureau (CFPB) went into full operation with the controversial recess appointment of Richard Cordray to head the Bureau.
The CFPB operates without congressional oversight or budgetary approval. Funding for the CFPB comes directly from the Federal Reserve. Many banks are worried that aggressive implementation of a burdensome new regulatory apparatus for mortgage lending will result in higher costs and reduced profits.
While consumer advocates welcome the CFPB as a powerful protector of the public interest, critics of the new bureau worry about the scope of its powers.
Sen. Bob Corker, R (TN) said that “Instead of working in a productive way with Congress, the administration has chosen to undermine any attempt to bring accountability and balance to the bureau.”
Echoing Sen. Corker, Senate Richard Shelby of Alabama, said a recess appointment will produce an “unaccountable bureaucrat who will have immense power over the economy.”
While protecting the financial interests of the public is an important goal, the idea of an entrenched bureaucracy, accountable to no one, seems contrary to democratic principles. Lord Acton, English historian and writer, summed it up best – “Power tends to corrupt, and absolute power corrupts absolutely.”
It’s funny; the Big Lie has a long pedigree. A year or so ago, I was leafing through Ron Chernow’s indispensable history of the Morgan financial interests, and found this interesting exchange between FDR and Russell Leffingwell, a Morgan partner and Washington fixer, a sort of Robert Strauss of his day. It dates from the summer of 1932, with FDR not yet in office....
The other day, I was leafing through John Kenneth Galbraith's book, The Great Crash, 1929 -- published in 1954!
Imagine my wry amusement to find a chapter entitled, "In Goldman, Sachs We Trust"!!
"Those who do not learn from history, are doomed to repeat it." · · ·
[b]A nationwide real estate downturn, stalling exports and declining consumer confidence have produced what a Chinese cabinet adviser...characterized as a “sharp slowdown in the economy.” The most striking feature of the slowdown is that it extends beyond the coastal provinces, which depend on exports and are closely linked to the global economy, to the country’s far more insular interior, including cities like Xi’an here in northwestern China.... China’s unexpected economic difficulties are starting to unnerve investors in world markets, especially commodity markets, as China is the world’s largest consumer of most raw materials and the second-largest consumer of oil.... A deepening slowdown would ripple across the world economy.... “Clearly the economy is much, much weaker than most people thought until recently....They have a real mess on their hands.”
emphases added
Europe in a tail-spin, and now China slumping. And yet there are still people who expect a recovery in the USA.
Once again, we see the triumph of hope over experience.
' Yet, perhaps there is some room for optimism, faint though it be.
From the same NY Times article :
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The cabinet called for stimulating the economy through faster construction of railroads, schools, clinics and other infrastructure. With the Chinese economy still heavily dependent on investment spending, some economists are optimistic that China can quickly reignite growth.
“When you’ve got state banks lending to state enterprises to implement the state’s five-year plan, you don’t have a lot of downside to investment,” said Paul Gruenwald, a former International Monetary Fund official....
emphasis added.
Socialism comes to the rescue!!
...or is it State Capitalism?
You can't tell the difference without help from the Brainwashing Machine!! · · ·
The number of Problem Banks has remained stubbornly high since the start of the banking/financial crisis in 2008. Prior to 2008, the number of problem banks was relatively small. For example, in 2007, only 76 banks were classified as problem banks. After 2008, the number of problem banks soared, reaching a high of 884 in December 2010. The recently issued FDIC Quarterly Banking Profile for the first quarter of 2012 showed a decline in the number of problem banks to 772, but the total is still historically very high. The number of problem banks currently comprise 10.5% of the 7,359 federally insured banks and savings associations. Total assets of the problem banks total $292.1 billion as of March 31, 2012.
A little bump,to toss in a prognostication article on derivatives.
Inside the blog, is a partial explanation of the turmoil going in in JP Morgan, regarding it's recent request to move a portion of their derivatives into the customer account portion of their equity. (as the other major banks were allowed to do during the crisis).
JP Morgan is known to have a liquidity problem, which could lead to selling derivatives. This would cause a rush by other banks to cash in at rapacious rates, and likely cause a domino effect in the industry. At this point, JP Morgan is holding on to the derivatives to avoid this. If the problems continue, the FED will likely bail out JP Morgan.
It also outlines the problems with the Dodd-Frank bill, whereby the derivatives market itself could be bailed out by the Federal Reserve.
According to the blog, the derivatives held by banks is 200 Trillion, 3 times the size of the global economy. A bailout of the derivatives market would be on the backs of the US taxpayer. Shelia Bair's warning None of this is reaching Page 1. You can draw your own conclusions.
............................................ Yes, unthinkable and so the dangers disappear from the news. We know this is unlikely to happen, but the question remains, how will this scenario be avoided.
'at's cause it aint news. Goldman Sachs losing $2 Bil, now that was news! Though it isn't news it's pretty good information. Financial regulation is off somewhere on the horizon because taxpayers cannot and will not be held up for the gambling losses of billionaires again. The last bailout saved the economy(ostensibly) but it also grubstaked the gamblers who continued their spree at the world's expense. Next time they come looking for a handout I don't think they will find government or the taxpayers so compliant. At least that's my hope, and of course, just my opinion.
If lower interest rates and lower taxes creates jobs, we ought to be rolling in jobs right now and needing to bring in illegals to handle the surplus. The thing that creates jobs is the sales of goods, materials, and services. The majority of Americans have stopped spending money on anything but necessities. So what are speculators investing in and making a killing on? The very necessities we cannot live without.
For no reason except it caught my eye, here's an article about Chesapeake... Shades of Enron excerpt:
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“Chesapeake has valuable assets, but they have a financial dynamic that only works in the fourth dimension: they need $12 billion when their cash flow is just $2 billion.”
Chesapeake has outspent its cash flow every year for the past decade — forging ahead with acquisitions of land and drilling more wells than any operator — convinced that it will be able to find others to finance its growth. The strategy worked pretty well, as McClendon and long-time friends like Ralph Eads, chairman of Jefferies & Co. (and former head of energy trading at El Paso) lined up willing buyers among foreign governments and orchestrated a string of off-balance-sheet vehicles like the Volumetric Production Payments. McClendon has been able to make Chesapeake’s ends meet, because, as Olson says, he can rely on Greater Fool Theory. “All it takes is one buyer.”
A fun read... makes ya wonder how many more Chesapeakes are out there.
edit to add this companion article with a few more details... Chesapeake (a $4Billion bridge loan from Goldman Sachs and Jeffries, and the price of gas is still falling.) Between leverage and low stock prices, this is a devil's brew.
The natural gas business is now toying with the idea of FLARING OFF excess supply in an effort to prevent FREE MARKET forces from doing their work.
UTTER HYPOCRISY...proof once again that there is no such thing as a free market and there never has been. It's a fantasy. What they really mean is, "us that gots the gold gets to make the rules and the fact that you still have even a scrap of copper means we can't make all the rules and change them at will."
Ever since the beginning of the financial crisis and quantitative easing, the question has been before us: How can the Federal Reserve maintain zero interest rates for banks and negative real interest rates for savers and bond holders when the US government is adding $1.5 trillion to the national debt every year via its budget deficits? Not long ago the Fed announced that it was going to continue this policy for another 2 or 3 years. Indeed, the Fed is locked into the policy. Without the artificially low interest rates, the debt service on the national debt would be so large that it would raise questions about the US Treasury's credit rating and the viability of the dollar, and the trillions of dollars in Interest Rate Swaps and other derivatives would come unglued.... There is a limit to how many stupid mistakes and corrupt financial policies the rest of the world is willing to accept from the US. When that limit is reached, it is all over for "the world's sole superpower" and for holders of dollar-denominated instruments.... The US government should simply cancel the $230 trillion in derivative bets, declaring them null and void. As no real assets are involved, merely gambling on notional values, the only major effect...would be to take $230 trillion of leveraged risk out of the financial system.
emphasis added
But... but...if you did that, the rich wouldn't grow richer nearly as fast !! Quelle horreur !!
So that is the beginning... Coming, the new world structure and direction in:
Money and Banking Education Law and Regulation Government responsibility to the people Proactive taxation takes place of Income Tax Underclass control Abrogation of international government debt Cancellation of selective Government Obligations: --- Healthcare --- Social Security --- Federal bonds Continuation of personal debt obligation
Your link was a good explanation of the derivative danger, and the "solution", not likely in the short run, but probably over the next ten years. The current situation in Europe... and strangely enough, in Egypt, where the people never quite understood what was happening is clear evidence that the solutions are far outside the ability of old governments to solve. In Egypt, overthrowing the government left the country in an eve worse state of political confusion. (the likely outcome of anarchy anywhere else, including the US.)
Getting back to the derivative crisis; to resolve it, and to save the worldwide economy, Obama must assume FDR-like powers, something he has seemed reluctant to do so far, despite his mandate to do so. The first thing he should do is to declare all derivatives placed outside of legally regulated markets (90% of them are unverified contracts) null and void.... This is as fair as things can be made given where we are. Right now, this enormous sum is only good for driving companies into bankruptcy and tying up the courts for years while the "winners" of these bets squabble over the crumbs of the bankrupt companies. This is already happening with creditors fighting over the last crumbs of Lehman Brothers. This is a pointless and destructive squabble and the administration must act to prevent years more of these.
If the parties object to the elimination of their derivative bets, they should be reminded of the penalty for fraud.
Already there is evidence of central banks and individuals moving out of dollars into gold and silver bullion and into other currencies of countries that are not hemorrhaging debt and money....The world is abandoning the use of the dollar to settle international accounts, and the demand for dollars is falling as the Federal Reserve increases the supply of dollars.... ...the Federal Reserve can create new money with which to purchase the dumped financial instruments, thus maintaining their prices. [b]But the Federal Reserve cannot print gold or foreign currencies with which to buy up the dollars that foreigners are paid for their US stocks and bonds. When the dollars in turn are dumped, the exchange value of the dollar will collapse, and US inflation will explode.
emphasis added
Quote
For a number of years I have pointed out that the problem is the loss of US employment, consumer income, GDP, and tax base to offshoring. The solution is to reverse the outward flow of jobs and to bring them back to the US...by taxing corporations according to where they add value to their product. If the value is added abroad, corporations would have a high tax rate. If they add value domestically with US labor, they would face a low tax rate.... The second part to the solution is to end the expensive unfunded wars that have ruined the federal budget for the past 11 years.... No one in the White House and no more than one dozen members of the 535 member US Congress represent the American people. This is the reason that, despite obvious remedies, nothing can be done. America is going to crash big time. And the rest of the world will be thankful. America along with Israel is the world's most hated country. Don't expect any foreign bailouts of the failed "superpower."
For a number of years I have pointed out that the problem is the loss of US employment, consumer income, GDP, and tax base to offshoring. The solution is to reverse the outward flow of jobs and to bring them back to the US...by taxing corporations according to where they add value to their product. If the value is added abroad, corporations would have a high tax rate. If they add value domestically with US labor, they would face a low tax rate.... The second part to the solution is to end the expensive unfunded wars that have ruined the federal budget for the past 11 years.... No one in the White House and no more than one dozen members of the 535 member US Congress represent the American people. This is the reason that, despite obvious remedies, nothing can be done. America is going to crash big time. And the rest of the world will be thankful. America along with Israel is the world's most hated country. Don't expect any foreign bailouts of the failed "superpower."
You can't expect a lion to become a vegan. While his suggestions are not wrong they would demand a complete about face in economic policy - not just this administration but any foreseeable administration under this system will not "GO QUIETLY INTO THAT GOOD NIGHT". So, the crash is inevitable but now, during the phase transition, I suspect we all must do our parts to increase the flow of turbulence
There is some serious money to be made. In 1987 I had little cash and could not take advantage of a depressed market. Poor planning on my part. I could in 2008/09. Bargains will be available thanks to panic selling. IMO the fiscal cliff will be as significant as Y2K.
For a number of years I have pointed out that the problem is the loss of US employment, consumer income, GDP, and tax base to offshoring. The solution is to reverse the outward flow of jobs and to bring them back to the US...by taxing corporations according to where they add value to their product. If the value is added abroad, corporations would have a high tax rate. If they add value domestically with US labor, they would face a low tax rate.... The second part to the solution is to end the expensive unfunded wars that have ruined the federal budget for the past 11 years.... No one in the White House and no more than one dozen members of the 535 member US Congress represent the American people. This is the reason that, despite obvious remedies, nothing can be done. America is going to crash big time. And the rest of the world will be thankful. America along with Israel is the world's most hated country. Don't expect any foreign bailouts of the failed "superpower."
You can't expect a lion to become a vegan. While his suggestions are not wrong they would demand a complete about face in economic policy - not just this administration but any foreseeable administration under this system will not "GO QUIETLY INTO THAT GOOD NIGHT". So, the crash is inevitable but now, during the phase transition, I suspect we all must do our parts to increase the flow of turbulence
While a lion won't become a vegan, the American version of top of the food chain has gone from being a quiet, self-possessed member of the international community to a creature that consumes anything and everything in its path, even plowing new paths to make more things available for the dinner table.
We are a nation that thinks might makes right, that our economic power will ensure our longevity at the top of the heap, while our industry is overseas, our jobs are being done by foreigners in foreign countries, and all could stop in a heartbeat. Were any nation that has accepted and welcomed our manufacturing plants were to nationalize these facilities, bar our exports from their ports, or banned us from keeping any employees in that nation, and the collapse will not be market driven.
We cannot make much of anything these days without foreign parts. Our Federal Reserve participated in bailouts here, and spread another $16 Trillion overseas. Using our money. And, they didn't get permission from the Congress, which constitutionally must approve any such action.
We are owned and run not by Congress or the Federal Government, but by the Federal Reserve. Our government is by, of and for the dollar, run by the Federal Reserve.
And, now that we are up in the top ten of most hated nations, we must be more careful of the sensibilities of others, or start bringing jobs home.
I wonder just how much more it would cost us to purchase things made in the US, if adding a mere 50 cents to a tee shirt can make workers assembling it able to receive a full living wage -- over the minimum, while working in a factory that meets worker and health and other safety standards.
If we taxed companies that manufacture overseas as foreign companies are taxed for their products made overseas, we'd provide incentive to bring jobs back to the US, and could get a lot of money into the US Treasury. Companies should be taxed on the value added to goods and the location of where that value is added.
We need to repatriate the jobs we've so industriously sent overseas. That would increase the US tax base, and would thereby, increase our chances of overcoming the bad fiscal policies of the prior 40 years.
We also need to take a step back to reality regarding our war funding, and stop perpetuating the various sacred cows of DC, most of which are related to those wars that we don't declare, needlessly borrow money needless conflict, and overall, we need to return to a policy of non-intervention in matters that don't concern the security of the US.
Legalized price fixing through mergers and acquisitions 
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