Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

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.

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.

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.

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.

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.

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.

More common by far is the gradual wasting away.

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.

Historically speaking, the super nova type ending of empires is relatively rare. More common by far is the gradual wasting away.