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

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!

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.

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Jobless rate now at 16.5%—if you use Depression-era yardstick

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Weakness abounds

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.

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The Fed's bubble trouble

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.