Economic Meltdown

[Donamy]

No one's bailing out my business in "crisis". Why should the wealthy bankers.

 

[Thunder Chicken]

The US does have anti-trust and other anti-monopolistic laws and regulations. But they aren't as strong as other countries as it has a historical tradition of laize faire and otherwise being friendly towards big business.
Most likely what will happen is just another layer of onerous financial regulations designed to patch over this flaw/loophole in the system.

But the problem isn't due to monopolies or trusts - there may be several competing firms, each of which is large enough on their own, and their investment products may be so ubiquitous, that if they fail they take the economy with it. If it were just one company, that would be one thing. The problem is that there are a bunch of them all subject to the same market forces.

 

[ar81]

To me it is easy to foresee.
Let's define deficit as living with a standard above current income.

+Government Deficit
+Company deficit
+Bank deficit
+Citizen deficit (internal market)
+External sector (foreign trade deficit)
---------------------------------------
= Excess of demand

Excess of demand (macroeconomical balance) must be zero in a balanced economy.

Trade deficit leaks currency, leaving less liquidity inside US.
Government deficit, bank deficit, trade deficit, leaves only 2 sources to fund that deficit and lack of liquidity:
Companies or US citizens.

Companies transfer their deficit to citizens with downsizing (firing people).
So the result will be increased poverty in USA (citizen deficit in long term).
More poverty means less consumption (contraction of internal market) and less taxes (more government deficit) so it leads to continued recession and contraction.

To me it is evident that if government spending is not turned into superavit and trade deficit is not cut off, US have not started to solve the root of the crisis yet. So we are only seeing the beginning of crisis.

Solving the crisis would mean US disappears from geopolitical scenario for at least 1 decade. Not easy, but the longer the solution is delayed, the longer US will be out of the world picture.

To me US at risk of becoming a third world country.
Unsustainable management of economy leads to this.
Even rich people can become poor, and that applies to rich countries too.

American Dream will be restored in about 10 to 20 years.

 

[JamesG]

Yes that is a possible danger of the current misguided policies in Washington.

But the problem isn't due to monopolies or trusts - there may be several competing firms, each of which is large enough on their own, and their investment products may be so ubiquitous, that if they fail they take the economy with it. If it were just one company, that would be one thing. The problem is that there are a bunch of them all subject to the same market forces.

And they were all acting in the same way, so they might as well have been one company.

That is actually one of the dangers of this whole situation. If only a few strong banks survive by eating the failed ones (like JP Morgan just did to WaMu) they become even more powerful/influential and competition and oversight becomes even weaker than before.

 

[Tschachim]

...valuing the currently problematic securities is impossible – you’d have to unwind the syndication process and get back to all the individual underwriting. This is theoretically possible, but would involve staggering amounts of tedious effort to do. On a cost basis, it’s more efficient to just wait and see how the underlying residential home loans actually perform.

Provided that I understand you correctly, the investors/banks aren't able to analyse the risk (and thus the performance) of their investment anymore, so they just "wait and see". It's my opinion, too, but for me that means they changed their job, they are no investment bankers anymore, they're gambler.

So it's not my money the American government wants to throw on them, but I won't be happy to give them any of my (i.e. current and future taxpayer) money. The "removal" of this kind of players isn't the crisis, it's already part of the solution...

Cheers
Tschachim

 

[Urwumpe]

To me US at risk of becoming a third world country.

Which just means, that you should study the important qualities of a third world country to notice, that you have been talking nonsense. Even a down-sizing to a "developing" country (like for example Mexico) would be technically only possible with a massive destruction of infrastructure - because that is the only difference between third and first world. Infrastructure. Even when all finance goes down the drain, that would be only one part of economic infrastructure. Transportation is still left, just as education and justice.

 

[ar81]

And they were all acting in the same way, so they might have been one company.

That is actually one of the dangers of this whole situation. If only a few strong banks survive by eating the failed ones (like JP Morgan just did to WaMu) they become even more powerful/influential and competition and oversight becomes even weaker than before.

If a bank is able to control US economy, US government will not be ruling the country anymore. It means virtual disappearance of US, and US government would become a municipal entity only, but unable to address main problems of the country.

 

[JamesG]

There are those of the tin-foil hat wearing ilk who think we are already at that point.
:dry:

Which just means, that you should study the important qualities of a third world country to notice, that you have been talking nonsense. Even a down-sizing to a "developing" country (like for example Mexico) would be technically only possible with a massive destruction of infrastructure - because that is the only difference between third and first world. Infrastructure. Even when all finance goes down the drain, that would be only one part of economic infrastructure. Transportation is still left, just as education and justice.

Unless that society/country no longer has the financial ability to pay to maintain that infrastructure. Bridges, roads, schools, police forces, etc. etc. all cost a lot of money to keep running.

 

[ar81]

Which just means, that you should study the important qualities of a third world country to notice, that you have been talking nonsense. Even a down-sizing to a "developing" country (like for example Mexico) would be technically only possible with a massive destruction of infrastructure - because that is the only difference between third and first world. Infrastructure. Even when all finance goes down the drain, that would be only one part of economic infrastructure. Transportation is still left, just as education and justice.

Reduced taxes with increase of poverty leads to harder measures to achieve govt surplus. It not only would involve to stop war, cut the military, but also sacrifice education, health and infrastructure to add liquidity to the economy.

You have old bridges (infrastructure) collapsing in US. Education has problems in US. There is no effective health system like in UK, New Zeland, Costa Rica or Canada. If US government does not take painful measures to solve crisis ASAP in the proper way, it is just a matter of time before it becomes third world.

I would like to have a different forecast, for I have friends there in US. But unfortunately it looks bad, for crisis has not been addressed yet. Only a few deficit transfers between sectors, and artificially low interest rates, to procrastinate the crisis.

In 3 years crisis will be tough in US even if crisis is attended. Interests will go to the sky.

 

[GregBurch]

... that is the only difference between third and first world. Infrastructure. Even when all finance goes down the drain, that would be only one part of economic infrastructure. Transportation is still left, just as education and justice.

I don't know if it's possible for me to disagree more with the first part of this -- and agree more with the second and third. The difference between economically successful and unsuccessful societies isn't "stuff" -- it's culture.

I used to represent a Brazilian family business in some complex litigation they had going on in the US. I was still pretty inexperienced in those days, and was constantly frustrated by the difficulty of getting anything done commercially or legally on the Brazilian side of everything I was trying to accomplish. Once I expressed this frustration to the pater familias of the client, and he told me the following story (which I've since heard told by citizens of almost every Latin American country with which I've done business):

When God was making the world, he did it by putting each thing in turn in place -- first the oceans, then the mountains, then the forests, then the animals. As he was doing this, one of the angels interrupted him, and said, "God! It's not fair -- you're giving too many good things to Brazil!" God chuckled and responded, "Wait until you see the people I put there -- that will balance things out."

If you blew up all the highways and railroads and power plants in America, but left a people with an entrepreneurial culture and a respect for the rule of law, we'd build it all back, better than before. The issue is not whether our "stuff" is still here -- the issue is whether we still have the "right stuff" in terms of a commercial culture.

 

[ar81]

I don't know if it's possible for me to disagree more with this. The difference between economically successful and unsuccessful societies isn't "stuff" -- it's culture.

I really hope it is. I would like to think that people living in US do not suffer that for a long time.
That would make the painful moments of solving crisis shorter, but unfortunately not less painful.

To me, thrid world is about corruption.
Corruption works better when you have anarchy.

A criminal with political power only needs to make his crime legal.

Third world countries confuse property and custody.

In a third world country, if you are a tourist and have a camera, someone takes your camera and property was tranferred. There is little you can do to recover your stuff.
In a third world country, international aid is received by politicians and they use it for their own benefit.
If you leave your stuff unattended, someone comes and grab your stuff and then custody determines property.

In Costa Rica laws are weak and they protect criminals. That makes a semideveloped country to become third world.

Congressmen yesterday passed a project of law to subsidize profit of private schools and appoint their teachers as govt employees without due process.

So money will go to subsidize education of rich, using money that would have been used to benefit the poor.
I wrote to minister of education, a very professional man, he was not allowed to talk before project was voted, and there were defects in such law that he already pointed but were not corrected by congressmen.

But congressmen in this country have custody of the country, so they handle it as if was their property.

I have plenty of examples of how custody is confused with property and how it leads to the most surreal facts.
This society does not even meet the required legal culture of property required to enforce social contract defined by Rousseau during french revolution.

Economic bailout makes government to subsidize bad decisions of bank executives, so taxpayer money that belong to americans are used to benefit executives. So the beginning of that confusion could start to take place in US as bank executives may think US is their property.
Therefore it might become third world.

 

[GregBurch]

Someone just sent this to me -- an old NYT article:

By STEVEN A. HOLMES
Published: September 30, 1999
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from theClinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer [and current Obama advisor] . ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''





​

This is obviously not by any means the whole story, but it casts an interesting historical light on where we are now ...

 

[ar81]

Bank executives are not idiots.
They can quantify the losses since before even providing the loan. Or calculate estimated losses in the future.
I worked for a bank.

And they can find ways and tricks to avoid such risky transactions.
Political pressure is irrelevant, unless policy comes from high levels inside the bank.

But just like an bureaucratic decision launched Challenger, a bank executive decision launched subprime credit expansion in those institutions. Regulatory entities do not have the most brilliant minds, for private financial companies pay better. So it is more likely that pressure came from banks, passing through president to let FED to do that.

The problem is that executives probably thought that more loans means more profit.
So basically bank executives are paid to engage in risky business.
And the greedy nature of banks led them into this.

I am not alone in this.
If you watch the last HardTalk interview in BBC, the specialists who were interviewed agree with the way incentives to executives work.

I just hope US economy is not a new Challenger.

 

[Tschachim]

"Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market."

Well, higher risk = higher mortgage rates. I think it's fine if the government wants to subsidize private home ownership, but it shouldn't do that by ignoring such basic rules (or force banks/investment companies to do so).

By the way, does anyone have some insight if the US will implement Basel II (http://en.wikipedia.org/wiki/Basel_II) any time soon? Any opinion whether it would had helped in the current situation?

Cheers
Tschachim

 

[ar81]

Bank crisis is just the tip of the iceberg.
But the cause is not there.
The fireworks of liquidity is outshining the fuel of deficits that lead to excess of demand in the macroeconomical level, which is what could turn US economy to a third world economy.


-----Posted Added-----

Well, higher risk = higher mortgage rates. I think it's fine if the government wants to subsidize private home ownership, but it shouldn't do that by ignoring such basic rules (or force banks/investment companies to do so).

By the way, does anyone have some insight if the US will implement Basel II (http://en.wikipedia.org/wiki/Basel_II) any time soon? Any opinion weather it would had helped in the current situation?

Cheers
Tschachim

It is not subsidizing home ownership... even now.
You are not paying for the fixed assets to give them to those who lost their homes.
There is no Robin Hood government.
That would be subsidizing.

Govt wants to "bailout", by subsidizing lack of profit of banks, which is already considered as "socialist government intervention" by many people.
Assets go to government, not to home owners, for that would be called "communist republican party policy".
In the end govt deficit goes up, and bank deficit goes down, but overall excess of demand remains the same.

 

[Urwumpe]

There goes the discussion. Circular arguments are even more annoying as corn circles.

 

[ar81]

There goes the discussion. Circular arguments are even more annoying as corn circles.

Let's fire prograde, to make discussion elliptic. :lol::speakcool:

 

[Tschachim]

It is not subsidizing home ownership... even now.
You are not paying for the fixed assets to give them to those who lost their homes. That would be subsidizing, which is already considered as "socialist intervention". Govt wants to "bailout", by subsidizing lack of profit of banks.

I wasn't referring to the current situation but to the article GregBurch posted about the Clinton administration.

Cheers
Tschachim

 

[Urwumpe]

Let's fire prograde, to make discussion elliptic. :lol::speakcool:

It takes a lot of more fuel to prevent discussions from returning to the same point every time - at least a parabolic discussion.

 

[Tschachim]

There goes the discussion. Circular arguments are even more annoying as corn circles.

Sorry for the dumb question, but where do you see a circular argument?