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The Economic Crisis: it's a bear market out there
Irond Will
WARNING: NO HURTFUL COMMENTS, PLEASE!!!!!Cambridge. MAModerator Mod Emeritus
WARNING: NO HURTFUL COMMENTS, PLEASE!!!!!Cambridge. MAModerator Mod Emeritus
So, the US seems headed towards, or already in, a recession or depression. Dire financial prospects are coming from all quarters and the stock market is plummeting in spite of historic reserve rate cuts. Most economists seem to agree that this is largely the result of decades of economic boosterism from Washington and the Fed in which the economy was specifically managed in order to maximize appreciation in various sectors - the stock market, tech markets, housing, etc. Pretty much every trick available to politicians has been exercised and exhaused - from tax cuts to deficit spending to massive increases in sector spending to many flavors of rate cuts to seeking investment from developing economies in a historic reversal (historically, first-world nations invest in developing economies, but for a while now, the US has leveraged a lot of political pressure to get third-world investment in American markets).
While many are saying that this is a long-overdue and inevitable correction, some are even going so far as to suggest that this is the beginning of the Great American Decline in which the US Dollar will be abandoned as the choice reserve currency and world financial markets will begin to realign along relatively healthy economies in Europe and Asia.
So what is it? A short-term recession, like in the early nineties? An economic realignment, like in the 70s? Or the beginning of the decline of American economic dominance?
Robert Reich has an article up at Salon that covers some of this:
While many are saying that this is a long-overdue and inevitable correction, some are even going so far as to suggest that this is the beginning of the Great American Decline in which the US Dollar will be abandoned as the choice reserve currency and world financial markets will begin to realign along relatively healthy economies in Europe and Asia.
So what is it? A short-term recession, like in the early nineties? An economic realignment, like in the 70s? Or the beginning of the decline of American economic dominance?
Robert Reich has an article up at Salon that covers some of this:
Robert Reich wrote:In reality, the crisis is both a credit crunch and the bursting of the housing bubble. Wall Street is in terrible shape and Main Street is about to be in terrible shape. And there's not a whole lot that can be done about either of these problems -- because they are the results of years of lax credit standards, get-rich-quick schemes, wild speculation on Wall Street and in the housing market, and gross irresponsibility by the Fed, the Treasury and the Comptroller of the Currency.
As a practical matter, our only real hope for avoiding a deep recession or worse depends on loans and investments from abroad -- some major U.S. financial firms have already gotten key cash infusions from foreign governments buying stakes in them -- combined with export earnings as the dollar continues to weaken. But this is something no politician wants to admit, especially in an election year. So we're going to go through weeks of posturing about stimulus packages of one sort or another, and then see enacted the big fat bonanza of a temporary tax break that will likely have little effect. That, perhaps along with a few more rate cuts by the Fed. The presidential candidates will be asked what should be done about the worsening economy, and they'll give vague answers. None will likely admit the truth: We're going to need the rest of the world to bail us out.
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Also, fun fact I found out the other day, this is from 2002 or thereabouts: the total value of securities, derivatives, etc markets amounted to more than the total value of the world economy. Translation: the value of spread betting about what the world economy will do was worth more than the economy itself. No wonder we've got problems on the horizon, eh?
We might have a mild recession. It might not even technically qualify as a recession, as the "recession" in 2001 did not.
I'm a huge optimist here, but I've got faith that other countries, regardless of how they feel about us personally, will be there to help rebalance our econoomy, because they need us just as much as we (need to realize) we need them. Finally, I'm hoping that within the next two presidential offices a candidate re-opens trade relations with cuba, because while I'm not in favor of an economic union of north america, I would like to see a general agreement of parties between Canada, USA, Mexico, and Cuba.
Perspective on the crash yesterday.
Bernanke ain't no Greenspan?
I don't doubt the details of what Reich is saying, but I'm going with Shinto.
Now, things may not be as catastrophic as some are predicting, but I think that what seems to be this sense of living on borrowed time among experts very likely has something to it.
It would gut the market?
The stock market is based mostly on attitudes and speculation. It's a good barometer of economic status but it's direct effects on the real world isn't immediate. Barring a Black Friday type crash the stock market going down a bunch isn't going to make a ton of difference to the average joe. It does show that investors are losing faith in the market's performance in the long run which is troubling.
correction: I meant black tuesday
The markets in Asia tanked and the Fed was worried that the US stock market would also tank, so they cut rates before the US markets opened in the hopes that it would stave off a massive drop. It didn't really work, obviously.
It's the biggest crash since a few months ago!
Yeah, I'm also in the "we'll probably have a recession, welcome to the business cycle" camp. It'll be more correction than crisis, and once we let it play out, our economy will be the better for it.
Someday, perhaps we'll be able to go through a recession without a bunch of people predicting the end of society.
I'm with this guy for the most part although I am probably a bit more bearish. The underlying problem in the credit markets is the value of collateral and cutting rates is not going to fix this. Massive write-offs in the financial sector has created a hesitancy to to provide credit which has the potential of driving us into a Japan-like extended recession. However, given Bernake's academic background and fixation on the problems of the depression, I am confident the Fed will adopt appropriate measures to ensure liquidity in the market and availability of credit. Cutting rates, using the discount window, purchase of securities by FOMC, etc.
I also feel pretty confident that the U.S. market will continue to attract foreign capital for a number of reasons:
1. As shown by the global market crash of the past two days, the U.S. economy is too important on the world stage to be abandoned and I believe key trade partners will continue to be supportive.
2. I saw an estimate (wish I could source right now, will try to) that hard currency reserves for oil rich nations is expected to grow from $2 trillion to $11 trillion over the next 4 years at $80 oil prices. That money needs to go somewhere.
3. I don't think that Western Europe (huge social benefit problems in the form of pensions, aging populations, more socialist leaning governments ) or Japan (still dealing with a decade plus period of low economic growth) is all that much more attractive to foreign money than an admittedly battered U.S. market. Corporate earnings continue to be strong and P/E ratios are in-line or lower than historical norms (i.e. there are still attractive investment opportunities in the U.S.).
I do believe the dollar will continue to weaken which could create inflationary problems. I also feel that the fiscal ship needs to be righted in a comprehensive way very quickly. This needs to be done through a combination of modestly raising taxes and over-hauling massive spending programs like Social Security, Medicare/Medicaid, and defense (the Iraq war is so obvious that I feel it need only be mentioned in a paranthetical). The U.S. federal govt spends over $3 trillion per year. That is more than 25% of our GDP. Throw in state and local spending and you are probably approaching a number over 1/3 of GDP on govt spending. I just don't see that as being sustainable.
To sum up: I don't think the current recession is going to be severe but unless we get our shit together we are facing financial armegeddon in the not to distant future when developing countries become less reliant on our economy and can basically kick us to the curb.
Bank: Why hello there, would you like a loan?
Loser: Sure!
Bank: How's your credit?
Loser: Well, not so great, but I'm hoping it will get better!
Bank: Sounds good, have some money!
Other Bank: Hey, can I get a piece of that potential pie?
Bank: Sure! It will no doubt be tasty someday.
Loser: Oops, sorry, I can't afford to pay you back.
Bank: That's okay, one of our other bazillion customers can make up for this loss.
Other Bank: Yeah, don't forget my pie!
Repeat until the house of cards gets toppled by a stiff wind of RATIONALITY.
It's pretty simple - the bigger the gamble, the bigger the payoff. The problem is that the banks shortcut the natural feedback mechanism (see the bankrupcy reform bill), so there ceased to be any short-term consequences.
I'm going to approach this right now cautiously; I still have a job, and it will be there for the foreseeable future. I'll just need to cut expenses: the various luxury items that I don't really need to continue to consume (or just cut down on the amount) and save and invest more. Unfortunately this tactic probably won't help immediately, as the government wants us to revitalize the economy by spending, which is what people probably aren't going to be doing.
The country has just shown how badly its education has been in regards to economics and history not to mention its ethical defficiencies.
You don't do stupid shit with other peoples' money dammit, much less your own.
It's not even that big of a gamble. It doesn't take much for your credit score to tank - I mean, if you pay a bill late every other month, your score will suck. Practically, this just means that lenders are getting more money from you than they otherwise would - they still get their payments, plus they get the fees they're charging.
It's a lot more lucrative to offer the guy who sometimes makes late payments a loan at 20% than to offer the guy who never makes late payments a loan at 5%.
It was a little odd walking dow nmy street(a big area fo gentrification going on) and everyone for Sale sign on a house is now covered up by for rent one. Guess houses aren't selling for 1.5 million in an area that was the ghetto 5 years ago.
Anecdotally, friends tell me the ones that pay their bills on time are known as Deadbeats.
I heard the term was applied to people who pay off their credit cards every month before interest is applied.
This is probably why I can't get a credit card. :x
It kind of stings for me, having bought into a neighborhood that was recently the ghetto, though.
Still, I guess at least my monthly payment isn't entirely going down the rent-hole. We paid a large down payment on the house (20%), which means that we still have some equity even after depreciation, we locked in at a fairly low mortgage interest rate (just over 5%) and I've been paying ahead by around $500/ mo on the mortgage. Also luckily, Cambridge has been fairly stable in terms of housing prices as opposed to some of the big-expansion suburban and exurban areas that really took off in the late 90s and early 2000s.
It kind of sucks that we really tried to do everything right but are still getting screwed somewhat, but I guess it could be worse.
It was more a lessor who charges late fees when the lessee doesn't pay on time.
Heh, which is also funny in that banks like WaMu shot themselves in the foot by pushing through the new bankruptcy laws which were supposed to make people pay instead of taking bankruptcy. Now people are just walking away from their houses leaving the banks holding the bag with no income and a lousy market. And guess who are declaring bankruptcy now?? Is that Alanis Morrisette irony?...
I'm telling you, it's crazy.
Bank: Hey, you haven't paid your mortgage lately.
Loser: Yeah, I have no money, sorry.
Bank: But you owe us money!
Loser: But I can't pay you because I don't have any!
Bank: Fine then, we're taking your house.
Loser: Go ahead, I can't pay for it and it's worth squat anyway.
Bank: Why does my anus hurt so much?
Other Bank: Where's my pie?
Well when the board comes and makes a quick deep cut like this week it shows what they can do when motivated.
On a separate note, today's sign of the apocalyspe: certain folks in Congress are pushing for provisions in the "economic stimulus package" that would give "tax breaks" to people who don't pay taxes!
I mean, I get the economic woes, but prices aren't falling, so the only way the dollar could be considered to be getting stronger is in comparison to the record setting inflation of 2007. If you ask me, this a stagflation.
Yeah blame Greenspan. A lot of people knew what bad deals limited fix and 25 year ARMs were. Instead of blowing the whistle people were cashing in on it. I got offers from people whom I work with that were part time "loan officers" every day. Lots of people got scammed. Oh well.
The best thing to come out of this is that everyone's stopped bugging each other about getting each other loans.
edit: Mind you I'm not saying it's Bernanke's fault. It's everyone's.
Yeah, but how much will it really help? I mean, stocks are stampeding back up today, but is that really rational? There's no evidence yet that banks are taking advantage of the lower rate to lend money to each other; last I heard, they'd all developed a sudden case of the tightwads. And banks not lending to each other is trickling down to banks not lending to consumers, which isn't really helping the economy one way or the other. I mean, they're still not collecting on billions worth of bad debt, which means that the pseudo-dollars in investor portfolios are rapidly becoming empty vats of nothing. The only people making money are the people who banked on everything going to shit.
I'm not going to make any predictions, because it seems like there is no rhyme or reason to what's going on. It's some kind of organized hysteria that appears not to be ruled by natural laws, unless you count lack of logic as a natural law.
Actually, it has been found that many of those saddled with subprime loans had good enough credit to qualify for normal loans, and that lenders were instructed to use deceptive language when selling adjustable rates. Beyond this, between the time one stops paying and the time the bank has to write it off, the lender inflates the debt with various late fees before selling the loan to a credit buyer.
The people who don't pay taxes are the poorest, and most in need of money. Therefor, giving them money is the best way to make sure it enters the economy.
One good strategy I've read is to repeal the Bush tax cuts, inducing all the rich people to spend their investment windfalls before the taxes are enacted. This worked before the estate tax was put into effect (though I don't know if this was intentional).
I watch those "Flip My House" shows with a much different eye now. Usually I feel a bit queasy.