I think you're confusing manufacturing for producing. We don't actually manufacture a lot of the goods that we used to, you're correct. But then, we also don't have everyone growing their own food. At one time, 80% of Americans were farmers. When we industrialized, was it a bad thing that that number dropped to 10%? Not really, because the loss in wealth of crops was made up for in gains in income in the new manufacturing jobs.
Globalization produces a similar 'labor evolution'. We've transitioned our economy from a manufacturing based economy to an IP based economy, sometimes referred to as the 'service economy', but since 'service' makes people think of wait-staff, I don't like using that term.
It's not that our economy is in a shambles and the American people missed all their true wealth being ported overseas. It's more a matter of the educational programs to transition our workforce into the new economy have been lacking. This is one thing I actually agree with Obama on and commend him for properly calling. He's not talking about bringing all manufacturing back to the US by executive fiat. Even he knows that's a bad idea.
What's causing the pain is 2 things: 1) the rate of transition is too fast and 2) our labor pool is not receiving the proper skills training to allow them to transition in a timely fashion.
Trust me, a nation of engineers and accountants has a better economy than a nation of press-operators. Any day of the week.
Last edited by Don Corleone; 10-07-2008 at 12:51.
"A man who doesn't spend time with his family can never be a real man."
Don Vito Corleone: The Godfather, Part 1.
"Then wait for them and swear to God in heaven that if they spew that bull to you or your family again you will cave there heads in with a sledgehammer"
Strike for the South
The real issue is that people around the world are becoming more intelligent. Their nations are becoming more secure in many areas as well. They are harder working on average, just as intelligent and will work for peanuts without a belief that they are entitled to anything; and they know how to live on a shoestring. You can't honestly believe that people are inherently equal and still hold on to the notion that we are somehow better "just because".
We squander life savings on sub-par education that teaches our children very little. We buy or lease cars that make us feel like we are better than other, but we can't afford them so they make us worse. Many of us pay 30% on every dollar we borrow or 4 dollars every time we go to a non-bank ATM. We spend $2.50 on bottles of tap water and $60 or more on shirts. Our health care has skyrocketed because we treat it like everyone else - have someone else be in charge of the prices you pay and never even look at them. Real world gas prices have finally come to our shores as well
We have gone insane and burned our advantage in a national bonfire.
A national correction is not the worst thing that could happen now - further travel down this delusional path is. We need to work harder, expect less and fight for the things that are most important to us while marginalizing the others.
Last edited by ICantSpellDawg; 10-07-2008 at 15:20.
"That rifle hanging on the wall of the working-class flat or labourer's cottage is the symbol of democracy. It is our job to see that it stays there."
-Eric "George Orwell" Blair
"If the policy of the government, upon vital questions affecting the whole people, is to be irrevocably fixed by decisions of the Supreme Court...the people will have ceased to be their own rulers, having to that extent practically resigned the government into the hands of that eminent tribunal."
(Lincoln's First Inaugural Address, 1861).
ΜΟΛΩΝ ΛΑΒΕ
This hysteria is ridiculous.... I can't believe some of the seemingly rational people that are currently stockpiling guns and ammo over a dip in the markets.
As I've said, every institution left holding the bag on the bad loans is going to take a hit. Some will and have failed, and some will make it. All the investment banks failed or were forced to commercialize because they all dealt in this securitized bad debt. After these loans - in whatever form they've taken - have done their damage and make it out of the system, the fundamentals of the market and economy will remain.
So calm down. Spreading unwarranted fears of another depression will just drive your 401Ks lower. If you know what you're doing, there can be a lot of money made in this type of situation. Ask Banquo. ~:P
This hysteria is ridiculous.... I can't believe some of the seemingly rational people that are currently stockpiling guns and ammo over a dip in the markets.
As I've said, every institution left holding the bag on the bad loans is going to take a hit. Some will and have failed, and some will make it. All the investment banks failed or were forced to commercialize because they all dealt in this securitized bad debt. After these loans - in whatever form they've taken - have done their damage and make it out of the system, the fundamentals of the market and economy will remain.
So calm down. Spreading unwarranted fears of another depression will just drive your 401Ks lower. If you know what you're doing, there can be a lot of money made in this type of situation. Ask Banquo. ~:P
Some people will always make money. I'm talking about the average Joe who will be hit hard. I've been hearing "unwarranted fears" so often that I don't know what it means anymore. When would fears be warranted?
We have serious problems that we need to look into - I hope you aren't arguing that status quo is the way forward? No one seems to understand how we will make promises happen, both in the public and private sectors. That concerns me. We don't have workable financial models in either segment, people have very little faith in their congressional or private sector leaders. We are a nation of debt who has gambled too much of the money that we do have in an overvalued system with cooked books.
Things always get worse around election time, but that doesn't mean that concerns aren't real.
"That rifle hanging on the wall of the working-class flat or labourer's cottage is the symbol of democracy. It is our job to see that it stays there."
-Eric "George Orwell" Blair
"If the policy of the government, upon vital questions affecting the whole people, is to be irrevocably fixed by decisions of the Supreme Court...the people will have ceased to be their own rulers, having to that extent practically resigned the government into the hands of that eminent tribunal."
(Lincoln's First Inaugural Address, 1861).
ΜΟΛΩΝ ΛΑΒΕ
What's causing the pain is 2 things: 1) the rate of transition is too fast and 2) our labor pool is not receiving the proper skills training to allow them to transition in a timely fashion.
The only part I really disagree with you on is 2) our labor pool is not receiving the proper skills training to allow them to transition in a timely fashion. The labor pool can not wait for someone to train them for the next hot job/career. If some of the labor pool that lost their jobs when GM left Flint would have used some of their over inflated wage* to go to college they could have prepared for the future. The labor force is… the labor force and the companies like GM don’t want to smarten them up and the government can’t be held responsible for them not being forward thinking. The labor force needs to be responsible for themselves but in many cases they don’t seem motivated enough until it is too late.
*if the wage wasn’t over inflated GM wouldn’t have had to leave. Which is where I think the housing mess started. Let me explain, jobs went away (southern US, Mexico, china, etc.) and the jobless or people with jobs that didn’t pay as well were forced to compromise their lifestyle. Banks and lenders saw that as the (government encouraged) opportunity to make a buck off downtrodden people who wanted to live like they were but didn’t have the means. They lowered their standards for loan approvals and the next thing you know everyone has the house they want that is just barely in their affordable range then the economy slumps and all of a sudden Joe sixpak (a wink at Palin) is spending $40 more a week on gas and another $20 on groceries and so on. So they start using their credit cards and wham-bam-thank-you-mam, default on their mortgage. The labor pool is not bright, big companies want to keep them that way and the government encouraged predators to take advantage of them. I could chain that back to the unions cutting the manufacturers too deep, or back to the fat cat manufacturers treating the labor pool lousy encouraging the growth of unions, or back to my head exploding.
Got a little carried away there, sorry Don.
Peace in Europe will never stay, because I play Medieval II Total War every day. ~YesDachi
Oh and, if I am correct, it's not going to bounce back. There is nothing to make it bounce back, unless it's just in the form of a flush of foreign investment coming in and us slinking more and more into debt. Short of completely revamping our economy with new industries and probably a significantly large government hand in helping to incentivize and push such a change along, we are on a downhill incline.
People say that every time there is any kind of economic crisis. And you know what? They have been wrong every time.
"What, have Canadians run out of guns to steal from other Canadians and now need to piss all over our glee?"
People say that every time there is any kind of economic crisis. And you know what? They have been wrong every time.
It isn't that bad yet and will probably bounce back eventually. The great depression did to, but not without some introspection.
I'm not fan of inevitability. I assume we've all had something similar to this happen: the incredibly kind, healthy, industrious, bright, independently wealthy friend; who if you had to bet that one person you knew would succeed -it would be him- mysteriously gets sick one day and dies 3 days later because of an undressed illness that he himself didn't realize was such a serious problem. Ironically it happened 1 1/2 years ago when he just got a job at Lehman as an analyst.
Hope for the best, but don't just expect it. Sometimes the best of us are out for the count.
Last edited by ICantSpellDawg; 10-07-2008 at 16:44.
"That rifle hanging on the wall of the working-class flat or labourer's cottage is the symbol of democracy. It is our job to see that it stays there."
-Eric "George Orwell" Blair
"If the policy of the government, upon vital questions affecting the whole people, is to be irrevocably fixed by decisions of the Supreme Court...the people will have ceased to be their own rulers, having to that extent practically resigned the government into the hands of that eminent tribunal."
(Lincoln's First Inaugural Address, 1861).
ΜΟΛΩΝ ΛΑΒΕ
This hysteria is ridiculous.... I can't believe some of the seemingly rational people that are currently stockpiling guns and ammo over a dip in the markets.
Hey, I don't need to use a dip in the markets as an excuse to stockpile guns and ammo!
If I werent playing games Id be killing small animals at a higher rate than I am now - SFTS
Si je n'étais pas jouer à des jeux que je serais mort de petits animaux à un taux plus élevé que je suis maintenant - Louis VI The Fat
"Why do you hate the extremely limited Spartan version of freedom?" - Lemur
"That rifle hanging on the wall of the working-class flat or labourer's cottage is the symbol of democracy. It is our job to see that it stays there."
-Eric "George Orwell" Blair
"If the policy of the government, upon vital questions affecting the whole people, is to be irrevocably fixed by decisions of the Supreme Court...the people will have ceased to be their own rulers, having to that extent practically resigned the government into the hands of that eminent tribunal."
(Lincoln's First Inaugural Address, 1861).
ΜΟΛΩΝ ΛΑΒΕ
This hysteria is ridiculous.... I can't believe some of the seemingly rational people that are currently stockpiling guns and ammo over a dip in the markets.
As I've said, every institution left holding the bag on the bad loans is going to take a hit. Some will and have failed, and some will make it. All the investment banks failed or were forced to commercialize because they all dealt in this securitized bad debt. After these loans - in whatever form they've taken - have done their damage and make it out of the system, the fundamentals of the market and economy will remain.
So calm down. Spreading unwarranted fears of another depression will just drive your 401Ks lower. If you know what you're doing, there can be a lot of money made in this type of situation. Ask Banquo. ~:P
Yeah, the chicken little routine is baffling to me as well. When I stop seeing people buying thousand dollar flat screen TVs two at a time from Costco along with their 80 packs of bottled water maybe I'll be able to better understand the '2nd Great Depression is looming!' angle.
People say that every time there is any kind of economic crisis. And you know what? They have been wrong every time.
I'm not talking about piddly four year bouncebacks and a new industry to inflate and then pop. I'm talking long-term, big picture. I stated that explicitly. If we get into all kinds of new exportable, profitable and forward-geared industries, we will bounce back. If not, we won't. But I did also state that I don't believe any such traumatic change to the status quo loving free market will happen without considerable government-created incentive.
I think people who say "bah, this happens every 10 years or so" are really rose-shading how much we've undergutted the economy in a way that wasn't true 20, 40, 60 years ago.
Last edited by Koga No Goshi; 10-07-2008 at 17:32.
We have serious problems that we need to look into - I hope you aren't arguing that status quo is the way forward?
Actually, I am.
The fundamentals of the market economy work just fine.
The sole reason for the current mess was the bubble created through bad lending practices. As with all bubbles, it has to burst at some point. This one was especially bad because it directly affected the financials.
The market is the ultimate school of hard knocks. If we just let it work, it will punish bad behavior and lessons will be learned.
After this "crisis" passes, banks will be far more vigilant in their lending practices - just as business people now know to do solid research before investing in tech industries.
As with every bubble, sound market principles will always prevail. Just as it should have been obvious that throwing money at techs that consisted of little more than a website was a bad idea, it should have been obvious that giving people with bad credit scores credit was a bad idea. Sometimes, though, it takes a major correction to reinforce those principles and teach people that the market cannot be cheated.
I'm not talking about piddly four year bouncebacks and a new industry to inflate and then pop. I'm talking long-term, big picture. I stated that explicitly. If we get into all kinds of new exportable, profitable and forward-geared industries, we will bounce back. If not, we won't. But I did also state that I don't believe any such traumatic change to the status quo loving free market will happen without considerable government-created incentive.
I think people who say "bah, this happens every 10 years or so" are really rose-shading how much we've undergutted the economy in a way that wasn't true 20, 40, 60 years ago.
But it was true 20, 40, 60 years ago.
This is nothing different.
"What, have Canadians run out of guns to steal from other Canadians and now need to piss all over our glee?"
The fundamentals of the market economy work just fine.
The sole reason for the current mess was the bubble created through bad lending practices. As with all bubbles, it has to burst at some point. This one was especially bad because it directly affected the financials.
The market is the ultimate school of hard knocks. If we just let it work, it will punish bad behavior and lessons will be learned.
After this "crisis" passes, banks will be far more vigilant in their lending practices - just as business people now know to do solid research before investing in tech industries.
As with every bubble, sound market principles will always prevail. Just as it should have been obvious that throwing money at techs that consisted of little more than a website was a bad idea, it should have been obvious that giving people with bad credit scores credit was a bad idea. Sometimes, though, it takes a major correction to reinforce those principles and teach people that the market cannot be cheated.
Let me preface by saying that I think this mythos is just as fantasy-based as a pure application of socialism. In the sense that, in theory, either would work. But in practice, neither do. The free market or rather the "smart" parts of it, are constantly striving to make the market unfree, either through monopoly, or favorably influencing politics and laws to benefit one industry or hurt a competitor, or what have you. The free market wet dream assumes everyone will play by the rules, even though at the same time it argues to have as few rules as possible, and that this will somehow work. And that idea deserves every bit as much incredulousness as the idea that people will ever eliminate greed and be purely socialist and create utopia.
Now, I don't believe in the U.S. anyone is truly dedicated to the free market. I honestly don't. I really do think as Naomi Klein says that we have crybaby capitalism and that even the most dedicated anti-tax, anti-regulation free market right-wing conservative ideologues suddenly like the idea of a bailout once they've screwed up their industry. That's happened time and again. And I think as long as big corporate money funneled into lobbying can have this strong of a political effect on the market, there will never be anything close to a free market. Other examples would be companies getting together to pass through legislation (with the happy approval of the administration) to stop people's ability to file class action suits for fraud or any other abuse, or get out of credit card debts when filing bankruptcy-- even though that's more or less PRECISELY what credit industries can do as a matter of course either by filing corporate bankruptcy or getting bailouts.
I know you're just an ideologue, Panzer, so I am not expecting anything but a canned answer. But given America's economic and political and legal landscape, I do not understand how you can think a free market system could even exist or work for more than five seconds, let alone get to the point of self-correction and self-regulation.
The government made these loans profitable and then proceeded to deregulate the system. So while the deregulation spurred this on. It was the making of unprofitable loans profitable that did this and if you cant see that I will never talk to you again.
There, but for the grace of God, goes John Bradford
My aim, then, was to whip the rebels, to humble their pride, to follow them to their inmost recesses, and make them fear and dread us. Fear is the beginning of wisdom.
I am tired and sick of war. Its glory is all moonshine. It is only those who have neither fired a shot nor heard the shrieks and groans of the wounded who cry aloud for blood, for vengeance, for desolation.
Small picture Goof. You're talking about various sudden bursts or pops of speculation.
My point is, the only real thing still driving the economy is speculation. It doesn't really matter if you're talking about tech, oil or housing.
Erm... That's exactly why the current crisis is no different from any that I have mentioned.
The market economy follows a set pattern. Recession, followed by cautious return to capital markets, followed by increased confidence and venture, followed by over-exuberant greed/speculation, followed by crash. Lather, rinse, repeat...
Cripes, during the end of the tech bubble none of our financial analysis models for valuing companies worked anymore, because they were all based on the rather old-fashioned idea that a company's value should be based on some sort of present value calculation of the cash flows they would generate. During that time, companies were considered a good deal if their daily burn rate was at least sustainable via further stock issues...
The current crisis was brought about by the same sort of speculative insanity. It is no different.
"What, have Canadians run out of guns to steal from other Canadians and now need to piss all over our glee?"
Im going to start a depression survival store and suck all of you dry.
There, but for the grace of God, goes John Bradford
My aim, then, was to whip the rebels, to humble their pride, to follow them to their inmost recesses, and make them fear and dread us. Fear is the beginning of wisdom.
I am tired and sick of war. Its glory is all moonshine. It is only those who have neither fired a shot nor heard the shrieks and groans of the wounded who cry aloud for blood, for vengeance, for desolation.
Erm... That's exactly why the current crisis is no different from any that I have mentioned.
The market economy follows a set pattern. Recession, followed by cautious return to capital markets, followed by increased confidence and venture, followed by over-exuberant greed/speculation, followed by crash. Lather, rinse, repeat...
Cripes, during the end of the tech bubble none of our financial analysis models for valuing companies worked anymore, because they were all based on the rather old-fashioned idea that a company's value should be based on some sort of present value calculation of the cash flows they would generate. During that time, companies were considered a good deal if their daily burn rate was at least sustainable via further stock issues...
The current crisis was brought about by the same sort of speculative insanity. It is no different.
I'm not arguing it's different from a similar speculation bubbleburst 10 or however many years ago.
I am not sure you are grasping my point yet. My point is, what is the value of the U.S. dollar? What backs it up? What is the promise of its value in the future?
Another speculation bubble? That will hold up exactly for as long as it takes for someone to call in foreign debt.
Now, I don't believe in the U.S. anyone is truly dedicated to the free market. I honestly don't. I really do think as Naomi Klein says that we have crybaby capitalism and that even the most dedicated anti-tax, anti-regulation free market right-wing conservative ideologues suddenly like the idea of a bailout once they've screwed up their industry. That's happened time and again. And I think as long as big corporate money funneled into lobbying can have this strong of a political effect on the market, there will never be anything close to a free market. Other examples would be companies getting together to pass through legislation (with the happy approval of the administration) to stop people's ability to file class action suits for fraud or any other abuse, or get out of credit card debts when filing bankruptcy-- even though that's more or less PRECISELY what credit industries can do as a matter of course either by filing corporate bankruptcy or getting bailouts.
Well Koga, you make some good points but only if you ignore the “small business” portion of the free market. The big guys are the ones that push for the legislative changes and the bailouts and cause all the problems and do all the cry-babying. The small businesses like $25 million and under, with less than 100 employees are the ones that ride the free market like a rodeo cowboy. Even here in Michigan where the economy sucks there are still thriving small businesses all over the place. I think that sometimes we are focused on the big headline making businesses when there is probably a dozen or more small businesses that we passed while in our car on our way to work or school today that are doing just fine and laugh and call the big guys fools for collapsing in on themselves.
Peace in Europe will never stay, because I play Medieval II Total War every day. ~YesDachi
This hysteria is ridiculous.... I can't believe some of the seemingly rational people that are currently stockpiling guns and ammo over a dip in the markets.
As I've said, every institution left holding the bag on the bad loans is going to take a hit. Some will and have failed, and some will make it. All the investment banks failed or were forced to commercialize because they all dealt in this securitized bad debt. After these loans - in whatever form they've taken - have done their damage and make it out of the system, the fundamentals of the market and economy will remain.
So calm down. Spreading unwarranted fears of another depression will just drive your 401Ks lower. If you know what you're doing, there can be a lot of money made in this type of situation. Ask Banquo. ~:P
Good post PJ.
I think there is some risk, but mainly of talking ourselves into a significant turn down. If liquidity can be restored (admittedly quite a challenging "if") the fundamentals are actually quite strong in both the US and Europe. This is a moneylender's crisis.
As for your last point, I like Warren Buffett's philosophy: "Be fearful when others are greedy, and greedy when others are fearful." There's a lot of bargains out there for longer term returns.
Off on a tangent Koga; as an accountant, what is your view of changing back away from "mark to market"? I think a lot of the panic has been created by this change over the last few years - which seems sensible (it's the practice for those who don't know, of valuing a company's assets at current immediate market value, so when the markets tank, in theory so do all the assets) but has proven very destructive. If we went back to future marks, would that stabilise the banks without needing $700bn?
Last edited by Banquo's Ghost; 10-07-2008 at 18:48.
Reason: Additional thoughts
"If there is a sin against life, it consists not so much in despairing as in hoping for another life and in eluding the implacable grandeur of this one." Albert Camus "Noces"
Well Koga, you make some good points but only if you ignore the “small business” portion of the free market. The big guys are the ones that push for the legislative changes and the bailouts and cause all the problems and do all the cry-babying. The small businesses like $25 million and under, with less than 100 employees are the ones that ride the free market like a rodeo cowboy. Even here in Michigan where the economy sucks there are still thriving small businesses all over the place. I think that sometimes we are focused on the big headline making businesses when there is probably a dozen or more small businesses that we passed while in our car on our way to work or school today that are doing just fine and laugh and call the big guys fools for collapsing in on themselves.
Are you telling me that small business owners don't take advantage of small business loans, small business tax incentives, or other various incentive structures where they exist, if they are available?
Free market always seems to translate into = I want all the things that help me, and none of the things that hurt me or make me meet standards of quality/pay/confidence/whaever.
Are you telling me that small business owners don't take advantage of small business loans, small business tax incentives, or other various incentive structures where they exist, if they are available?
Free market always seems to translate into = I want all the things that help me, and none of the things that hurt me or make me meet standards of quality/pay/confidence/whaever.
Of course they take advantage of many of the incentives and loans and tax breaks but how often are cities bending over to lure a small business into their area or to keep them in their area? Or legislators listening to the needs of a company that’s entire sales for the year isn’t enough to pay for their next reelection campaign. I bet if you add up all the small business loans they wouldn’t equal the top 5 bankruptcy cases.
Small business success is based on their quality/pay/consumer confidence and whatever. Blow a job because of poor quality or loose a couple key employees due to poor pay and the company could struggle or even fall. The upside is that if they do fall they can’t fall far and there is always another small company there in the wings, ready to take over.
Peace in Europe will never stay, because I play Medieval II Total War every day. ~YesDachi
Has anyone else noticed the.... I don't know what to call it.... air of romanticism floating around about depression? I'm not talking about here, specifically. I hear it every single day at work, with all these various financial people and clients calling in. There seems to be almost a longing for something like that to happen.
What do you guys think the reason for that is? Just people feeling fed up with the corruption and b.s.?
Has anyone else noticed the.... I don't know what to call it.... air of romanticism floating around about depression? I'm not talking about here, specifically. I hear it every single day at work, with all these various financial people and clients calling in. There seems to be almost a longing for something like that to happen.
What do you guys think the reason for that is? Just people feeling fed up with the corruption and b.s.?
I know you're just an ideologue, Panzer, so I am not expecting anything but a canned answer.
Well then, guess what? You won't get one at all.
Originally Posted by Banquo
As for your last point, I like Warren Buffett's philosophy: "Be fearful when others are greedy, and greedy when others are fearful." There's a lot of bargains out there for longer term returns.
You must have made a killing after the first big selloff when the markets rebounded for a couple of days.
Whatever happens in Congress, the crisis is now global; that means governments must work together
AMERICA’S Congress is not used to being second-guessed. But as lawmakers wrestled in the Capitol, world stockmarkets have been giving real-time odds on the Bush administration’s $700 billion bail-out becoming law. After the plan’s thrashing by the House of Representatives on September 29th, spurred on by voters’ loathing of “casino capitalism”, investors panicked. Yet as The Economist went to press, they were optimistic that, after winning the Senate’s approval on October 1st, the plan would pass.
Even if it does, that should not be a cause for optimism. Look beyond the stockmarkets, especially at the seized-up money markets, and there is little to see except bank failures, emergency rescues and high anxiety in the credit markets. These forces are drawing the financial system closer to disaster and the rich world to the edge of a nasty recession (see article). The bail-out package should mitigate the problems, but it will not avert them.
The crisis is spreading in two directions—across the Atlantic to Europe, and out of the financial markets into the real economy. Governments have been dealing with it disaster by disaster. They have struggled to gain control not just because of the speed of contagion but also because policymakers, and the public they serve, have failed fully to grasp the breadth and depth of the crisis.
What’s the Icelandic for “domino”?
Step forward, Peer Steinbrück, Germany’s finance minister, who rashly declared on September 25th that America was “the source…and the focus of the crisis”, before heralding the end of its role as the financial superpower. Within days, the focus shifted and Mr Steinbrück and his officials were obliged to arrange a €35 billion ($51 billion) loan from German banks and the German government to save Hypo Real Estate, the country’s second-biggest property lender.
The hapless Mr Steinbrück is not alone. European banks were collapsing at a dizzying pace even as Christian Noyer, governor of the Bank of France, declared that “there is no drama in front of us.” Hypo Real Estate was just one of five banks in seven European countries bailed out in three days. Belgium, Luxembourg and the Netherlands carved up Fortis, a big bancassurer; Britain nationalised Bradford & Bingley; Belgium, France and Luxembourg saved Dexia; and Iceland rescued Glitnir. Separately, Ireland took €400 billion of contingent liabilities onto the national balance sheet, when it stood behind the deposits and debts of its six large banks and building societies. You have to wonder what Mr Noyer regards as dramatic.
By some measures, many European banks look more vulnerable than their American counterparts do—and that is saying quite something, given the past week’s forced sale of Washington Mutual, America’s biggest thrift, and Wachovia, its fourth-biggest commercial bank. In America, outside Wall Street, the banks have lent 96 cents for each $1 of deposits. Continental European banks have lent roughly €1.40 for each €1 of deposits. They have to borrow the rest from money-market investors, who are not especially confident just now. Some Europeans, including the British, Irish and Spanish banks, have housing busts of their own. And they must contend with the toxic American securities they bought by the billion, as well as their own slowing economies.
Western Europe is not the limit of this: the panic has also struck banks in Hong Kong, Russia and now India. And it is not just the geographical breadth of this crisis that is alarming, but also its economic depth. Because it is rooted in the money markets (see article and article), it will feed through to businesses and households in every economy it hits.
Take a deep breath
Most of the time nobody notices the credit flowing through the lungs of the economy, any more than people notice the air they breathe. But everyone knows when credit stops circulating freely through markets to banks, businesses and consumers. For almost a year the markets had worried about banks’ liquidity and solvency. After the bankruptcy of Lehman Brothers last month, amid confusion about whom the state would save and on what terms, they panicked. The markets for three-, six- and 12-month paper are shut, so banks must borrow even more money overnight than usual.
Banks used to borrow from each other at about 0.08 percentage points above official rates; on September 30th they paid more than four percentage points more. In one auction to get dollar funds overnight from the European Central Bank, banks were prepared to pay interest of 11%, five times the pre-crisis rate. Astonishingly, rates scaled these extremes even as the Federal Reserve promised $620 billion of extra funding.
Bankers have always earned their crust by committing money for long periods and financing that with short-term deposits and borrowing. Today, that model has warped into self-parody: many of the banks’ assets are unsellable even as they have to return to the market each day to ask for lenders to vote on their survival. No wonder they are hoarding cash.
This is why those politicians who set the interests of Main Street against those of Wall Street are so wrong. Sooner or later the money markets affect every business. Companies face higher interest charges and the fear that they may one day lose access to bank loans altogether. So they, too, hoard cash, cancelling acquisitions and investments, in order to pay down debt. Managers delay new products, leave factories unbuilt, pull the plug on loss-making divisions, and cut costs and jobs. Carmakers and other manufacturers will no longer extend credit (see article) and loans will become elusive and expensive. Consumers will suffer. Unemployment will rise. Even if the credit markets work well, the rich economies will slow as the asset-price bubble pops. If credit is choked off, that slowdown could turn into a deep recession.
Financial markets need governments to set rules for them; and when markets fail, governments are often best placed to get them going again. That’s pragmatism, not socialism. Helping bankers is not an end in itself. If the government could save the credit markets without bailing out the bankers, it should do so. But it cannot. Main Street needs Wall Street; and both need Washington. Politicians—and President George Bush is the most culpable among them (see article)—have failed to explain this.
Governments need not just to communicate, but also to co-ordinate. Past banking crises show that late, piecemeal rescues cost more and work less well. Ad hoc mergers work for a while, but demands for help tend to recur. Inconsistency sows uncertainty. Cross-border banking can make one country’s policies awkward for the neighbours: the Irish government’s guarantee of all deposits threatens to suck in money from poorly protected British banks. France’s suggestion on October 1st that Europe’s governments should work together was a good one; Germany’s rejection of it was wrong.
Central banks have co-ordinated their liquidity operations. Now that oil prices have plunged and worries about inflation are receding, interest-rate cuts are possible. They would be more powerful if co-ordinated. But it is not only central banks that need to combine. Whatever America’s Congress does, governments should work together on principles to stabilise and recapitalise banks—not just to stem panic but also to save money. Even if, as the Europeans claim, the crisis was made in America, it now belongs to everyone.
Last edited by Lemur; 10-07-2008 at 22:30.
Reason: Messed up the tags.
Re: The Second Great Depression?
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Originally Posted by PanzerJaeger
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