Why panic?
I might as well start with an admission: I wouldn't recognise a collateralised debt obligation if it came up to me in the street and shook me by the hand.
So if you were to doubt my expertise when I start pontificating about financial matters, well, I'd concede that you just may have a point.
But I hope I'm not being a total simpleton if I suggest that some of the coverage of recent events risks losing a sense of proportion. Yes, I know that Alistair Darling said that current economic conditions "are arguably the worst they've been in 60 years". And I have no doubt that's how it feels if you're trying to keep the ship afloat in these storm-tossed seas.
Leave aside for a moment the hysteria on the stock markets. Consider the UK unemployment rate, up sharply to 5.5 per cent, and rising more quickly than at any time since 1992. But consider also: at 1.7 million out of work, the figure is still only just over half what it was 25 years ago.
All right, what about inflation, also up sharply? True, and it's rising at its fastest rate for 11 years - but at 4.7 per cent, it's still far lower than in 1975, when it reached 24 per cent, or 1980, when it was at 18 per cent.
Those of you of a certain age will recall a character called Corporal Jones in the TV comedy series Dad's Army. His catch-phrase "Don't panic!" was guaranteed to spark exactly the opposite reaction. So I won't do a Corporal Jones.
Nor will I pretend that the events of the past two weeks haven't been dramatic or serious. When a major UK mortgage lender is taken over; when one of the world's biggest insurance companies is nationalised in the US; when iconic names in the financial world like Lehman Brothers, Merrill Lynch and Morgan Stanley are bandied about like so many dodgy second-hand car dealers, even I can recognise that something is up.
But my experience of previous crises - and I don't think anyone who lived through the recession of the early 1980s is likely to forget it - leads me to conclude that what goes down must, sooner or later, come back up again. The whole point of economic cycles, I would have thought, is that they are cyclical.
Yes, if you have a mortgage, you'll be worried about interest rates. But doesn't any prudent borrower factor in possible rate changes over a 25-year period? If you're saving for a pension, you'll be worried about the value of your pension pot. But unless you're planning to cash it in now, there's a fair chance it'll claw back its previous value within the next couple of years. (After all, the stock market now, even after all the falls of recent days, is about where it was three years ago.)
Of course, jobs are being lost, businesses are suffering, and homes are being repossessed. Not for a moment am I suggesting that the current crisis doesn't involve real hardship. And with the financial services industry playing such a significant role in the national economy, clearly a crisis in the City has important knock-on effects.
All I'm saying is that I doubt the world is about to end just yet.
Oh, and by the way, remember how oil prices were close to $150 dollars a barrel a couple of months ago? You may not have noticed, but yesterday, they were below $100. That's a drop of one-third in eight weeks. Just thought I'd mention it.
© MMIX~RS~q~RS~~RS~z~RS~31~RS~)
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Robin,
You mention that the United Kingdom unemployment is rising but it is, at 1.7million people, half of what it was 25 years ago. However that is viewing both the figures and the relationship with past history with rose-tinted spectacles.
Rochdale Council today announced that they are going to have to discard 850 staff in order to make in-roads into a 17million pounds sterling deficit that was built up by previous administrations.
This set me to analysing the types of jobs that existed in the United Kingdom 25 years ago versus the jobs that keep unemployment low today.
In fact it is the public sector of the UK that has been the main job creator in the past 25 years and high employment has been artificially generated through more and more people being employed by Government Agencies, Local Authorities and government-ceated quangos.
Whilst public sector employment has risen the UK private sector has seen (apart from the Financial Sector which is rapidly going to change) actually shrinking the private sector workforce as technology or improved processes allows for increased output with less manpower requirement or manufacturing simply disappearing from the UK scene.
Thus your view that all is not necessarily doom and gloom when one see that unemployment is not higher than 25 years ago is based upon a false premise.
In reality, it is the British Tax and Council Tax Payers who are funding employment in the UK and, just like the Financial Sector has proven to be a house of cards, so too will the tax-funded employment in the UK fall over in due course.
The beneficiaries of this boom in employment can enjoy handsome wages, salaries and pensions that are inflation proof but this is propped up by taxation that under the government has risen two-fold in the past 13 years BUT there is a limit on how much tax can be raised to fund the false economy of paying the non-profitable public sector more than the profitable private sector.
Sooner or later the tax burden will reach a peak (if it has not already done so!) and local authorities will start to develop deficits they cannot sustain and, as sure as eggs are eggs, Rochdale Council will be merely the first of many Local Authorities who will have to lay off their staff and the Unemployment Figures which you see as not being all doom and gloom will certainly soar to their more realistic level to reflect the actual poor state of the United Kingdom's economy.
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Menedumus.
Just as I was saying over on Mark Mardell's blog. There is simply too much government. Someone has to pay for it. What does intrigue me though are the unanswered questions. If Rochdale can do without 850 employees, why did they take them on in the first place? If governments both sides of the pond can afford massive bailouts for financial institutions, where did the money come from? Why was it not in the real economy in the first place? Maybe we are simply employing people to do non-jobs and paying them in Monopoly money.
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"The significant problems we face cannot be solved at the same level of thinking we were at when we created them."
- Albert Einstein (1879-1955)
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We are top heavy, in all government jobs,
This has always been Labour's problem.
Add the unemployed to the huge excess at the top and the tax required from the workers is not sustainable.
We pay for young men and women to attend school.
I left school at 15, I have worked all my life.
I have worked from 11, after school and weekends.
This Gov. has trained the young to stay irresponsible children.
Now there is not going to be the same amount of jobs in the city. trained to sit at a computer, use a mobile.
When we had factories and apprentiships we did not need to import shoes and clothing and there was work.
Now we are loosing these skills, the very basic skills we need. We dare not get bigger we need to regroup and get real work for the people that cuts the imports.
No more EU Superstate. the bigger they are the harder they fall.
I'm not just talking about economy, it also the fact the bigger the state the more inclined they are to go to war and 'fix' the world.
And just before I finish my ranting, I wish to God they would stop the climate change, end of the world chant. The climate IS changing, it alyways has changed, get out of the big picture, we are not that powerful in the grand scheme of things.
If I were depressed I would have cut my throat by now
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Mr. Lustig, I think you fail to understand just what a precarious house of cards the world's financial institutions have become and how vulnerable they now are to complete collapse. The analogy with the 1980s is not accurate, a far better analogy would be the late 1920s only the current situation may be even worse. One thing that makes it worse is that the world's economies are so interlinked with each other that collapse in one place has an impact on others, the US being the world's single largest economy (unless you count the EU as one economy.) The US is the lynchpin.
"All I'm saying is that I doubt the world is about to end just yet."
Don't be so sure. Here's the terrible analogy. In what was an entirely unregulated market in the 1920s, people saw that they could make easy profits by buying and selling shares of stock. They had easy access to credit buying shares on 30%, 20%, even 10% cash for the price they paid borrowing the rest and using the stock itself as collateral to pay off the debt. This was not a problem as long as the shares continued to rise in value. Being that making money this way was so easy, many people did it and so bid up shares far beyond the price objective analysts considered any reasonable measure of their true value. After all, owning a share of stock is owning part of a company and part of its anticipated profits. When you pay a price for a stock that will not return your money as profits even if profits rise at a reasonable rate for decades, you paid far too much. When most stocks are in this price range due to speculation, inevitably this bubble will burst and people will rush to the exits to get out before their overvalued shares are worth less. This drives the price down because suddenly there is a vast supply looking for buyers but little demand. When the value of these shares fell below the value of the loans used to buy them, the lenders wanted their money back immediately. This is termed a "margin call." This precipitated panic selling and a market collapse. If you look at the graph of the Dow Jones Insustrial Average between October 1929 and January 1930, it is quite interesting. It didn't fall all at once or in a straight downward curve. It continually took small jumps in price leading many to think the crisis was over but the next leg down was always larger so that by January 1930, the Dow had lost about 80% or more of its prior high value.
In 1929 before the stock market crash, The US economy seemed strong. It had government tax surplusses and a strong dollar. I think there may even have been a trade surplus. Everything looked good. When the crash came, the Federal Reserve Bank said the same thing you hear many people say today, among them John McCain, that the markets should be punished. So to teach the market a lesson about the consequences for handling money irresponsibly, it tightened credit, removed liquidity, made it harder to get credit. The result was that the depression only got worse and lasted longer. It was exactly the wrong thing to do. The Federal Reserve and the US Treasury never made that mistake again.
Fast forward to the mid 1990s. Home ownership is every American's dream. For most Americans, it is the most expensive and most valuable asset they will ever acquire in their lives. The government wants people to own their own homes. That is why interest on mortgages and real estate taxes on a primary residence are 100% deductable from income on federal income tax. That is why Fanny Mae and Freddy Mac were created. Also FHA loans. And many other mechanisms to encourage home ownership and all of the secondary industries which thrive off of it including the home financing industry benefit from it. Generally it is considered a mechanism for creating wealth and stability. But in the mid 1990s, many lawmakers and notably Mr. Alan Greenspan felt the regulations on banks including making home mortgages available had been far too restrictive and removed many of them. This was signed by Congress and President Clinton and was not ever reconsidered or repealed. Both major political parties in the US were in control of both houses of Congress and the Presidency at one time or another since that time so blaming this on one party or the other is incorrect. It was a fatal blunder by people who were blind to it. Ever inventive employees of financial institutions devised schemes which created a housing bubble by making credit to buy houses very easily available. It got so bad that some of the worst loans were called NINJA loans. The borrower had no income, no job or assets but was still given a large amount of money to buy an expensive house. Some bought many houses this way. They reason they got away with it was because the loans were given to uncreditworthy people or in amounts far more than they were justified in getting based on the value of their assets and any reasonable expectation of their income but the loans were chopped up into small pieces, repackaged with other simililar loans and sold to people in other financial institutions who didn't know or bother to find out what they were comitting their employer's money to. For awhile, when these loans at initial "teaser rates" that is low interest rates up front suddenly reverted to rates necessary to recover unrealized necessary profit on interest later on, the borrowers could not keep up with the payments and started going into default. The loans were in effect ticking time bombs just the way the stocks were in 1929 and like the stocks, the homes were held as collateral for the loans so the banks were forced to foreclose and repossess the houses. Thus the same kind of market bubble and collapse with the same kind of financing scheme as in 1929 happened in the last few years in the housing market.
Why did it happen? Several factors. One was lack of internal oversight, auditing, and careful evaluation at the financial institutions themselves. Another is that a lot of high paid high flying financiers had no idea what they were buying when they acquired these loans. You don't hear the term "due dilligence" much anymore. They used to use the term a lot but it rings pretty hollow now. Many say probably correctly that markets are driven by only two emotions, greed and fear. Greed is a very important and valuable asset for human beings. It is what causes people to make an effort to create more wealth than they need for the moment for themselves, more than they can use. However, since it will explore every avenue to acquire as much wealth as it possibly can, it has to be constrained, that is regulated to prevent it from creating unreasonable risk at a systemic level. This is where the system broke down, by a failure to recognize this. The stage was set for what is happening now when the regulations were removed in the 90s, it became inevitable.
Why does it matter? The US's economy, about 15 trillion dollars is the single largest one and the most powerful engine of wealth in the world. It is two thirds driven by consumer demand. All of the other economies of the world directly or indirectly depend on it. When this driving wheel slows, they will also slow or even grind to a halt. Much of the risk taken in those economies will turn out to have been bad risks. This goes for the small entrepreneur in China who borrowed money to manufacture toys to export to the US for example even if his customers were in Indonesia who resold them to buyers the US. Also, many foreign financial institutions themselves bought these repackaged securities. Considering the speed at which markets move today, the deliberate complexity of the financial instruments to obfuscate the risks by hiding the true nature of what they were about, the pressure by employers on people in the financial world to perform by demonstrating generating profits, and the natural propensity for laziness when it comes to reading and absorbing complex financial documents, it is hardly surprising that many people copied a formula that seemed to work, at least up until recently to perform. The evaporation of all of the wealth that will be lost both from the forclosures themselves and from the slowdown in the economy will be catastrophic for many millions of people's personal lives. It will mean loss of jobs, loss of savings, loss of their homes, personal financial ruin. It's not to be dismissed lightly. And unlike a worthless piece of stock certificate, a bank owning a house is actually a liability. There are taxes and insurance to be paid, and maintenance to be performed even if nobody lives in them. If the taxes aren't paid, then municipal governments see their own incomes go down and cannot afford to provide the services their citizens expect and need.
What can be done? One problem is that the size of the crisis is unknown. Markets hate uncertainty more than anything else. Is it half a trillion dollars? Two trillion? Five trillion? Nobody knows including the financial institutions themselves. One thing we do know is that unless drastic action is taken soon, this downward spiral will result in a worldwide depression which may not end so quickly. The great depression starting in 1929 did not end until the US entered WWII in 1941. How does it end? How can it end? There is actually only one way that has been proven to work. That is to have the US Treasury print vast new quantities of money that can be easily acquired by borrowers. This will pay down not only private but public debt, now 9 trillion dollars for the US government. In other words, the currency will be rapidly and severely deflated. This will cause wage and price inflation, increases in interest rates, and for a time, a collapsing dollar. It will also wipe out those who are owed money in dollar denominated loans at fixed rates including banks and foreign governments. This is what the US government has been avoiding at all cost up to now but can't avoid much longer. What will be the impact on the world's economy? One way or another, whether by depression or inflation, there will be a massive negative impact especially on China and Europe.
BTW, for those who thnk economists are particularly smart, recall that two Americans who won the Nobel Prize in economics about 10 or so years ago with their theories created a hedge fund for billionaires only and after initial successes lost every dime their wealthy clients invested with them. As the old saying goes, a fool and his money are soon parted. This goes for billionaires and bankers as well as us mere mortals.
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Thank you Marcus. A fine piece of analysis if I may say so.
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MarcusAureliusII @ #5
I mean no criticism by this comment. I am genuinely interested in your view.
A strange thing happened today in the USA. Bush committed to pumping money into the Financial Sector by offering the Banks the opportunity to off-load their mortgage-backed loss making loans to the government for more easily merchantable treasury bonds and all this at a potentially massive cost to the government which will ineveitably mean the USA has to raise taxation at some stage sooner or later.
Personally, I see this as an absolute necessity as the alternative with global stock market falls and uncertaintity being rampant there was a massive loss of confidence that was driving share prices down and I suspect we were on the verge of a stock market crash.
Strangely enough the Democrat Candidate for President of the USA seems to be suggesting that he agrees with interventionist tactics like this but the Republican Candidate is criticising Government intervention.
It seems odd to me, as an outsider, that the Party of the Right's candidate is suggesting no intervention and let the weak Banks go to the wall, yet the candidate for the left is recommending supporting the Capitalist economy and in a way supporting the current even-more right wing President Bush.
Is this quirky behaviour? Or am I misreading the newspaper reports that seem to highlight this difference in the views of the two candidates.
I accept that things may have moved on and, for political expediency, either candidate for President may have reversed their opinion in the meantime but it does seem somewhat bizarre from my English perspective!
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#5 Marcus...
wrote
"
What can be done.. The scale of the problem is unknown ...
"
If we have such perfect systems of accounting and such correct systems of reporting as enforced through the SEC then why is the situation unknown? Are we not identifying a very important cause of the problem?
Enron and WorldCom were contributed to by large firms of accountants and now it seems that the Credit Crunch has been amplified, if not caused by, accountants too.
After all, if banks trusted one another's balance sheets we would not be in the situation in which we find ourselves today.
It is my belief that one of the necessary actions is for the SEC and accountants World wide to insist that balance sheets show all of an organisations assets and liabilities and that there exist no off-balance sheet assets or liabilities - this was the problem in Enron and if we had learned from our errors then perhaps the credit crunch would not be so bad.
As to the bounds of the problem - I guess that there must be an upper bound to the toxic USA (and UK housing) debt. The talk seems to be about a trillion US dollars (in the Poulson scheme) so I guess that could be 2 trillion in reality - the UK should be no more than a fifth of that (on the relative population basis plus a bit for our higher house prices) so that is say half a trillion dollars. (pounds US 1.1 trillion and UK 300 billion)
These are big numbers and perhaps there is toxic debt in other countries too, but my guess is less extreme so lest say another half a trillion.
Total World toxic debt is possibly 3 trillion US or 1.7 trillion UK pounds - estimated error bounds -30 per cent to + 100 per cent. (Error bounds - total guess!)
Two things are fairly obvious: The financial system neither knows who is holding this debt nor can it handle writing it off, and secondly, the markets today overreacted I guess because they felt that the financial institutions had managed to escape their genuine obligations and the poor(taxpayer) would be bailing out the rich once again.
The latter point is an interesting political point - will the poor sit back and be willing to be forced to bail out the rich? Probably, but also probably not without the rise of extremism on the right and the left as happened in the thirties, but started after the crash of 1907.
One final note and aside - I find it interesting and possibly curious that you chose the lead your paragraph with the phrase 'what can be done' - I find this is disturbing similar to the phrase and title of his pamphlet by Vladimir Ilyich (Lenin) usually translated as 'What is to be done'? to quote from (the English translation as the rules prevent me quoting the Russian) pre penultimate paragraph 'that (Russian) Social-Democracy will emerge from the crisis in the full flower of manhood'!
(I digress into Lenin's writings to illustrate the risks that the previous similar financial crash gave rise to and might do again.)
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Menedemus;
I've always said few if any Europeans actually understand America. First of all, both political parties are 100% Capitalists lock stock and barrel. There is only a tiny fraction of one percent of Americans who do not support Capitalism, so small they just don't count. Most Americans in one way or another own shares of stock in private companies. The differences in views are in the way captial markets are regulated and what social benefits the government will and won't provide at taxpayer expense and to what extent. Therefore both parties can be said to support what some term a "mixed economy" or welfare state. Republicans support social security, Medicare and no Democrats are in favor of nationalizing any industry including the medical industry (well perhaps the medical insurance industry.) But in fact, with few exceptions such as the US Post Office, the country is entirely Capitalist, that is the government does not own the means to create or distribute production of materials and services, ie wealth. That is entirely in private hands. (I'm talking about the Federal government, I once read there are over 70,000 governments in the US.)
The Republican party has traditionally been the party of laissez-faire capitalism, low taxes, little government regulation, minimal government social services. The Democrats are more in favor of social re-engineering and government services. But these are not hard and fast rules and don't expect American politicians to fit a mold. The Democrats are not Labour and the Republicans are not the Tories. American politics are a continuum and elected oficials are individuals, not slaves to doctrine or party policy. American politics is extremely nuanced. Republicans would not allow capital markets to go completely unchecked. Even they see that is how the great depression got started. Democrats would not completetly regulate competition out of existance either, that is a sure road to a failed socialist economy. This nuance is why people often disagree on many issues with those they support and why they sometimes support policies of those in the other party and oppose policies supported by the majority of their own party. Good thing the government won't fall when they do. For example, it is not unusual for someone to be fiscally conservative yet support abortion. Also, Americans are practical people and will set aside their pet political theories in an emergency. They want what works, not what some party dictat requires of them. Right now many Republican conservatives will say they support government intervention in the capital markets althought they don't like it because to do otherwise is to risk ruin of the entire economic structure of the Western world. Yet others will stick to their non interventionist guns saying that private companies no matter how big or powerful should be allowed to rise and fall based on the success or failure of their own company policies no matter what the consequences. There will be Democrats who will differ with each other on this as well.
The failings of the market was not the result of greed for money but that it went completely unchecked. But it is only money. What the Constitution sees as far more malovalent is greed for political power and in that regard, it strongly puts checks and balances on every branch of government. This means that for the US government to avoid being paralyzed, its participants must cooperate with each other. And ultimately being reasonable, they are forced to whether they like it or not.
The fact that few if any or our representatives in government saw this crisis coming and virtually none sounded the alarm before it happened demonstrates that they didn't understand it, they didn't learn the lessons of history. This means that while McCain's experience over many years did not give him insight into the economy, Obama's inexperience proves no matter how confident he is, he's no better or smarter. Everyone's vision is 20-20....when they are looking in the rear view mirror.
The proposed intervention which will happen is not a matter of political expedency but of economic expediency and survival. The nation's economy is caught between a rock and a hard place. If it doesn't intervene with huge amounts of cash that it doesn't have, private debt will bankrupt the economy and we will have a depression. If it does intervene, it will have to get that cash from somewhere and that will come from the same place it always has, it will simply print it. If it doesn't, the only way to pay these debts off would be to raise taxes to the point where the economy would crash into depression anyway. With no money left to spend on cars, TV sets, vacations, or to invest in business or even run a business, bankrupcies would soar and the private economy would shut down just like it did in the great depression of the 1930s. Credit is the mother's milk of capitalism, the oil which greases the skids of the economy. That is why catastrophic failure in the credit market is such cause for panic. The Federal Reserve and the Treasury have resisted the only alternative for as long as it could. Now the Treasury has no choice, it must print money far beyond the rate of real economic growth to make it possible to pay down this debt or the economy not only won't grow, it will sharply contract. That means anyone holding fixed rate dollar demoninated debts such as fixed rate mortgages like banks and foreign governments who hold US Treasury obligations will be paid back with dollars that have much less buying power than they did when they assumed that debt. There's an old saying that if you owe a bank a million dollars, you are in trouble. If you owe a bank a billion dollars, the bank is in trouble.
Did I see this coming? Yes. As I said above, despite difference in the details, this in many ways is nearly an exact parallel to the stock market crash of 1929 only this time we have a model to understand what is happening. That is why earlier this year, I refinanced my house getting as much cash at a fixed rate as I could get my hands on. If nothing else, it will eventually earn more interest than I will pay out on it after the inflationary spiral takes it toll on interest rates. Also I've stayed out of the stock market which will likely go into a tailspin as the currency deflates. It's an old saw on Wall Street, when interest rates are high, stocks will die. I own some houses which I do not live in and which have almost no debt on them. I'll hold these until the crisis is over, maybe two to four years more. They are very desirable properties (like buying stocks, buying a house means you should consider the investment potential of it as a financial asset as well as whether or not you like it) and they should go way up in value on the next up leg of the housing boom/bust cycle. They were just too good to get rid of before this hit. Also, when we have price inflation, there will be a round of wage inflation which wil make it much easier to pay off my newly increased debt. Fortunately I work at a profession which is and will be in critical demand. I expect there to be even higher wages for it than there already is.)
BTW, the Treasury doesn't actually create most money by printing paper currency, we just say that metaphorically. Besides the impracticality of it, it is far too inefficient. It's actually done by computer. This is the sovereign power those nations which joined the Euro zone gave up to the European Central Bank so that Europeans would not be inconvenienced by having to change currencies when they crossed borders or did business outside their own territory. Brits should feel lucky that they still have at least this left to them even if they don't have the huge economic clout the US has. They can separate themselves from whatever ERM and other financial handcuffs they've gotten themselves into with the EU and still have at least some control over their own destiny. The other EU countries don't have that luxury anymore, they are forced to bear whatever burden the ECB imposes on them.
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John_from_Hendon
Excuse me for laughing, your posting was actually funny. The answers to your questions are the cruelest of ironies.
"Why is the situation unknown?"
The beauty of he scheme was that the instruments of deceit were deliberately made so complex, nobody could understand them (just like the EU constitution.) For each financial institution to trace back each and every exposure they have in these bundled instruments, they'd be looking for a box full of needles in a haystack the size of Mount Everest. What's more, even if they could fugure out how many of the loans they have are likely to default because they never should have been made in the first place, they have no way to know how many which would otherwise have been perfectly safe will also go into default because of the consequential change to the economic fundimentals and the credit collapse will cause. The banks do not have systems in place to retroactively do their due dilligence on all of the complex instruments they own. Not only would acquiring them take a lot of time and cost a great deal of money but they would only prove that the top management and boards of directors were asleep at the switch when all of that was going on under their noses. That's the last thing they want to prove. So the best they can do now is to sit back and pray that somehow they get through this mess alive. That is far from certain.
Enron and Worldcom are two entirely different situations. Enron was a kind of prototype for this scheme to hide losses. But Enron was a scheme to hide losses retroactively by creating subsidiaries, partnerships, and other entities whose books would show the losses but would not be reflected in their own books they showed shareholders and the SEC. This credit scheme was designed to hide losses proactively, before they actually materialized. Worldcom was a combination of investment stupidity, hype, and acounting fraud. I had an up front seat at the competition in ATandT. The stupidity came when Worldcom bought MCI for 42 billion dollars when British Telecom shareholders were in open revolt when they tried to buy it for 21 billion and it was in renegotiation for 18. Not only was Worldcom stupid for buying it at this insane price but the banks were stupid for lending it the money to do it with. They believed the hype right up to the end. Then there was the hype about the internet and how it was doubling in size every 100 days, a false claim. The accounting fraud was very simple and easy for regulators to catch once Worldcom's own internal auditors reported it. They booked expenses as capital investments. That made the company seem to be worth more and at the same time cost less to run. It also had listed on its books among its 129 billion in assets 50 billion in "good will." Hahahahah. Talk about hubris. The Canadian born milkman turned gym teacher, turned evangalist turned entrepreneur will spend the rest of his life in jail for it while his lieutenants in Worldcom's accounting department turned states evidence are being let off with just ten years in prison. Ironically, it was Worldcom's advertising fraud which lead to the final nail in its coffin. They advertised 10 cents a minute for long distance phone calls anywher in the US but unsaid was that this was only for nights and weekends, it was 25 cents for normal business hours, the highest in the industry. C. Michael Armstrong at the helm of ATandT had had enough of Worldcom's games. He cut his rates to 7 cents a minute anytime anywhere. This essentially bankrupted the entire long distance telephone industry as those rates could not pay off the huge capital investments that had been made for equipment and facilities upgrades by the long distance companies.
One ironic thing to consider in the current mess is that the current chairman of the Federal Reserve Bernanke along with the highly regarded Alan Greenspan were the chief advocates of the lax regulations that created the mess we're in. They also advocated and got a sharp reduction in the number of regulators and their budget. Now it is up to these same people like Bernanke to fix it. Of all the people to have to put your faith and trust in when you are in a crisis.
You say the poor will bail out the rich. That is also very funny. How? Everyone is broke. Their main assets if they have any left are their homes which they can't sell. With no credit because the banks won't give them any and scraping along as it is to pay mortgages and real estate taxes (or rents), utility bills, car payments, credit card debts, medical insurance (sometimes) gasoline, how are they going to pay higher taxes to bail out the rich? They can't. That is why the only choice left is to print more money and take it out of the hides of the banks themselves. It's going to kill them. 40 cents, 30 cents, even 20 cents back on the dollar in real dollar amounts is what they are going to get on those now worthless investments.
Charlie Rose had Greenberg, the founder of AIG who built it up into the tower of financial power it became on his program at least twice this week. Greenberg left awhile back and formed another company which is AIG's largest shareholder. He did not get a seat at the Treasury Department's table last weekend when its fate was decided. He was like a beaten puppy, this pathetic old man seeing his life's work about to crumble before his very eyes. For him it wasn't about money, it was about ego. His ego is crushed and he will live denying to himself and the world until the day he dies that his own incompetence was to a large measure the cause of its demise. His life is now like a Greek tragedy.
As for banks trusting one another's balance sheets, the SEC will be having a field day looking into the bond rating services like Moodys. There again, the likely failure was due to laziness rather than deliberate fraud. It's easy to just say that a bank Like Lehman Brothers bonds are AAA rated the way they have been for most of their 158 years than to sift through tens of thousands of deliberately confusing documents and ask lots of questions nobody at the firm can probably answer anyway.
One more irony of this episode is that when it is over, when the dust finally settles, the US in all likelihood will be the last man standing because when all is said and done, it is the one place which you can be certain will not have a political revolution, a radical new form of government that would see Capitalism as its enemy. For that reason, regardless of what upheavals it will go through and they will likely be huge, it will remain the one place people can count on where their money (and their lives if they can get there) will be reltively safest.
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#10 Marcus
1. Enron and Worldcom and the present Credit crunch are possible due to the acquiescence of accountancy systems and accountants. Nothing was implemented, or was sufficiently implemented, after Enron etc that should have stopped the credit crunch occurring - the complexity should not have been permitted - everybody concerned should have had to have shown the full liabilities on their books - if they had had to do this then there would have had no advantage to the complex schemes. Hence accountancy has to take part of the blame.
I the regulators and professional accountants had insisted that these off-balance sheet liquidity generation schemes had to be kept at full value on the books of the banks then they would not have engaged in theses hugely destructive toxic funding schemes.
2. Poor vs Rich The tax take from the non-rich is far higher than that from the rich and in consequence the vast majority of tax dollars will result from the taxes taken from the poor. The proposed Poulson scheme will 'give' (use) this money to support the rich - if you do not accept this there is something wrong with your arithmetic! It also appears the Poulson money will help the bankers not those who took out the NIJA, or in the UK, liar-loans. You are surely not arguing that bankers and wall street financiers are not rich?
Your advocated solution of printing money may occur but that will also hurt the poor more than the rich as it will reduce the value of the dollar and reduce the spending power of the less well off as against that of the rich - here the poor also pay. I also do not like the idea that you find it acceptable to laugh at the poor. That will not get you, or the part you support elected as there are again more poor than there and rich.
3. Your point about AAA rated bonds reinforces the point I made about the responsibility for permitting the complexity in the first place - this is the same complexity that allowed Enron and Worldcom.
4. The USA will not be the last man standing - China will be and your 'super-power' status will most firmly be a subject studied in the history books, just like the Roman and British empires. Learn Chinese so that you can obtain goods at favourable prices!
5. Your point about the situation being unknown is rooted in your inability to grasp the concept of making reasoned estimates - everything is possible to be evaluated - perhaps not accurately but it is possible to make reasoned estimates. There is a reasonably well established mathematical concept of asymptotics where by even if an answer is unknowable with a high degree of accuracy due, generally, to complexity it is possible to establish bound to the problem and its values.
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John_From_Hendon
First of all, I am not laughing at the poor. I'm laughing at the situation. I'm sorry you fail to see all of the irony in it I do. I also do not subscribe to your thesis of dialectic materialism, in other words I am not a Communist nor a Socialist. Those systems have proven to be utter failures every single time they were tried. They are inherently flawed if for no other reason than they do not take into account the basic elements of human nature of greed for power and money. That is why they are so easily and inevitably corrupted.
It can't be denied that the corporate accountants were well ahead of the regulators in devising schemes so complex the regulators could not hope to discover them easily, make them illegal, and force them to open their books keeping them in a manner that is clear for others to understand. In fact that is what is being talked about a great deal now but in the current circumstances, this is like closing the barn door after the horse has gone.
It is also true that lawmakers on both sides of the political aisle and presidents of both parties as well were complicit in breaking down the barriers to these deceptions, and reducing the government's resources to uncover them. In a democracy more than any other form of government, people get the government they deserve. Remember that the people who created the situation that allowed this to happen were voted into office. Whether the electorate holds them accountable for the mess is the next question.
Enron, Worldcom, and the current financial crisis are different situations which should not be confused. Worldcom was the result of a very simple accounting fraud. The official account puts the loss at 11 billion dollars over 3 years but my own analysis is that it was far closer to somewhere between 75 and 100 billion. Enron was a one billion dollar scheme to hide losses through a very complex maze of schemes. It isn't clear that all of them were illegal based on accounting laws. These losses were hidden after the fact. The current mess is an entirely different matter. Enron and Worldcom each affected one company in one industry and while it was suggestive of more widespread abuses, in itself the damage was relatively limited. This is an entirely different matter. Under the law, it is not clear that fraud was actually committed. In fact it isn't even clear that the bond rating services incompetence rises to the level of fraud which is not to say that there won't be civil suits. But it is for the DOJ and the courts to decide if and how fraud was committed. It is not against the law to lend people your own money when you know probably they won't be able to pay it back. It's for the courts to decide if it is a crime in the legal sense to do it with someone elses money. Or to recklessly buy instruments constructed of what were the results of indifferent lending. Here the hiding of losses was proactive, not retroactive as in Enron or Worldcom. And the consequences are so massive because they attack the financial underpinnings of all other industries all over the world, they are in an entirely different league than Enron or Worldcom. In fact this has resulted in a worldwide effort now to deal with it and hardly an inconsiderable one. But it is still not clear if it will even work.
Are bankers on Wall Street rich? I presume most of them are. I also presume many are no longer as rich as they were just a short while ago or as they expected to be. If you are looking for me to join a crusade against people being rich as part of a class war you feel represents social justice you are barking up the wrong tree. Maybe that song plays well in Europe or South America but it is very out of tune in the US. Those of us who are not rich do not hate or resent the rich, we aspire to join them through our own efforts. Perhaps that's one more difference between the mentality of Europe and America.
Will the poor suffer more than the rich? I don't know? The poor don't have as far to fall as the rich do and believe it or not, while America does not have the kinds of social safety nets Europe has bought on money it doesn't have either, people will not be allowed to starve to death, live out on the streets, or die from lack of access to medical care in the US. But huge piles of stocks and bonds held by the wealthy as well as real estate may become all but worthless. So I don't know the answer to that question.
Your point about complexity is a poor one. The issue is not complexity, it is transparency. It's not merely that the instruments were too complex to understand, in time we could have learned to decipher them. The problem was that much of the required information was not supplied by the seller of the instrument nor demanded of the buyer. If a buyer of one of these instruments knew that 90% of the loans in them were given to people for which no due dilligence had been done to ascertain whether or not the borrowers had much chance of paying them back, now many of them do you think would have been sold?
China depends on exports to countries who have markets with the resources to buy its cheap disposable discretionary low cost junk products like electronic toys and textiles. It must also rely on foreign credit because its own banking system is another pile of junk. Without a place to sell its goods because most people in more affluent nations like the US will not be giving expenisve Christmas presents this year because their Christmas present to themselves is to pay the heating bill or buy a couple of tankfulls of gasoline, and no access to foreign credit because there isn't any, China Inc would go broke. There are other reasons why China's days as a dominant econoomic power are numbered too but I won't go into them now.
More people have spent more time and effort trying to create mathematical models of the US and world Economies in the US than you can imagine. They have every tool our technology can make available to them but even they are throwing up their hands at the size and precise nature of the problem. For you to glibly say we can make good guestimates is just plain foolishness. What you are implying is that every economist who misjudged the size of this problem up to this point was a deliberate liar. I just don't buy that. If you are getting your numbers from the media now, what makes you think they are any more accurate or reliable than the numbers you got six months or a year ago?
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#12 Marcus
On China
It is entirely wrong to characterise products from China (as you do above) as "cheap disposable discretionary low cost junk products like electronic toys and textiles".
China makes and designs high quality state of the art products and ships them to the USA where you use a screwdriver to assemble them, or simply run a distribution depot. You are about twenty years out of date.
On Accountants
It is not only the Corporate Accounts who are culpable it is the Professional Accountants (and Lawyers) who allowed the corporations to get away with using such complex products (as in Enron) to evade proper accounting disciplines. Enron's schemes were devised on the premise that they were legal (even through they were not), just as the artificial constructions behind the range of synthetic financial instruments were devised to be within the law.
It is not about what is or was legal it is about acceptable professional probity and standards and it seems quite reasonable to question these in the current situation. There are standards of probity that do not require the matter to be explicitly illegal for a professional accountant to at least raise a professional eyebrow and there is very little evidence in the public domain that any of the major auditors questioned any of the schemes that are presently brining the World to its financial knees.
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John_from_Hendon
You are wrong about China. The best products made in China are designed elsewhere, in the US, Japan, and on rare occasion in Europe. Can you name one innovative computer chip such as a CPU which was designed in China? We manufacture them there because the physical process is so dangerous and involves the use of countless highly toxic chemicals. Can you name a major software product designed in China? How about a breakthrough in robotics. A miracle drug? Most of what China knows how to do was the result of a deliberate transfer of technology. Twenty years ago, we wouldn't allow PCs to be sold to China because they were considered to have military potential. But now when many a ten year old American can assemble one in an hour, we didn't think twice about IBM selling its entire PC business to Lenovo. VCRs, DVDs, television sets, this is the kind of junk I am talking about. They can't even build a decent car that would sell on the US market unless GM or Ford shows them how. We'll let Boeing subcontract assembling parts of civilian airplanes there....under very strict supervison. But the real high tech cutting edge stuff stays in the USA unless spies steal it.
China depends on both foreign capital and foreign consumer export markets to stay afloat. Period. They'd be the last to deny that. Profit margins on this stuff is slim. If they try to increase it, those factories including the ones Chinese own themselves will just pick up and move somewhere even cheaper.
I'm not going to argue what is legal, illegal, immoral, or fattening about various financial schemes corporations and individuals invent in the US. I'm just going to point out to you that the best lawyers and accountants don't work for the government because that is not where the money is to be made. The people they do work for expect them to invent methods and products which will keep them out of jail even if they are just one step on the right side of the law and ever profitable....at least for the next quarterly report. Some in their zeal (or desperation when their schemes fail) will stray over the line. In case you don't know much about the economic history of the US, something like this happens about every ten years. There were real estate bubbles in the 90s, the early 80s and all kinds of other schemes like derivitives and structured notes nobody had ever heard of before they blew up. Some of the largest American corporations fell prey to them, they even outsmart each other We have gone long past the time when we could rely on just simple transactions any 11 year old could understand and we can't and won't go back. This one will be fixed with much pain and careful legislative planning to prevent it from ever happening again. Meanwhile, its inventors or people like them are probably already inventing the seeds for the next generation of financial products that will create the next disaster in 10 to 15 years. Always happens. And the people who supposedly were the brightest in understanding the markets will be among those who lose the most in it. That's one beauty of capitalism, it is infinitely inventive.
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"Why Panic?"
Having read many books about the stock market and investing and seen many TV programs about it as well, (Wall Street Week was great when Louis Rukeyer was on and I've watched probably thousands of hours of CNBC) I've noticed that when the stock market is in trouble and stocks take a sudden downturn, the so called experts who come on always advise viewers not to panic. Not to sell out. Yet thinking about the stock market crash of 1929 and perhaps a few other lesser incidents, at least on that September 3, 1929 when the Dow lost 17% in its initial drop, panic selling and not getting back in would have been exactly the right thing to do.
http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
That would have preserved most of an investor's capital. I wonder if investors had memories longer than five minutes if any of them would trust "experts." In the words of Rukeyser that he repeated over and over again as they constantly disagreed with each other; "at least some of them will be wrong."
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#14 - MarcusAureliusII
"You are wrong about China. The best products made in China are designed elsewhere, in the US, Japan, and on rare occasion in Europe. Can you name one innovative computer chip such as a CPU which was designed in China?"
You are absolutely right but I suspect it has a lot more to do with production unit costs than health and safety.
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#14, and #16
Both of you are deceiving yourselves in believing that China does not make and design high quality products.
You rely on the supply of high quality goods from China. As an example: Just go and buy a network router, switch or high end telecoms exchange equipment from ... (I will however not advertise.) The suppliers offer standards interoperable equipment and the Chinese manufactured equipment is on a par with anything available anywhere in the World. You are trying to treat China in the same way as Japan and the Far East was treated just after the war. May I remind you which manufacturer is the biggest seller of automobiles in the USA - hint it is not American!
China is a formidable manufacturing and design threat (as seen from the USA) the main reason for this is the gigantic home market if has in China.
No self respecting technology company ignores China - I recall even IBM could no longer make PCs and sold the business to Lenovo.
I will not go on, but suffice it to say that to ignore the huge strides that China has made in moving towards overhauling the USA in all fields is ignoring the facts.
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#17 - John_from_Hendon
I don't suggest for a moment that the Chinese do not make high quality product. Almost all the technology surrounding my desk now is Chinese made. Nevertheless it is all branded product from western companies because they hold the copyrights, mainly because the original r and d was done in the west, Taiwan or Japan.
Why would the Chinese want to invest billions in r and d when they can engineer a production boom by letting someone else do the expensive work and simply manufacture?
In less high end product such as automotive, they are proving quite successful in buying western marques and the copyright which goes with them, for example Rover. In this respect, they are following India's Tata who bought Jaguar and Land Rover.
Where they will be investing heavily is in next generation technologies where they can compete directly with western developers because they can themselves register designs and eventually cut out the branding companies but I would suggest that is a decade or so away. Watch out instead for 'strategic partnerships'. The Chinese are still relatively liquid in capital terms and a credit squeeze in the west will open doors for them to buy in the design technologies they require.
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16
In the US, health and safety are a major factor in production costs. Waste water treatment plants, fume scrubbers, OSHA, EPA, building codes, law suits, and more regulations than you can possibly imagine. Do you know that now unless it would create or increase a risk to life or safety, it is no longer legal to work on energized electrical equipment no matter how much money it costs in lost production to shut it down? And then of course there is the direct and indirect costs of labor itself, 30 dollars an hour instead of 30 dollars a month.
17
China can make high quality products when Chinese workers are very carefully and closely supervised and Western standards are implimented. But they also make a lot of shoddy merchandise as well. A culture of best practice simply doesn't exist there. How could it? That is why food, toys, and all manner of goods can become contaminated with toxic chemicals and why people will die. China also does not yet have a technological infrastructure that can compete designwise with the US or Japan. It's working on it training hundreds of thousands of engineers and scientists but this does not happen overnight. It has not caught up to the US or Japan by a long shot. Europe maybe but not the others. The main technological brain trust for China is...Taiwan. Taiwan is the Silicon Valley of China. They'd be fools to blow it up.
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#19 - MarcusAureliusII
Health and Safety Regs are a minefield in Europe too (although, when someone is suspended for breaking them, we don't mean from a rope).
However, you said it yourself - 'And then of course there is the direct and indirect costs of labor itself, 30 dollars an hour instead of 30 dollars a month. '
I rest my case.
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Chinese technology and engineering at its beast is already as good as any in the World. If you do not wish to believe this I am afraid that you may find that China will not sell you its best products in the future, and the USA will have to make do with China's cast-offs!
Your derogatory statements about Chinese technology and engineering may have been correct ten years ago but there has been huge developments since.
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John_from_Hendon
Show me one example of a product of any kind that was conceived of, designed, and engineered in China which is at the cutting edge of any technology, the best of its kind available. In most cases, even the Japanese are no match for the US in this regard. By comparison, China is a joke.
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#22 Marcus
Find them yourself - start with say Huawei...
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Huawei, ho hum exactly what the world has held its breath for, a nifty modem. Today modems, tomorrow the world.
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#21 - John_from_Hendon
I really don't understand why you are taking me to task. I have not questioned the quality of Chinese technology and engineering. Far from it. In fact the techno around my office which I referred to earlier works brilliantly.
I am making an economic case which is that the Chinese are not going to invest vast sums competing with western and Japanese domination of r and d into extant technologies because they are the dominant force in producing this stuff already. It is the next generation technologies which will see the emergence of Chinese design and development expertise. Until then, their great strength will be unit production cost and upward pressure on labour costs make this an age dated benefit anyway.
To put it in a very basic way, would you put millions into redesigning the ink jet printer when you are already making a fortune building them and sticking Epson labels on them?
Thought not . . .
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Whether the Chinese can equal or surpass the cutting edge of any technology remains to be seen. So far they are just struggling with assimilating current technology. In some areas, there are factories in China, mostly built owned and supervised by foreigners that make near state of the art parts from foreign designs. But they have not yet demonstrated a home grown ability to do this on their own. My hunch is that they will partner with others who have that ability such as people in Silicon Valley USA. Some who are Chinese who spend time going to school and working in the US may come back to China when they see an opportunity to open a profitable business there. But they will in all likelihood maintain their connections to the US. It's not the same way with Europe. Europe does not afford them the opportunities. China and America have a natural affinity towards each other. And the US does not have a sordid record of having participated in the humiliating occupation of China the way Europen colonists did in the 19th century. How many Chinese people hold prominent positions in European corporations both as senior management and in the highest technical positions? In this three way game, Europe is the odd man out.
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Robin:
i agreed with your remarks about debts in any forms....
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Marcus Aurelius (26): this makes China sound a little like post-war Japan, whereas we're told it's like past and present empires.
Is China just piggy-backing off Western experience, or is it bringing something crucially new (as all empires do) to the party?
Your post gave a fascinating new slant on the taken-for-granted, that there's something 'new' about the emergence of China - is it just 'made in Taiwan' times ten?
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evenmoreloverly
As far as I can tell, right now China is a giant labor colony. That may change. I don't know when but it could. But just because parts for Lexus, Boeing, Airbus, Intel, AMD are made in China, that does not mean the same thing as Chinese scientists and engineers creating them. China is not about to design and build an A380 on its own. Nor the next generation of Pentium computer chips. India won't develop a replacement platform for Vista. They will be building LG LCD Television sets, Pioneer home theater receivers and Haier air conditioners and refrigerators. They may even build versions of Caterpillar back hoes and earth movers. The next robot going go Mars will not be designed in China. (It might be designed in Japan though.)
We buy China's labor for lots of good reasons but the bottom line is that it is cheap and does what we tell it to. It doesn't complain and if it's abused there is nothing they can do about it. If they try, we'll buy labor somewhere else. The way things are going in the world of finance, we may soon be unable to even afford to buy those LCD television sets and HT receivers. We'll be too worried about our heating bills, our mortgage payments, and our jobs. When that happens, a lot of people in China who invested in plants to produce these products will go out of business and their fragile stock market will crash. It's coming, it has been coming for a long time. I can tell you that right now eveyone is scared. The United States government is scared. When they are scared it's time for everyone else to worry. We've got a lot more to fear than fear itself.
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#24 Marcus...
"Today modems, tomorrow the world"
Also look at the hardware that runs the telecommunications systems of the World. They also provide state of the art in-house designed telecommunications switches and infrastructure that are type approved by the majority of the World's telecommunications operators - some modem eh! Last I heard they has ten times the number of design engineers in China, (and in Bangalore, India), than any US company can muster, and better qualified too. Do not underestimate the Chinese.
Rather yesterday Modems today the World!
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#25 threnodio
Sorry, it was MA's comments on China that were my target.
The point you make about relative labour costs (China vs Europe) is one that I believe is important. The yuan at about 15 to the pound is far too undervalued - once it reaches 7 or so then the rest of the World will be able to manufacture once again. Let us say in 20 years or so.
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Now if they can just figure out how to keep the poison out of the baby food.
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MA2(29): Thanks. Your key phrase "we'll buy labour somewhere else" - is it therefore The Same Old Order? Credit Crunch aside, has nothing changed???
Is the Big Story of early 21stC history (the emergence of China) just chimera - is Western Empire simply re-orienting itself?
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wouldn'titbeloverly
Don't be naive. China has something to sell American industry wants. A limitless supply of cheap disposable labor. Capitalism is a symbiotic relationship. Some might see it as exploitation when in fact it is trade. While it is true many will die as the result of Western industrial investment and the resulting pollution, many more would have died left to live as an agrarian society subject to periodic famines. Contrary to what you see in the movies, it takes generations for a society to develop from the primitive state China was in in the 1970s to a modern industrial state. China is headed in that direction and may at times show surprising advances in one area or another but on the whole, it is still catching up. Perhaps in another generation or two it will get there but even China knows it has a lot of work to do. From our point of view, we never could have manufactured anything like the quantity of goods or anywhere near the price we've paid for them had we tried to keep these jobs in the USA. One question which has to be asked is how much of China's GDP actually stay in China to be reinvested and how much is repatriated to western countries to be distributed as profits to shareholders? For that I think GNP is a better indicator.
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#34 Marcus
I read that you still have an out of date image of China.
MA wrote:
"how much is repatriated to western countries to be distributed as profits to shareholders"
Chinese companies are owned by the Chinese and it is extremely difficult to 'repatriated' 'profits', particularly when the profits are made in China by Chinese people and organisations owned by Chinese shareholders. Hasn't it occurred to you that this is the reason that the Chinese banks have accumulated large investment portfolios and (rather unwisely) lend money to the USA Treasury to finance Treasury Bonds? You, the USA are living of of money borrowed from the Chinese. The economic power is with the Chinese not the USA.
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So you think that Intel and GM and Boeing just set up factories and created jobs to help China prosper and don't make any profits out of that work that falls into the hands of its shareholders around the world. What planet do you live on? I heard one Chinese manufacturer on a BBC program lament that of every dollar earned in China by foreign owned investors, only ten cents remains in the country.
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MA2: I think you misread my 34. As for naivety: "some might see it as exploitation when in fact it is trade". On planet Earth, we use the word trade purely as a euphemism for exploitation; it's all theft in the end.
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evenmorelovely, so if you have something to sell and I pay you money for it, you are exploiting me? How do you earn a living then? What products or services do you provide which you use to exploit other people?
(I just love it when I run across people who reject capitalism. They have such wonderful theories about how the world should be run...and every time one of them that was ever tried it ended in disaster.)
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evenmorelovely
You seem to be suggesting the old 'work horse' that property is theft. In fact you cannot steal something which did not belong to someone else in the first place. Property in its broadest sense is the basis of all economic activity and the idea that you can sustain an economic model without it is pure cloud cuckoo land.
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threnodio: I didn't suggest any such thing.
MA2:"people who reject capitalism" - you need literacy lessons. Capitalism is a necessary evil. Only from this perspective can we address (or even be aware of) the injustices that concerned you in your post 29.
Capitalism is the best economic model, but there has to be a power-relationship in any form of bartering; that's not Marxist frothing - equality in any relationship is Not Possible. There has to be a victim, there has to be an exploitee.
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notquitesolovelyanymore
Your cynical views reflect bitter disappointment in life. You think that someone somehow owes you something you were cheated out of and that is how the world works all the time everywhere. I'm glad that's not my problem also. This dark side will sadden the sunniest day.
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On an upfront side-note, #40
"There has to be a victim, there has to be an exploitee."
All I have to say about that is ... phenomenal choice of words.
You know, 200 years ago, I doubt we had a grasp on any sort of real economic concepts. If we were to carry on for another 500 years -I have to imagine that means we somehow stumble out of the dark into light- I doubt capitalism and offenders, and victims will still be standing as the best economic model. I not going to pretend that I know anything about economics but, anything that is based off of growth is going to ultimately fail. Because, as we are finding out, there are limits to growth. Over population, pollution, nothing ... as far as we know grows forever. It is doomed to fail. Someone somewhere will hopefully come up with a sustainable market formula/model that will make those without not feel like they will be forever under the boot of those with, and still have avenues for those without to become someone with.
But anyway, I just wanted to say this,
F.B.I. --- now, this is getting really interesting.
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***
correction
Because, as we are finding out, there are limits to growth. Over population, pollution, nothing ... as far as we know* **nothing*** grows forever.
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Robin, while I am writing this comment I am watching the CSPAN (public) network broadcast of Senate hearings with Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson. Last week, we were informed by these two "leaders" that unless the Federal government extends $700 billion to buy up all of the bad subprime and Alt-A mortgage loans that are clogging the banks and dragging down their balance sheets, we could be facing a collapse of the financial system. They want Congress to approve this emergency appropriation in one week and want extraordinary powers to administer this handout of funds to the private banking system. Not all banks are involved but many of the largest such as Citigroup, JP Morgan, Bank of America, etc are certainly on tap to be "rescued." Like me, many ordinary Americans are alarmed by this emergency handout request and want to have more answers to questions too numerous to list here. As for me I think I am better informed about this financial crisis than most other people because I am retired and have the time to search and read the news and commentators who are very knowledgable about what is happening. Right now I am beginning to suspect that this bailout could be one of the biggest bank robberies which is about to occur in US history. This sounds extreme but I have reason to believe that this bailout will create bigger problems that the problems it is supposedly setup to solve. Remember that the financial crisis has been ongoing since August 2007. It is a fact that Paulson and Bernanke totally underestimated the severity of the financial problems during the past year.
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expertsceptic, I think most of Congress knows this and strong opposition to it is coming from both sides of the aisles. If this were a Parliamentary system, it would have been a done deal. The PM would have said this is what the Chancellor of the Eschequeur says we need to do and his rubber stamp majority would hve voted into law with little more than grumbling. But that is not going to happen here. As this 3 page "proposal" stands, it isn't going anywhere. Congress will not give anyone the keys to what is left of the kingdom. Democrats want to know what is in it for the taxpayer and the homeowner who risks forecolsure. They also want an end to multimillion dollar golden parachutes for execs who wrecked their companies. Republicans are calling it socialism and say the market should sort it out itself. Me, I want to know why the US taxpayer will be told to bail out foreign banks. All that Paulsen and Bernanke said is that this is the only way to stave off collapse and it has to be done right now. Congress isn't buying it. The Republicans are saying let it collapse. Democrats want to know what the real numbers will be and if 700 billion is just the first installment. Both sides want complete oversight and control over the process, they do not and will not trust the Treasury with this much power. How long it takes to make something happen will depend on when the Administration stops playing chicken little and gets down to the business of composing a viable plan that makes sense to Congress and the public. The days when the banks had it all their way I think are over.
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Turn the W in W.M.D. upside down, and what do you get?
Money of Mass Destruction.
Nobody till even has a real grip on what's going on and to what extent. I an not terribly frightened by the situation. Where I live in the states has, what seems to me as, a fairly strong and more independent economy. However, I am still fearful of where this current situation is taking us, and how long I along with everyone else will be paying for it. And I'm also afraid of where it means we are, on an ethical level.
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Pharbin77
The people who should pay for this fiasco are the shareholders of the institutions who bought these worthless loans. That is what capitalism is about, you buy part of a business, you share in its profits or losses. If the people who run your business are incompetent, then you made a bad investment. Now the Treasury is telling us, the taxpayers to bail out the shareholders, the employees, the top management, the board of directors to the tune of probably before it is over, trillions of dollars. If the US government is going to buy these homes and mortgages, they should pay what they are probably worth, about 25 cents on the dollar, no more. Let the banks, insurance companies, and other reckless lenders and the "investors" who were asleep at the switch buying their stocks and bonds eat the cost of it till they choke. If there is all this money out there to buy these properties, then that money can be used to supply the credit that failure of these institutions will otherwise leave unmet. The best assurance that it won't happen again is the example of the ones that made these mistakes going broke and losing everything. That is after all what market self regulation is all about.
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No matter of what course of action is taken by congress, lots of people that had nothing to do with the unethical decisions made by an elite few (one of your favorite terms), will in fact be paying for catastrophic results.
I think it pretty safe to say, no matter where one stands politically, or by any other means of differentiating people, that there is no question something utterly, profoundly, deeply wrong ... has occurred within our financial system. If we bail them out, no matter how hard the shock-wave of their fall/failure, it is no longer capitalism ...
it is communism.
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I was just thinking, how this brings a entirely new meaning to the term "Corporate America." "We" keep trying to live on money that we do not have. We are in a war, that is costing more than we can afford (on multipule levels). Are we going to pull our heads out of the sand before it is too late?
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Pharbin77, if we weren't shackled by this sanctimonious morality about killing innocent people, World war IV would be over already and have cost us next to nothing. We have the means, we just don't have the political will. If we fought WWII this way we would have lost. In fact American hasn't won a war (unless you count the skirmish in Kosovo in 1999) since WWII.
I'm sick and tired of this need to bail out eveyone and everything at American taxpayer expense. The banks and finance institutions wanted deregulation, they got it. Now let them live with the consequences of being stupid, crooked, or both. If we need credit, let the taxpayers finance projects directly with the money the Treasury, Fed, and Administration want to bail out the banks and financiial institutions with. They are only going to make a profit on it anyway. If the US government buys all these houses, who do you think will pay for the local real estate taxes, the insurance costs, and the maintenance that doesn't go away even when nobody lives in them. Time for Citibank, Bank of America, Wachovia, and the rest to go broke where they belong and their top management should be told they have five minutes to clear out their desks and get out of the building with nothing but the shirts on their backs just the way an incompetent teller would be told.
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The way wall-street has attacked the heartbeat of our nation is in a way that those who orchestrated 9-11 could only dream of. Bail them out? No sir Mr. President, I'm an American. I'm ready to knuckle up and endure hard times so the message is clear to wall street and capitol hill ...
For the people, by the people,
Not on the backs of the people.
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Pharbin 77 (42): thanks for your nice coments.
MA2(51):"shackled by this sanctimonious morality about killing people" - and you call me bitter.
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#10, #14 Marcus
5 days ago you would not accept that there was any connection between the way that Enron and WorldCom were ran and the present situation.
But now the FBI have announced that they are looking into the same type of chicanery in Fannie Mae, Freddie Mac, Lehman Bros. and AIG. Now, (judging by your more recent posts) you appear to have been more impressed with the idea that some from of illegality may have taken place. Also your President has announced that your country is drinking at the last chance saloon.
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what a useless rant jfh
Enron and Worldcom were both criminal cases but the crimes were entirely different in the specific nature of the crimes. Worldcom's was easy to understand, Enron's was far more complex. Ironically, Worldcom's involved a lot more money. The FBI has begun investigating what if any crimes were comitted in this latest credit fiasco. If there were, it is yet to be determined to what extent crime was a decisive factor in creating a crisis of this magnitude and what kind of crime it was. My hunch is that in some cases fraud will be found to be a crime on both on the borrowers' part and the lenders' part. But the nature of the fraud will be particular to this industry and not likely similar to either Worldcom or Enron. There may ultimately be crimes discovered to have been comitted by the bond rating services but more likely I think that the errors will turn out to be mostly the result of negligence.
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Four years ago my 18year-old daughter was given a£500 overdraught without asking for it. I went to the Bank and asked what they thought they were doing offering an overdraught to someone who hadn't been earning long enough to prove themselves credit-worthy. I pointed out that I had been a longterm saver and wouldn't lend to someone as green as a school-leaver. The MANAGER said his Bank was looking for borrowers, not savers.
A Credit Crunch in the making.
Last year I went to HSBC for advice on where to invest £100000. I was given a 20 minute appointment - fair enough. But absolutely no follow-up and no written recommendations.
Also went to Alliance and Leicester for a Friday, 4.30 appointment. The "advisor" was obviously desparate to be out the door. I asked him if he would put his advice in writing. So he did, on the back of an envelope, there and then.
I also went to see a Partner of a reputable independent company in March 1999 for advice. He "still thought it was a good time to buy shares"!!
The advice from "professionals" has all been the same - put a third of your assets in shares because historically, shares outstrip other savings.
What do I think? I care more about my money than any professional who's after the commission. And don't buy Shares unless you can afford to lose the lot. I went for Guarunteed Bonds. And Cash ISAs grow surely year on year. Most of the rest is in High Street or internet accounts for now, so I can get it out quick.
My Dad was a Bank Manager. He'd be turning in his grave if he saw the mess today. He judged people who came for loans face to face. His written recommendations to Head Office would include phrases like "this man has good hands" (regarding a builder). How can a computer judge character or determination or honest willingness to work?
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Well-said, Pharbin 77.
No bailing out of the banks. If Congress bails them out it'll be true that the Banks rule the world.
The biggest theft ever. And all done with a hand-shake!
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