It’s a scary buzzphrase we’re hearing a lot lately, but is it really something to worry about? I’m way over my head here, as economics is something that doesn’t interest me at all, and I haven’t spent much time reading or learning about it. I’ve never even had an econ class, besides that day we talked about Adam Smith in government class 15 years ago. The extent of my knowledge is probably what I’ve picked up from cutural background noise and reading Freakanomics, much of which I :dubious:'ed at.
But my question is, isn’t money kind of . . . made up? I realize it’s a lot more complicated than that but bear with me here. Money is just pieces of paper we print (and really probably moreso these days, digits in a computer) that only has the value we give it. Could we all go poor at once? There is no less money in the world now than there was a couple years ago when everyone was doing great. And if this is a credit crisis, well, won’t it at some point stand to reason that, in order to stay in business, creditors will have to give credit? Wouldn’t the system self-correct at some point, before it self-destructs?
Are people ultimately driving this crisis or allowing this to happen - presumably meaning they stand to gain something (what?), or is this a beast that has grown out of our control - and at what point will it realize it can’t eat itself and calm down?
Well actually, banks can ‘create’ money by lending more than they have in assets. So since banks have become more carefull in their lending, there is less money going around as before. Also the worth of stocks is derived from the expected yield in the future, with this crises this has decreased dramatically (an thus also the worth of stock). Since this stock can be used as colateral for loans, there is again less lending. The main point is that banks (through lending) play an important role in the ‘amount’ of money there is.
Creditors do make money by lending it, but only when this is repayed. If banks decide, as was bound to happen after the whole mortage fiasco, to take less risks with their lending, this will mean they will have smaller profits, but also that there will be less money goig around. You should also not forget that it is very difficult for businesses to be a safe option for banks. The only way they will be repayed is if the company’s investment is succesfull, with the current situation it is very hard to convince a bank that you are going to sell a lot of stuff.
As for your last point, I vote for the beast. Most actors are acting rationally - being carefull in lending, selling stock because it looks like going down further, etc. - which has spiralling eefect on the economies in general. This is why all these countries are talking about stimulus packages; they are trying to brake the spiral.
My usual response is to this question is to suggest that the questioner buy some assless chaps, a motorcycle, and a crossbow to prepare for the end of times, but let’s see if I can give this a shot:
Here’s the thing: human economic interaction is based on promises.
Some of these promises are simple: “Hey, if you paint this fence, I’ll give you a hundred dollars.” The fence is painted, the dollars are exchanged, and the transaction is completed. Easy-peasy. But big transactions can’t be completed so quickly. The promises are larger, both in dollar value and in the time it takes for the promise to be fulfilled. Think about a huge investment for a person, like buying a house. A 30 year mortgage is a guarantee that you will be forking over a steady flow of cash for more than a third of your lifetime.
And even a nation’s currency represents a promise. The US government borrows dollars from individuals, banks, and other governments, and the guarantee is that when the time comes for the government to make good on that debt, it will be paying back the debt with dollars that are still valuable. The Federal Reserve could, in fact, just start running the printing presses hot to pay back all of that debt with a bunch of useless green pieces of paper. But after that, trust would be completely annihilated. And with that trust gone, the world economy would fall apart.
This means a collapse of world trade. Why would they send oil to us if we give them worthless paper in exchange for it? Why would they send us electronics? Textiles? Exotic fruit? Cheesy pieces of plastic? Those items are shipped to our country by the boatload, huge ships full of nothing but this stuff, and that huge current of transaction would start to dry up if our promises meant nothing.
This isn’t to say that you’d need to break out those assless chaps. These promises would be renegotiated on the fly as world trade collapsed. But the broken trust would make everything cost much, much more. We wouldn’t be able to afford the luxuries that we now take for granted. Our standard of living would drop precipitously, unemployment would skyrocket to Great Depression levels or even higher, and I doubt we would see our government continue as it exists now. Wars would also break out as countries sought to preserve their own citizens’ quality of life by exploiting the resources of other people, and everything would just become generally shitty for a long, long time.
So yes, we could all go poor at once. This would happen quickly if we flagrantly broke our promises and destroyed the trust that others have in us. Our wealth depends on our ability to work together.
There is much less credit now than there was before, and significant chunk of our money supply is based on credit. So yeah, in a way, there’s less money than there was before. And you can believe that the higher-ups in the Fed are having miserable sleepness nights trying to think up ways to increase the amount of money without debasing the currency and breaking our promises to our creditors. It’s an ulcer-inducing sort of problem, and I don’t envy them their jobs.
Well, obviously, the Beast is made up of a bunch of people. The weird thing is that people act collectively in ways that individuals would never do on their own. In this way, it’s certainly fair to treat the Beast as an entity in and of itself, and it makes sense to try to understand its actions on its own terms. But the deeper answer lies ultimately in human nature, in how each individual’s behavior changes as more and more of us join together into larger and larger groups, until the stampede can’t be stopped by the calm deliberations of the few.
But I’m not personally worried about collapse. Agree or disagree with the stimulus, it was proposed by experts who studied similar problems in the past and devised a solution to try to get us out of this. The next step includes reform of our financial system, which will likely involve temporary governmental stewardship over the largest banks, just as the FDIC deals with smaller banks. In addition to those problems, we need to arrange financial restructuring for key industries, such as the automakers. We also need to reform our health care system, with its costs that are spiraling out-of-control while also leaving so many people uninsured. All that accomplished, we can then finish with a move toward serious budget balancing.
We have a huge task in front of us, but we can see all the steps. We’ve taken one step. The banks are the next. It’s a mess, but we can pull this off if we stay smart and stay focused. And even if we fall down halfway, that doesn’t necessitate a total collapse. We could simply get mired in stagnation instead of having the ground beneath us disappear.
Bernanke was on TV yesterday saying the money the banks have received is sitting there. It was supposed to be loaned out to free up the system. They have not done so. I suppose he was trying to shake them up.
Even Greenspan now thinks we should nationalize some of the banks and get the system rolling again. He even thinks we need regulation. That is so far from the stupid mantra that unfettered capitalism is self correcting and good for all.
Yes, it absolutely is. Not as a cure for our current downturn, but dealing with health care costs is vital to any long term budget plans, for both the public and private sectors.
First off, Medicare can’t continue along its current path indefinitely. We need to deal with that particular entitlement, and the best way to do so would be sweeping reforms of the system in general. We spend a larger percentage of our GDP on health care than any other industrialized nation, and yet we leave a large percentage of our population uninsured. We spend significantly more money, to significantly less effect. And in looking at our overall debt problems, medical costs are the top reason for bankruptcy filings in the US. All of that has got to change. If we do it right, we can shave a couple percentage points of GDP from our medical costs, which will free up resources for other more productive uses than paying insurance companies to come up with creative new justifications for denying claims.