Okay, I thought I’d round up all the major questions that I know is on everyone’s minds about this past week into a single thread. We’re all wondering how much we should be fearing for ourselves, our families, and the institutions and businesses we hold dear, and those who think they know for sure are probably mistaken, given how complex the issues are. But all the threads so far have focused on parts of the issue; none seem to strike at the big picture; heck, I’m surprised that every thread on the front page isn’t about this (after all, why worry about anything else if we’re all about to starve?). So I thought I’d ask the key questions straight out.
I’ve read many people and reports (though admittedly, I’m completely unable to figure out how reliable they are) that say that the bailouts of the past week, and those still being planned, were necessary to prevent the nation’s entire economic system, and by extension much of the world’s, from being completely destroyed. Some even say that we came within a hairs breadth of that happening (through runs on banks and general panic). But some argue that it’s only delayed it for a time, and that it’ll still happen unless the right thing (vague on what that is, exactly) is done. (I know that not everyone agrees with this - Greenspan doesn’t, but then, a lot of folks blame him for this in the first place.)
Is this true? What’re the odds that our basic economic system is going to be destroyed? That we’re going to hit Great Depression II (is there a difference between this question and the one just before to begin with)? What exactly needs to be done, if anything? Can we trust that the right thing will be done (normally, I’d say no, but given the stakes this time, who knows)? Will our next president be key either way?
If there are other related questions that I’ve forgotten, feel free to answer them anyway.
We’ll be fine. Bernanke and Paulson will do what is necessary to avoid a Great Depression. Fed Chairman Bernanke is an expert on the 1930s. Treasury Secretary Paulson has a solid grasp of investment banking. Congress is apparently on board and Bush/Cheney have thankfully stayed out of the loop.
If their positions were currently held by Greenspan and Snow, I wouldn’t be so optimistic. We got lucky.
First, a couple of nice deep slow breaths. In and out, in and out. Good, good. Breathing is good. The overall lesson I’m going to give is “Don’t Panic” (I’ll spare you the friendly yellow letters), but you asked a lot of questions, so I’ll try to deal with them. Okay, now:
Basic economic system to be destroyed?
No. We’re gonna keep muddling on with the basic system we got. It’s due for an overhaul, sure. And we need to watch our mileage more carefully so we don’t miss the next tune-up. But the system we got right now is damn good when it’s working proper. All we have to do is get it working proper again.
Great Depression II?
Prolly not. This is the biggest financial crisis since 1929, but we know a lot more than did in the Roaring Twenties. They didn’t know what they were doing, so they got all protectionist and deflationary, which made the problem worse. We won’t. We’re not going to cut off a foot to stop a toe from bleeding.
Is the destruction of the economic system the same as GD II?
Again, no. We could probably handle another whopping depression if it comes to that. But if the economic system collapses, then the nation collapses. We’re not a country of subsistence farmers. Most of us work in cities. Our most rigorous hunting and gathering is done in the produce aisle of the local grocery store. Without a functioning international financial system, we wouldn’t be able to convince other people to send us oil. Without oil, we could not carry ourselves to and from work, and just as important, we could not transport food from the farm belt to our sprawling suburbs. This would put us in some serious shit. We’re talking Donner Party writ large. Don’t worry, though. We are not going to let that happen. This is what the government buyouts are all about.
What needs done?
Basically, we need information. We need to know how much bad debt is left out there, and then we need to quarantine it, seal it away, so that people have confidence again that the investments they make will once more return a healthy profit.
Ordinarily, the best way to get this information would be to watch these companies crash and burn, pointing and laughing at them the whole time. They made their bed, now they get to die in it. But again, this is the worst it’s been since '29, and we can’t risk a total collapse, so Uncle Sam is starting to absorb these losses. This means that we all have to pay for these mistakes. You, me, and every taxpayer. We are quite literally going to pay for the mistakes made by Wall Street.
This particular solution, the only apparent solution, sucks in so many ways I’m not sure I can list them all. Beyond the basic unfairness of it all, it also encourages other brainless Wall Street dickweeds to risk their own companies because, hey, Uncle Sam might bail them out too. This is called “moral hazard”.
So to prevent these stupid dickweeds from risking the entire nation’s economy in the future, we’re going to regulate them again. An unregulated financial sector gripped by overwhelming short-sightedness and greed is susceptible to market failure, and that is flatly unacceptable. They need their regulations, same as a growing kid needs broccoli. They’ll hate it and they might try to resist, but if we have to, we’ll force it down their gullets like they’re fois gras ducks. That’s the price of accepting god knows how many hundreds of billions of dollars of debt. It should never have been this way. They should have been regulated before they tanked our economy, not after. This is an ass-backwards way of operating, but right now, we’ve got no choice. We’ll bail out the companies, and if we’re lucky, we’ll remember the lessons from this.
Will the right thing be done?
To prevent collapse, absolutely. We’ll keep chugging along. Will the right regulations be put in place afterward? That’s a little hazier. Good regulation is a fine balancing act. You want to keep the dickweeds from doing anything destructive, but you also want to keep the spirit of competition alive. It’s tough to get right. But even if we over-regulate things a bit, that’s still better than sitting back and waiting for them to fuck around with the foundations of our economy yet again.
Will our next president be key either way?
Hard to say for a certainly, but there’s definitely evidence to believe that one choice will be better than the other.
Obama seems to have the support of most economists. In contrast, one of McCain’s chief advisers was the primary architect of the last round of deregulation. Seems like a pretty clear choice between old bullshit and competence. I, for one, am going to choose “competence”. But I’m not going to claim that everything will go to shit if most Americans disagree. Of course, I’ve been wrong about that before.
The basic lesson here, though, is Don’t Panic. Things will get worse before they get better. But things will eventually get better.
For comparison, Japan’s debt to GDP ratio is over 150%. The US was at less than 40% (comparable to France and Germany) before this fiasco, and we have a bigger economy.
And this is not at all like construction projects. It will go down, not up. After all, some of the investments will turn out okay, even if we don’t yet know which ones. The problem, like I said before, is information. We don’t know which debt is bad and which is good. We have to wait to find out.
I know % wise it isn’t a disaster, I’m just wondering how on earth it’s ever going to go down. It seems to only ever be going in one direction, and the political system seems to encourage Senators etc to always want to spend more, not less. Just wondering at what point Bad Things start to happen.
As for it going up, I’m just a pessimist The “experts” always seem to underestimate costs.
Okay, so with half a tril, the bailout begins. The treasury is buying bad mortgages so people aren’t out on the street. I don’t see any other way to go, and I’m prepared to pay more taxes as part of the solution.
The market recovered most of the losses for the week. But what does this mean to things like 401Ks and pension funds? Are they pretty safe? Do we expect the roller coaster to continue, despite the bailout efforts being discussed this weekend? The talking head on MSNBC said that decisions being made over this weekend are Step One of a long process. In addition to regulation and oversight, what’s next? Another news show suggested a fee-per-transaction thing similar to the .25% that the Brits tack on to stock transactions might be something to look at.
Certainly there will be administrative costs, but the “bailout” parts of the program cannot go up in cost, because taking on the $800 billion in debt is assuming that ALL of them will totally go into default with no return from the foreclosure. Whereas, if some of the homeowners/loans do get paid off or we foreclose on them and sell the property, we’ll get at least some of the $800 billion back.
Expanding the program beyond its original intent is something we need to be aware of, but I can’t see the path to there from here.
Are there any plans on how to pay for this?. Will we have a huge tax raise. ? Waging a war while cutting taxes is dumb,dumb,dumb. Bush put us in a precarious position. We do not have the money to do what is needed. If they just crank up the presses we will have bigtime inflation.
The idea that they will deal with the mortgages directly is sound. Finally the problem is partially recognized. But the bankers leveraged their companies at horrible ratios to buy more and more. The industry average was about 30 to 1. That left very little if things went wrong. They did. Bailing out risky management rewards poor practice. They should be prosecuted if they stepped over the legal line. They should be ridiculed like Kristol for being continuously wrong. They should not walk with huge bonuses.
Pretty high. Recall that the market is in the midst of a “flight to quality”. That means that investors are dumping Mondo Bizarro Mortgage Derivatives in favor of …US Treasury Debt.
So, yeah, the US should have the ability to borrow umpteen trillions in order to bail us out.
Hey, I agree. Obama has a plan to raise taxes on those making over ~$250,000 and McCain raises revenue by taxing employer-provided health care. The big Wall St. boys screwed up on our dime, and there will be fallout.
Well perhaps, although I think they’re just stupid. But lets not rule out sinister conspiracy theories just yet. Since China (& Norway) has massive funds tied up in Fannie and Freddie it would appear letting them go bust would have been a good way to reduce some of your foreign debt. On the other hand perhaps your government is secretly hoping the Chinese will come in and take over, since the communists bastards have clearly shown themselves much more adept at running a capitalist pig nation than your current capitalist rulers. Perhaps your new rulers will give you cookies. heh ah well, nothing so fun as sticking it to the man. Chavez is having a ball. My ruskie friends also think it’s a fine spectacle to watch. Funny how you still find the time to hand over 1 billion dollars to further corruption in Georgia – I guess you have nothing better to waste them on. Although the most amusing thing of it all is the German bank, which mistakenly wired Lehman 300 million euros hours before it went belly up. ups. To really fuck up a bit of Teutonic discipline gives it that extra twist.
The talk around here is that it is for good. The USA will recover and will remain a large financial player for a long time, but the trust is broken and it will never regain this unique singular role it used to have. Also I heard a passing rumour that your Detroit car companies are looking to get hitched on this fine nationalisation wagon you have created. Oh well, perhaps they’ll finally come up with a real Volkswagen then.
The next few days will be critical. The program will have to be defined and before funds can be committed to it ,it has to be voted on. If Bush and the Neos try to push their agenda in this crisis any program will be in trouble. They could scream the dems are being unpatriotic. If it does not deal with keeping the people in their homes and making payments, it will not work. There are 5 million more foreclosures to come. They will kill any financial institute that carries too many on their books. But house payments have to be made. The average financial institution is leveraged at about 30 to one. They do not have the reserves to stem an influx of foreclosures. If they just jump on this by decaring Medicare, Medicade , Social Security and other programs can no longer be funded , I would smell it was a Nordquist plan coming together.
back in June the market dropped 384 points in a single day. A lot of people were very worried and scared.
Last Thursday the market was down more than 1000 points from that June day. Bloomberg was running headlines saying “global financial collapse!” and there was open speculation as to whether this was the end. There was a thread here stating the market was “over,” and it would be years if ever before we recovered.
Do you know how long it took to recover the 1000 points we lost since June?
The thing is, it’s impossible to accurately calculate the probability of an event so rare that it’s never actually happened. All we can say for sure is that the probability is tiny. If this were chemistry, we’d need an expensive microscope to see how teeny-tiny it is.
There is overwhelmingly compelling evidence of the overall structural integrity of our system. After all, we’ve never actually seen the collapse of a post-industrial economy. And we got through the Great Depression even with government policies that were actively contributing to the problems. This current financial mess is pretty awful, but it’s still not quite so bad as the previous one, and this time Uncle Sam has a solid plan to get us back on track again instead of making things worse.
In short: We have no credible reasons whatever to believe we’re headed for destruction. In the most pedantic sense, yeah, it could theoretically happen. But it’s just not going to happen.
It jumped Friday because people believe something will be done to fix the problem. That remains to be seen. If the world investors think it is wrong headed Monday, you will see an enormous drop in the market.