Thoughts on the Financial Crisis from an Actual Economist
Friday, 19th September 2008 (by J.D. Roth) This editorial is from Stephen Popick, a real-life government economist. He’s also the administrator for the Get Rich Slowly discussion forums.
Why did the current financial crisis happen? I don’t think a fully comprehensive answer could fit into a few paragraphs, but I can give some brief thoughts.
As of this morning, otherwise sound companies are encountering financial difficulties. If we think of the current financial crisis as being a simmering pot on an oven, the water just boiled over and knocked the cover off. Forces that were either hidden or contained were let loose, and this had a cascading effect. Credit markets dried up further in response to the fall of Fannie Mae, Freddie Mae, and Lehman Brothers. Businesses that otherwise were solid ran into cash flow problems. Essentially, we saw a bank run and lenders pull back their lines of credit and new credit could not be found.
This morning we have news that a neo-Resolution Trust Corporation will be formed to handle the tranches of bad debt currently out in the market. The market rebounded because such a move increases the certainty that at least part of the bad debt will be repaid.
But still, companies like Washington Mutual and Morgan Stanley are whispered about in the hallways. Will they be bought? Will they declare bankruptcy? Just what else is out there? And sadly, the answer is that we really don’t know, because we don’t have a handle on just who owns what debt in what financial instrument.
We don’t know the final impact of the government’s foray in this financial maelstrom. What I’d venture to say is that the output and growth of our future economy will be slowed. If we were to have 3% GDP growth before, maybe it’s 2% now.
We know that compounding matters, so losing even fractions of a percentage of GDP growth means that, over time, we’re going to lose out on a lot of wealth creation. That impacts our children. With the new Resolution Trust Company, our national debt will increase. That impacts our children. Whatever presidential candidate you support, their budget plan just went the way of the dodo.
This crisis further serves as an illustration that our actions have tangible effects on others. Our actions affect others. The risky behavior of many investment firms which have led to the credit crisis sent 401K values tumbling, strained home mortgages, and reduced confidence worldwide of our financial system’s health.
There’s going to be a lot of congressional oversight hearings on these matters shortly, along with regulation. We’re sure to hear “Where’s the accountability?” But don’t expect hearings and inquisitions to solve much. We’re reacting to actions and events that started years ago. Any regulation is likely to also be reactive.
But when this crisis does abate — and it will — we will have other problems looming. We have in this country increasing healthcare costs, a growing national debt, and a retiring workforce. While their impact will be felt 5, 10 years from now, perhaps now’s the time to proactively address these concerns, rather than reacting.
This is, I think, where the personal finance community here and throughout the web can have a large, positive impact.
Let’s hope that the new agency that is formed will be a step in the right direction and helps to resolve the issues for which it is intended. It is sometimes a bit scary when the government intervenes, because it invariably causes new unforeseen problems.
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Twice you call these floundering companies “sound” and “solid”, financial struggles aside. These are firms in the financial sector. In what way are they sound??
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We have in this country increasing healthcare costs, a growing national debt, and a retiring workforce. While their impact will be felt 5, 10 years from now, perhaps now’s the time to proactively address these concerns, rather than reacting.
People have been screaming for medicare and social security reform for a very long time. Our government is only worried about what will get them elected within the next few years, not what is down the road. Even when the thing down the road will become a staggering burden on the economy.
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What Is “The Economy”?
Its very easy look at who is screaming the loudest that the government must do something. These are the people that have been benefiting from the distorted and over valued assets that are starting to unwind. They know that the gig is up. The profits taken over the past decade on Wall Street by hedge funds and the like are not real they are a bubble filled with nothing but hot air. They were not producing anything of real value or at least not of the value they were claiming. So, what do they do now?
http://digg.com/political_opinion/What_is_The_Economy
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Stephen, if we get a slower growth rate and a larger public debt, where could that leave us in terms of interest payments as a percentage of the federal budget? We’ve heard from some in government that deficits don’t matter because we never have to pay them off. To me, that sounds like we can buy any house we want with a 100 year ARM, because we’ll be gone before we make a dent in the principle. Yeah, but… what about all the interest payments and other risks?
(I found some data from prior years, but don’t know how it measures up to the current trends and future projections.)
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“As of this morning, otherwise sound companies are encountering financial difficulties.”
Let them prove they aren’t insolvent.
Mark their “assets” to the market value they could reasonably be sold for.
They would rather be bought by the Chinese or propped up for more orderly dismemberment by the government than show how stupid they were.
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“Give Us AIG and Keep Shopping”—keep your eyes on the Mall
Melt Up, Melt Down it’s the same Story of Stuff, Robert Singer (contact me about this and other articles featured on Opednews)
Kevin G. Hall in the McClatchy Newspapers writes:
Why would the government bail out a company like AIG but let Lehman Brothers file for Chapter 11 bankruptcy protection?
Kevin answer: Speaking frankly, the world can do without another investment firm. If an investment bank fails, any remaining investment bank can hire more people and take their jobs. AIG is not an investment bank. As a principal insurer, it insures consumers, it insures businesses and it insures business ventures, so it’s not just that your corner store needs insurance.
The best analogy I’ve been able to come up with is to use an automaker. When you think about putting an automaker out of business, you put tire makers out of business, you put seat makers out of business, you put all sorts of things out of business. It’s the same thing with AIG. There are tentacles. They’re just so connected to so many other parts of the economy that the government deemed it more dangerous and potentially more expensive to the economy to have it fail than to give them this loan.
Story of Stuff answer: Lehman will not affect shopping, AIG will!
Number of employees AIG = 116,00, Number of employees Lehman = 25,000
The Bank for International Settlements recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars, cost of bailout 85 billion.
Do the Math and Read my September 14, 2008 OpEdNews article
“Give Us the ANWAR and Keep Shopping”-They Found They Can’t Have Both
http://www.opednews.com/articles/-Give-Us-the-ANWAR-and-Kee-by-Robert-Singer-080914-244.html
And watch a 20-minute documentary http://www.storyofstuff.com that lays this all out in a manner that even a child could understand and shows the path to saving the planet is no more complicated than controlling our addiction to all that “stuff.”
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It is definately an interesting dilema. However it is strange, though all this turmoil is happening I feel confident about my financial future. I am going to be a full time blogger and online entrepreneur.
It is weird how the economy shifts so much. It is kind of like the weather, always changing and trying to stablise, but never stable
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A few responses
Matt,
The underlying business of AIG is sound. There’s nothing wrong with their insurance arm. From what I understand, and please note that this is just from what I read, is that AIG ran into a short-term cash flow problem stemming from the credit system running dry due to its contraction in the face of the mortgage crisis. Here, AIG would be akin to an civilian casualty. That’s in part why the government stepped in and took them over. (That, and AIG’s size and that it’s not an investment bank are other reasons. I hope that helps explain a bit.
Sean,
Regardless of who continues to be in political power, with the new Resolution Trust Company on the horizon, the nationalization of Fannie / Freddie, a fiscally irresponsible medicare prescription drug bill, we’ve already added on a very large chunk to the debt. We’re going to see more and more of our budget go to mandatory expenditures, including interest debt. The former head of the GAO was just a part of a Fiscal Wake Up Tour. I’m very concerned about what happens when the politicos are no longer able to push the problem into the future. I firmly belive that government deficits DO matter. We’ve seen debt-ridden governments default, which is financial chaos. Now, we’re not there yet, but we’re not on a path to being healthy, either.
Matt in Texas,
It isn’t as simple as that. Many firms who were not a party to the creation of the credit crisis will be hurt because of the actions of those who did. That’s one way of looking at why Lehman wasn’t nationalized but AIG was (Fannie and Freddie engaged in risky loan practices, but there was always an implicit guarantee)
To Everyone,
There are many of us in the government who are doing everything we can to provide sound advice and counsel. But until the voters of AMerica decide en masse to start heavily weighting the future’s value in their political decisions, there’s little incentive in the present for politicos and such to change. I truly believe that those of us most interested in our personal finances are going to have to more than blog one day.
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Here’s some information on the AIG nationalization
http://www.portfolio.com/views/blogs/market-movers/2008/09/16/libor-850bp
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Congressional leaders stunned by warnings
Wow
I have no idea what the best course of action is cases like this. I don’t think anyone does.
All I can think is to cling to the things that have worked in the past.
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I don’t mean to sound naive, but this article mentions rising healthcare costs as a point of concern, and we all hear about it everyday (politicians, ugh!). I typically just ignore it. I’ve worked since I was 16 and had my own insurance since I hit college at 18/19. It’s always been pretty cheap, and with Wal-Mart offering generics under $5…where’s the fire?
Sure, if you have some dread disease like AIDS, it’s going to be expensive and incurable…there’s no good answer there. Beyond life-ending illness, is there really a healthcare crisis? Does some horrid future await me that I’m naively unaware of?
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it’s hard to imagine that the economy is doing well at all, but there are lots of companies with huge cash reserves. yes, we may get a spike in unemployment from the financial sector during this period of consolidation, but we haven’t been seeing widespread unemployment. this indicates to me the economy is doing fine, at least for now.
if it only costs the govt $1 trillion to control all these assets, and with freddie and fannie alone that is $5 trillion in mortgages that the govt only had to pay about $25 billion to acquire, i’m seeing this bailout being a hugely profitable one for the govt in the end. remember the S&L cost alot up front too, but when the dust settled and assets were sold, it ended up costing around $120billion, which is nothing. with the mortgages alone, the govt could sell for 30% of $5 trillion in mortgages and still be able to cover the $1trillion est total cost of all the bailouts plus have an extra $500 billion in its pockets. maybe this is the conspiracy theory that will get additional govt funds to pay for medicare and social security.
AIG has enough assets to cover the bridge loan, and the govt is going to be paid first from the liquidation. so in the end, the govt will profit from that one as well.
it’s hard to see what seems to be going on with all the focus bailout talk, but the govt has gone to a fire sale and reaping ok, toxic debt, but they are going to get some huge returns in the end. man, i wish i had that much cash and the ability to freely print money, b/c i would have put it up if i could get over 11% return from AIG, and gain $5trillion assets for only $25 billion…oh wait, since we are paying for it we will get it. unfortunately, the govt whoever is in office will spend it on pork barrel projects.
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I read that our politicians think short term to get elected, and these problems are long term. Many are not new, how long have we known that SS will be in trouble when the baby boomers retire? Just one example, we need someone in charge who can think long term.
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@jerichohill
Thanks for the response. It is nice to hear there is someone associated with government keeping an eye on things like that. Thanks also for the reference to GAO / Walker.
I guess what makes me uneasy is, unlike Tim, not knowing how much of this is risk reduction alchemy, and how much risk is being swept under the rug of last resort. (Be careful with today’s estimates. If you need proof, look at last year’s estimates.)
The government will do what they must to preserve the status quo, so odds are that they will, if they have enough waking hours to keep up and enough people and countries cooperate. Hopefully, we can minimize the unintended consequences, especially complacency.
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I’m no great shakes about the economy, but does it seem to anyone else that WE could be the cause of our own demise? After all, we are the ones who took those loans, we are the ones who re-financed to cash out our equity to buy toys or pay down the debt our lifestyles accrued.
It’s easy to blame the financial industry; some lending WAS predatory and perhaps could have been more regulated. But in the end, so many of us had our own heads in the sand.
The only long term cure is to repudiate the easy credit culture that the U.S. has developed in the last 50 or so years, as this blog advocates.
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@Wesley
For those of us with insurance, we’re insulated from rising health care costs. On the other hand, we have no idea what health care costs are when we’re insured. One of the issues with rising health care costs is that they tend to bias and influence who gets health care and when. This leads to behavior like, only going when it’s dire, which is much more expensive to treat than a preventative regime. It does affect those with insurance as well, our premiums rise over time. This definitely does have an effect on our economy and its allocation of resources.
@Tim
Yes, it a good deal for the government. However, what we’re seeing is a discount on what returns were expected, so someone’s losing out on a good chunk of change. AIG will be sold back to themselves after the bridge loan, in all likelihood, to little fanfare. Fannie and Freddie were implicitly backed anyways. I think these moves were made with more of an eye towards increasing “confidence” and preventing say…WaMu from filing bankruptcy. However, I think the bailout of Bear Stearns and recent history have created the opposite incentive. We’ll see.
For us, we’ll get more inflation and a lower growth rate, so we’re going to get the bumb end of the deal.
@Sean
No problem. Government tends to be reactive, because the rewards from politics doesn’t benefit one to be proactive.
@Kim
That is exactly the service I see this blog,and others, doing. It’s going to be up to individuals banding together, just like its always been.
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I happen to agree with Kim. The thing I keep reading on the news is how “urgent” it is for credit to flow, but no one talks about how urgent it is to someday pay that borrowed money back. The Federal Government is almost $10 Trillion in debt now, and paying almost $500 Billion each year in interest. That is more than both of our current wars combined for the last 3 to 4 years spent on just 1 year of Interest!
Frankly, I suspect the future for our economy and country is very bleak. To pay off the national debt alone (not counting the state or local debts taken on by other levels of government) every man, woman and child in this country would be on the hook for close to $35,000. If you have a family of 4, your family needs to come up with $140,000 to cover your share of the federal government’s debt. This would be money you need to pay on top of the current taxes, which already fall short of covering what the government is spending (hence the deficits that led to this mess.)
Of course a good bit of that debt is money (probably illegally) diverted from the Social Security trust fund, which is why Social Security is in a crisis. The over $5 Trillion the Social Security system has loaned the rest of the government (neatly hiding the depths of the deficits it was running up and even allowing the Clinton Administration to claim a “budget surplus” one year when the government’s debt load still increased) is simply impossible to repay with our current tax structure.
The only way we could get this debt paid off without defaulting is to greatly increase taxes, cut back on services (including cuttign Medicare and Social Security payments) and put all of the money we could towards paying off the debt. Obviously no politician will ever admit this, because it is political suicide, particularly the part about needing to cut Medicare, Social Security and even Welfare payments at a time when people need these services more and more. Further, the drag on our economy from doing this, and from the large-scale Federal layoffs that would ensue as the government cut back on expenditures and needed less workers, would easily push us into a recession even in good economic times.
It’s much more convenient for politicians to continue to promise that the government can spend more than it takes in and magically someday the toxic debt that it is creating will disappear. After all, the current crop know that they will be retired (and quite possibly passed on) before the ponzi-scheme they are passing off as revolving federal debts collapses and people from around the world are left with worthless “toxic” debts… Kinda like what is happening today to banks that made bad loans to sub-prime borrowers, knowing that those borrowers couldn’t repay.
Mind you, I say this as someone that has never liked the idea of the government increasing taxes, since I see it usually as nothing but more money to be wasted on programs designed to buy votes for the politicians. Unfortunately, the only way we ever could pay the debt off, to free up that $500 Billion a year in interest, would be a massive tax increase along with the restraint to put the extra tax revenue solely to work paying off debts. And I don’t believe for one second that the polticians that run this country, supposedly looking out for our interests, would be able to resist the temptation to divert that money to programs that get them more votes in the next election.
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@Sean: don’t get me wrong, the reason the market has not found itself yet, was because of the ficticious valuations of mortgage backed securities. A large part of what is going on right now and why things are so hectic is because the market is trying to determine the proper value.
@Jerichohill: I wasn’t talking about projected returns, but you are right there are some questions as to the true cost of all the mortgages; however, the actual mortgages in question are only $500 billion if you just wipe them away and count them as a loss. The remainder of the $5trillion i would say isn’t really in question. That still means the govt is getting a huge deal and will be able to auction off mortgages for 1/3 of the cost, even properly evaluated mortgages. that can more than pay for all the bailouts, not just freddie and fannie. I agree with you these actions were designed to install confidence in the system. This is the ironic part of the whole situation, since the pros are the ones who tell everyone not to panic. I guess it is better to do as i say and not what i do when your ass is on the line with billions of dollars.
we’ll get some inflation and slower growth, with I’m alright with if it means that americans are forced to re-evaluate their savings and purchasing behaviors. at the end of the day, these corrections and consolidations will make us more efficient, and god forbid being smarter about our money. a boy can dream can’t he?
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Thanks for plain English description, those are hard to come by. There’s plenty of accountability to go around and I’ll happily lay plenty at the feet of financial institutions that are supposed to manage risk. However, I don’t see a lot of people placing any accountability on the consumers. Many people knowingly took on debt they knew they weren’t likely to be able to handle should any bumps in the road come up. Living beneath your means seems to be a lost art.
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Re-reading, I don’t disagree with much. I do think that you stated a lot of things very, very, carefully however.
I just guess I wouldn’t use the boiling over analogy and imply that the source problem was the lid not being secured tightly enough. I would blame rather all the fire turned onto the bottom of the pot and continually stoked with the Fed providing more pure oxygen when the heat flow seemed to falter.
Once people can make more and more money by crawling farther and farther out onto a limb, the final end is known, but is just not entirely predictable as to exactly when the snap will be heard.
It isn’t the hysteria of a crowd, it’s returning sanity striking the crowd suddenly as all the rats jump past them back toward safety.
The Washington State Constitution:
SECTION 12 RECEIVING DEPOSITS BY BANK AFTER INSOLVENCY. Any president, director, manager, cashier, or other officer of any banking institution, who shall receive or assent to the reception of deposits, after he shall have knowledge of the fact that such banking institution is insolvent or in failing circumstances, shall be individually responsible for such deposits so received.
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@Wesley: We all would like to think that we are going to be healthy with nothing but an occasional easy-to-treat illness, and then we’ll die in our sleep. But in reality, most people get sick before they die. About 1/3 of people get cancer at some point of their life. Heart disease affects even more people. Then there are other expensive items like end-of-life care (if everyone had a Do Not Resuscitate and refused futile care a lot of money could be saved). There is some unnecessary testing going on sometimes because doctors are afraid of lawsuits and sometimes because people demand the hot new test they saw on TV or in a brochure or .. Tests have false positives, false positives lead to more expensive (and risky and invasive tests – testing is not risk-free as people think).
@Kim Cornman:
Well, I refuse to take any of this collective blame. I didn’t take any bad loans. Why should I or ANYBODY who hasn’t taken this type of loans take part of the blame? Are we all supposed to know what was happening? If you are the one who took such a loan why are you shifting blame on those of us who had never even heard of them? Pray tell me what those of us who have been responsible with our money our whole lives were supposed to do when this was happening? Check out local banks’ lending policies? Keep track of how loans are traded? Create a huge poster “please don’t take these loans”? Yes some people are blogging, sorry not all have time or the writing ability.
Some people took bad loans, not everyone. I’d imagine it is the minority of people who took those bad loans or refinanced to “pay for toy” as you say. First of all these loans weren’t even available until 2000s. So unless someone took out an equity loan – and I’d imagine this is a minority – those who bought in the 90s or who were renting throughout this crisis didn’t take bad loans. Among those who bought in 2000s, there are also people who bought what they could afford and took out a perfectly normal 30-year fixed loans. So how do they “share the blame”.
If you are the person who took this type of a loan, then use “I” not “WE”. Some people were irresponsible and they share the blame. But I sure as hell don’t. And I’d imagine neither is the majority.
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@19: You said: “we’ll get some inflation and slower growth, with I’m alright with if it means that americans are forced to re-evaluate their savings and purchasing behaviors”
Sorry, but inflation punishes savers and rewards spenders. So, if you are looking at inflation to cause Americans to re-evaluate their habits, I’d think again.
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@kitty: I simply made an observation based on 1. that I worked in the property appraisal industry with lenders for clients, and 2. the number of ‘cash out’ refi’s on properties lenders kept pushing us to get high value for, and 3. the observation, mentioned many, many times in this blog, that we are part of a consumer society, to a negative degree.
You may not have exercised bad judgment, however I believe that there ARE many who did, definitely not a minority as you propose. If that hadn’t been the case, I don’t think the financial industry would be in the position it is. Personally, I did not – so don’t assume I’m spreading the blame – indeed, why would I even post such a comment if I felt guilty or a victim?
I’m sorry if you feel you are an innocent victim of this whole mess. In my opinion, there is plenty of blame to go around.
Oh, by the way, I do agree with you in your response to Wesley. Wesley, you don’t have to have a “dread disease like AIDS” or even cancer, to accrue amazing amounts of medical expense. I personally batttle depression, and the best med for me is $250/mo w/out insurance. With that med I am fine, without it, I don’t function well enough to hold a job or gain financial security, let alone insurance. There are plenty of people with chronic conditions that are not (at lease immediately) life threatening, that require regular medical care, like arthritis, diabetes, asthma & COPD. You may be blessedly healthy, but so many are not. I leave you Wesley, with this thought: to know you are ignorant is the beginning of wisdom. I guess I don’t see you as naive so much as un-observant.
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@Kim Cornman: regarding if it was a majority or a minority who took these loans. When I say “minority” I don’t mean “small number”, I mean fewer than 50%. When you say WE, it seems to me you mean everyone, i.e. the whole population. Do you seriously think that 51% of households in the US took bad loans? I am really not sure about those who bought or took out equity loans during the bubble – it’d be interesting to see the statistics – but given that the bubble is only a few years, wouldn’t you think there are more households in the US who bought before it? What about renters? Not every US household owns a house.
Also, given that some areas of the US are much more affected than others (maybe yet), I wonder if percentage of bad loans varied by the county or state as well. Do you know the actual percentage of bad loans in the whole of the US? As someone working in an appraisal business you can judge based on your area and your clients, but do you have actual statistics in the whole population?
BTW – the fact that I refuse to take the blame (and that I don’t believe most Americans are to blame either) doesn’t mean that I am a “victim”. I think on the whole, I am much better off than many: my home is paid off, I have no debt at all, and even if I lost a fair amount of money, I still lost less than I made on my previous property (that I was renting out) at a premium, although not for as much as I could’ve if I hadn’t chickened out too soon. But this crisis is still ongoing and it will affect us all, including those who had nothing to do with it in any capacity. For example, I work for a large technology company and while it is not in finances business, many of our customers are. It’s been doing fine for now because of sales oversees and low dollar, but it would be silly to think it will not be affected. Or other similar companies. Then there is risk to our investments, there is risk of inflation… It is quite a mess. But I still don’t think we can say “we are responsible” unless “we” are the ones who took bad loans. There were some greedy lenders, there were some stupid people – some of whom were truly ignorant or uneducated and lacking in common sense, and even if they add up to a large number, I still think the majority is largely innocent.
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Just to add (regarding Wesley) – when one is young and healthy one often thinks he is immortal or at least will stay healthy as long as he practices some preventive measures and then will die quietly in one’s sleep. The reality is – an expensive illness can strike anybody at any time. Low risk of having a specific condition at a young age is not the same as no risk.
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Interesting post and good comments… I’d add that I think we may have to rethink the threat of a “retiring workforce.” Every issue of AARP’s magazine carries some article or short squib about where seniors can get jobs, how to retool for a new “career,” best places for seniors to work, and on and on. In those quarters, certainly, it’s expected that most people will continue to work after age 65 (or, in my cohort, 66). They pretend it’s because we want to, as if we couldn’t keep ourselves busy otherwise.
Well, I for one can keep myself real busy without trudging to work every day. I very much want to retire. But it ain’t gunna happen. I will work until the university fires me, and hope to God they don’t can me much before I’m 70. I’ll do it because I have to, not because I want to: thanks to the present economic situation, there’s no way I’d even consider retiring on my present savings, which are substantially more than the average Baby-Boomer’s nest egg. I could not maintain my paid-off home on Social Security plus the income from savings — not and eat, too.
I’ll bet we’ll find that a large segment of my generation will work until we drop in the traces.
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@Wesley,
The greater “healthcare crisis” is that we have created a healthcare-welfare system (Medicare) that is funded by our taxes which will cover approximately 20 percent of US citizens with baby boomers hitting age 65. This care covers them during the most expensive time to cover an individual (the 6 months before death) and creates financial incentives for physicians to literally “treat patients to death” to increase his/her own income. The healthcare system is broken!
Additionally, our tax revenue cannot meet the anticipated budget (for Medicare and everything else), hence our current $10 trillion debt. If we continue to spend at this rate, we will soon have more debt than we can afford to pay even the interest on (as a country), Which is exactly what undid Lehman Bros… Just like Lehmans stock, If our country cannot pay our debt, our currency becomes worthless…
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What I’m wondering about is how the American people are reacting to the 700 billion dollar bailout your government is pumping into the market.
1. It’s an awful lot of cash. Where does it come from? Tax payer money? or straight from the printing press, causing massive inflation? Either way, it’s not good news for the average Joe.
2. It’s hurting the free-market economy. This isn’t government or semi-government parties happily speculating along with the rest of the guys. This is a unique rescue operation for a unique problem. What’s more important? Instantly solving the situation by throwing money at it? Or the long term effects of this money-throwing, which can’t be good?
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Sorry, but I REFUSE to take blame for others’ failings.
I saved nearly 7 figures over the last decade (my paid-off house is about 15% of my total net worth)
My reward for that is a dollar that is worth about 40% less (in purchasing power parity), and a current return on my savings of essentially zero (go look at current Treasury rates)
Our government has now made a conscious, explicit choice to prop up borrowers (retail and commercial) to the detriment of dedicated savers like myself.
I feel like I ought to have “CHUMP” tattooed on my forehead.
Well, I’ve learned my lesson.
My capital will now be heading overseas into sounder currencies before this trillion dollar bailout further tanks the U.S. dollar.
Who would ever have thought that a bunch of socialist European countries would be more fiscally responsible (reflected in the Euro’s value) than the U.S.?
Remember this post when it costs US$3 for a Euro (and US$4.50 for the U.K. pound)
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Up here in Canada we went thru the 1990′s and 2000′s with a massive debt. What happens is that everything low on the bush is cut. Biggest impact was downloading. Federal level told the Provinces (States) to start paying for virtually everything. The Provinces downloaded on the counties. Could your county pay for the Highways within it’s border. Why of course it can because the new law says it has to. No wiggle room, no Special Earmarks and no Bridges to Nowhere. We hit the point that almost 50% of all Federal tax dollars were to just pay the interest. (This happened under the equivalent of the Democratic Party). Add cuts to everything in site no matter how important.
2 years ago we elected the Conservative (Republican) Party and with a bouyant economy they proceeded to cut the tax rate twice on the most visible tax. Now with the economy slowing down, we could face a deficit again. Sound familiar? Be careful of what you vote for. The bills must be paid and it will get worse before it gets better. Avoid racing to lower taxes at all costs ’cause it will haunt you.
Best of luck with whomever gets in.
A occasional Canadain Reader of the Site.
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You should read Thoughts On The Financial Crisis From Rep Ron Paul Of The House Financial Services Committee:
http://www.cnn.com/2008/POLITICS/09/23/paul.bailout/index.html
It is unfortunate that so many people are ignorant of the fact that government is causing so much of our economic trouble, and that government’s solution to the problems they cause is always MORE GOVERNMENT.
But the central planners can never create an economy as robust as all of us can, knowing our own circumstances, and acting in our own best interests.
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@Bill in NC: it seems you think the european economy is isolated from the US economy and that the economic fundamentals of the europe are better than the US simply from the current exchange rate.
i feel like a chump too, but a chump because i am not getting any part of the $300b home owner bailout or the proposed $700b bailout.
I hate these stupid buzz words like predatory lending. instead of going after “predatory” lenders (and you really have to get a true definition of who is predatory or not, or is it just marketing?), why not educate people and reemphasize common sense like not spending more than you make, don’t sign the dotted line if you don’t understand what you are signing, actually reading what you are signing, actually thinking about what a loan will cost not during the “teaser” time, but post-teaser, etc.
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It is amazing how everyone has missed the simplicity of this crisis, including our esteemed economist.
The crisis was caused by poor lending practice by financial institutions, who allowed garage based agents to source mortgages on their behalf. Commissions were paid to these people if the mortgagors did not default within the first 3 months, after which the mortgages were packaged into bonds and sold to the investing public. 3 months? A seasoned mortgage? The investors were foolish to buy these bonds. The credit rating agencies should be sued for negligence. How could a bond with mortgages that were only seasoned for 3 months attract an investment grade rating? No way! But the investor was foolish for relying on the rating agencies alone for comfort. Don’t forget, these investors (the institutional ones who now want to be bailed out) are supposed to be intelligent! They’re paid 6-7 figure salaries, so you would expect them to at least do some of their own research and homework before investing in these securities surely! How did they miss the junk bond status that they truly deserved??????
Then there is Henry Paulson! What a lazy, juvenile solution he and his cohorts have come up with! The problem is that it will not solve the huge overhang of houses sitting vacant and unsold. It will not relieve the downward pressure on house prices. It is this downward pressure on house prices that scares the banks and the consumers, not the toxic MBS’s (“mortgage backed securities” for those of you who aren’t familiar with the term).
It would be much simpler, more efficient and effective for the government to buy the foreclosed properties, rather than the whole security package. To properly value the whole security requires something like 3,000 mortgages to be separately valued (i.e., the mortgages that constitute each security line), which would be very time consuming, rarely accurate and not transparent.
Rather, to buy the properties that have been foreclosed would be easier to value and would be more transparent. Not only this, but this approach would underpin housing prices and provide a boost to confidence in the real economy, which is the outcome that is sought by the less direct, less efficient, less effective and more morally corrupt approach being proposed by Paulson and his bunch of merry men (who also appear to be as overpaid as the investment managers who failed to recognise the risk inherent in the MBS that they were buying).
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If a company spent its money the way the U.S. government spends our money, the CEO’s would be in jail.
You spend a trillion dollars here, a trillion there, and eventually it starts to add up.
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While there is no ‘decoupling’, the Euro countries have agreed to fiscal and budgetary constraints – that has resulted in a much stronger currency vis a vis the U.S. dollar.
I expect that trend to continue even if economies weaken both here and in Europe.
We have had NO such constraints or voluntary restraints here.
At this point we’ll essentially have to monetize the upcoming trillion dollar bailout as no new taxes are politically palatable.
Even the Canadian dollar is siginificantly more attractive than the U.S. dollar given the high-demand resources backing it (oil sands & natural gas).
The Canadians also had a severe fiscal crisis several years ago, buckled down and cut spending, and reaped a recovery.
So no, the value of the currency does not directly depend on the performance of that nation’s economy.
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A very interesting alternative to the Paulson Plan is here:
http://www.rgemonitor.com/roubini-monitor/253783/is_purchasing_700_billion_of_toxic_assets_the_best_way_to_recapitalize_the_financial_system_no_it_is_rather_a_disgrace_and_rip-off_benefitting_only_the_shareholders_and_unsecured_creditors_of_banks
In general, it seems to me that if the objective is to keep the credit market from freezing up, it is far more efficient for the govt to give out loans directly to businesses (maybe using Fannie and Freddie as proxies, or nationalizing the next bank that goes belly up). In order to prevent more mortgage defaults, they can force a renegotiation of some of the riskier mortgages or buy up homes that are about to foreclose (as suggested above). It seems like these would be much cheaper and more politically palatable alternatives to the Paulson Plan.
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It’s amazing to me that the goverment is quick to bailout the big shots and not realize that the everyday person is suffing on a daily basis. Nobody talks about the republican montra of de-regulation as one of the causes. Why? It’s is common sense that greed kills capitalism. And the republican montra of de-regulation allows that to happen. No body talks about if we don’t change the fundamentals of the system (by the way trickle down economics is the most dangerous thing to believe in)we’ll be right back here in less than ten years. Can one person in the right position change those fundamentals. We’ll see, but if those are not changed the one percent will continue to rape the system. Bush sat by while month after month jobs were being lost and didn’t realized that was a sign. Any president in office who wants to know what’s going on with the economy only has the look at a few things. 1)Jobs report(loss or gain) 2)Wages (going up or down) 3)Inflation (cost of goods and services) 4)Dollar (Strong or weak). If any one of these four are happing it’s time to act. Don’t do what Bush did and sit by month after month and wait until the problem became to big to handle.
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@Mason:
Congrats on your attempt to politicize this. I must correct a few things, though.
“Nobody talks about the republican montra of de-regulation as one of the causes. Why? It’s is common sense that greed kills capitalism.”
I suggest you read a couple books on capitalism. Not only is it not “common sense” that greed kills capitalism, but it’s precisely the opposite. Given that humans are greedy by nature and you cannot legislate this nature away, our capitalistic system is designed to be FUELED by greed rather than hindered by it.
It is not regulation that is the problem. The government SHOULD regulate the financial markets to protect individuals from *fraud*. The problem is that the left wants the government to legislate it in many other ways, and these ways create distortions in the market. Furthermore, it distracts regulators from protecting against fraud. Every regulator who is assigned to work on non-fraud regulation is one regulator who could be investigating the Madoff’s of the world. See also: http://www.schneier.com/blog/archives/2009/01/allocating_reso.html
“We’ll see, but if those are not changed the one percent will continue to rape the system. Bush sat by while month after month jobs were being lost and didn’t realized that was a sign.”
Ask the last 100 companies who left the US why they left, and is it any wonder what answer you’ll get? The tax code. If you want jobs to stay in the US, then we need to stop our efforts to have the highest corporate taxes in the world. Again, you cannot legislate against greed, so if your solution to the job loss situation is protectionist legislation, it won’t work.
“If any one of these four are happing it’s time to act.”
You said a lot in your comment, but one thing you didn’t address is… you know… what you suggest anyone actually DOES about it.
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