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The Market Meltdown: Essential Reading Print
Thursday, 2nd October 2008 (by J.D.)This article is about Economics, News
Get Rich Slowly readers have sent me many stories about the ongoing U.S. economic crisis and the debate over a possible bailout. 
Because I don’t like to talk politics here, and because economics is way outside my area of expertise, I haven’t provided much commentary on this situation.
Besides, sound personal finance skills are the same no matter what the condition of the economy. When times are rough, it’s even more important to focus on the basics: spend less than you earn, do what you can to avoid (or eliminate) debt, protect your job, etc. Also remember that investing is a long-term adventure; the time to make adjustments for low risk tolerance is before the market drops, not after.
Rather than ignore all the stories you folks have submitted, however, I thought I’d link to them all at once with only a minimum of comment.
- First, from last May, here’s my write-up of This American Life’s “The Giant Pool of Money”, which is an anatomy of the subprime mortgage mess. (Also at GRS: Will the subprime crisis turn the suburbs into slums?)
- Second, The Money Meltdown is a new site with a single aim: “pulling together useful, authoritative, and comprehensive information about our current financial crisis in an accessible way.” This is excellent. [via waxy]
- Next, The New York Times has an excellent chronology of recent events: “As Credit Crisis Spiraled, Alarm Led to Action“. [via brip blap]
- Also at The New York Times, Ron Lieber has a great piece called “‘Is My Money Safe?’ and Other Questions to Ask“. This is a fanastic summary of what’s happening and what you should do (or not do) about it.
- Vincent sent me The Subprime Primer, which does a good job of explaining the housing portion of this mess. (But, be warned, contains some foul language.)
- Harvard Business has an interactive history of recessions going back to 1948.
- The New York Times Magazine recently published an article about Nouriel Roubini, an economist who predicted this entire mess.
And, of course, many people are looking for (and offering) solutions. Here are a few:
- At Ask Metafilter, one user wants to know how to invest as if a depression is coming.
- GRS-reader John writes: “I have mixed feelings about Michael Moore. I agree with some of his stuff, but his suggestions for fixing the Wall Street Mess just make my brain hurt.” Like John, it’s difficult for me to take political extremism of any sort seriously. Attempts to blame any one person or group of people for our current crisis are, well, stupid.
- Matt writes: “Have you seen Dave Ramsey’s bailout plan? I like what he has to say normally, but I think his plan is awful.”
- Erica Douglas has some ideas on what you can do to help solve the credit crisis. Her solution? Stop borrowing and start saving.
Finally, though it’s only marginally related, Clusterstock has an August 22nd transcript from what it calls “that awesome Warren Buffett CNBC interview”. It’s full of classic Buffett bites — little nuggets of wisdom about the economy from the world’s richest man. “I don’t try to pick turns [in the market] in any kind of an industry in terms of buying stocks. I just like to buy them when I think they’re cheap relative to their long-term earning power.”
But what does this all mean? Who can tell? Everyone seems to be flailing wildly to blame homeowners, banks, hedge-fund managers, Democrats, Republicans, George W. Bush, Bill Clinton, Ronald Reagan. I don’t think it’s the fault of any one person or group of people. This was systemic. And now the system is correcting itself.
The next few years will likely be painful for everyone, but less so for those who continue to practice basic smart personal finance skills.
Update: As I was composing this, Trent at The Simple Dollar published a great post in which he echoed FDR: “The only thing we have to fear is fear itself.” Photo by Wonderlane.
October 2nd, 2008 at 4:55 pm
I think it’s also time for some myths about investment strategy to be unpacked. The “buy and hold” approach to equity investing, for instance, is by no means the only way to go, and the long-term trend (i.e. many decades rather than 8-10 year boom / bust cycles) reveals that there often AREN’T significant gains from holding the same stocks.
Personally I believe that now is an incredibly good time to be investing, but not in stocks that have fallen and are “bargains”. Instead it’s important to look for sectors that are somehow resisting the overall market trend, specifically with regard to buying activity outweighing selling activity.
For instance, when Warren Buffett says he likes to buy stocks that are cheap relative to long-term earning power, he doesn’t necessarily mean stocks that have dramatically fallen in price. “Cheap” and “less expensive than yesterday” are not the same thing…
October 2nd, 2008 at 5:45 pm
I agree with Daniel’s appraisal of ‘buy and hold’. When and if we get a bump tomorrow, I’ll be cashing out all my holdings. Clearly, this is not the bottom.
As to sectors that might perform even in this environment, I’ll just say that there probably won’t be any for awhile. Once the economy ‘levels out’, then look at the financials we have all heard about the last few weeks.. Bank of America, Wells Fargo and Citi.. But I would expect them to cut their dividends and probably not do ‘that well’ as they have to digest the ugly banks that they have bought. Consumer staples IMHO will feel less pain, but won’t provide any great returns.
As to Buffett.. Fun guy to listen to, and if you had his cash and could get the deals that he has (10% interest on his loans and the right to buy ‘in perpetuity’ at a favorable price… ) then, I’d jump all over that!
Hold your breath, it’s going to get deep!
jegan
October 2nd, 2008 at 5:59 pm
I usually read The Economist for analysis and opinions. International Monetary Fund website (http://www.imf.org)has some good articles on recent meltdown as well.
Cheers,
A Dawn Journal
http://www.adawnjournal.com
October 2nd, 2008 at 6:13 pm
The other thing that I saw a few places today that I hadn’t seen earlier was reporters hammering home the difference between productive credit and consumer credit. It’s a really REALLY bad thing when productive credit freezes up and that shouldn’t be confused with the ability to open a new AmEx. That’s been explained SO badly all over the place. Blech. The whole thing has been explained so badly since day one.
October 2nd, 2008 at 6:25 pm
Anne makes a valid point. The common view of the bailout is that it rewards scurrilous bankers, Wall Street and speculators. In fact the real-estate meltdown is affecting the ability of banks to lend. Not only are mom and pop stores unable to borrow to purchase new stock, but well considered big businesses like GE have had to pay through the nose to borrow (from Warren Buffett). I just read to day that 5% of all auto dealerships in California have closed their doors and it is expected that up to 30% more will do so this year. It has gotten so bad, that banks will not honor their normal practice of lending to each other. Apparently, they do not trust the the other bank’s quality and ability to pay.
The cutest story I heard recently (if you are into black humor) was a well known investor, with a very good track financial track record, a great FICA applying for a small second mortgage on his paid-off home. He also had a several year track record with his bank (I believe it was Wachovia), After they ran him in circles for awhile, he asked them what the problem was. They told him, that they just had stricter loan procedures and had to be sure about his creditworthiness. His wry reply “I’m pretty sure my credit is better than your banks!”
jegan
October 2nd, 2008 at 6:54 pm
JD (and gentle readers):
You must read this article:
http://www.yesmagazine.org/article.asp?ID=2985&utm_source=oct08
It is absolutely the best writing I’ve read on the whole topic this week (and I’ve read a LOT).
October 2nd, 2008 at 7:18 pm
You say, “The next few years will likely be painful for everyone, but less so for those who continue to practice basic smart personal finance skills.”
But, if the government continues to bailout every industry, they will have to continue to increase the money supply, which will decrease the value of the dollar and steal from the savers. The hard working people that have practiced basic smart personal finance skills could get wipped out!
October 2nd, 2008 at 7:36 pm
@Curt: Excellent point re. the value of the American dollar (in fact it’s why many European investors have been leery of the US for the last few years, since market gains were wiped out by currency devaluation).
This may sound like craziness, but I actually believe that the trend could be turning re. the US dollar and we’ll see a bottom relatively soon (if it’s not already here).
October 2nd, 2008 at 7:51 pm
Assigning blame seems an exercise in futility. When the average family carries 10K in CC debt and has no clue how to manage personal finances, how do we expect our elected leaders to act?
If we’re going to want to change this, it’s got to start with individuals learning good personal finance.
We gotta get out there and into our communities.
October 2nd, 2008 at 8:12 pm
I recommend The Bailout Reader from the Ludwig von Mises Institute: http://mises.org/story/3128.
October 2nd, 2008 at 8:25 pm
jtimberman’s reference to “They Stood Up to the Banks”, refers to the fact that the American public has been very busy calling their Congressman and expressing their distaste for the bailout..(OK.. I know it’s not called the bailout, but that’s what it is..)
Unfortunately, the article continues to misunderstand the point of the bailout. It miscategorizes the legislation as a benefit to all the banks and lenders that did not run their businesses properly. In other words rewarding the very people that were pocketing big paychecks and now come begging.
As much as I dislike the whole process, and feel pretty much the same as everybody else, the point of this poorly written, pork-laden piece of legislation is not to hand cash to criminals, it is necessary to slow the financial meltdown of our Country and send the world into a tailspin.
Right now, there is no available credit. Banks have no lending capacity, the retirement savings of Millions of Americans are collapsing, businesses are closing, companies net worth has been halved, home values have been decimated. And all this in just the last month or so. This is very serious. If you think (as the article indicated) that the point of the bailout is to save a few banks and some Wall Streeters, you are seriously mistaken.
Just bear in mind that home values have dropped in some cases by more than 60%. Understand that on Monday, when our good congresspeople ‘responded to the will of the people’ that the Stock Market lost over a trillion dollars in one day! In the last 3 days, I’m guestimating that it has lost another trillion. (That’s trillion with a ‘T’)On Monday, of the 500 companies that comprise the S&P500, only 27 were positive in value. If before that fateful Monday, there were any Pollyannas out there that doubted that we were in a recession, they should understand now that we are.
Next stage, we watch property values drop further, we begin to see businesses fold, more bank failures, our GNP drop, factory output slow, higher unemployment. Then to top it off, while our Country suffers, we’ll probably top it off with a good dose of inflation.
I guess, I’d like to know why Bush, Paulson and Bernanke didn’t move sooner and develop a consensus before running around flapping. Did you know that the first legislation presented to Congress by Paulson was just 4 pages long. Now it’s up over 300. While our economy took a nosedive, our Congressmen ‘responded to the will of the people’ by larding up those 4 pages with pet projects totaling an extra $150 Billion. For example, as an addendum to critical legislation designed to stave off very ugly consequences, we now are ‘protected against importations of rubber tipped arrows’ and ‘tariffs have been lifted on imported rum’.
Yes it is an ugly piece of legislation and yes our administration was ‘fiddling while Rome burned’. But I’d go for a $700 Billion bailout any day over the immediate several Trillion dollar loss that ensued.
Unfortunately, the investing public seems to have developed an understanding of the situation in the last few days. What should have been passed on Monday will not have the same beneficial results ‘IF’ it passes on Friday.. Lord help us if it does not.
jegan
October 2nd, 2008 at 8:38 pm
“the point of this poorly written, pork-laden piece of legislation is not to hand cash to criminals, it is necessary to slow the financial meltdown of our Country and send the world into a tailspin”
necessary is a strong word to use when economists can’t even agree on what to do or how to do it.
there’s been much talk on the one bailout option and little talk about other options or if there should be a bailout at all.
October 2nd, 2008 at 8:41 pm
Well, the fed is the root of the problem. I don’t see how propping up worthless holdings fixes things, it just extends the problem; a correction is needed. Check out the von Mises stuff.
October 2nd, 2008 at 8:48 pm
This is a quote from a New York Times article:
# This is what a credit crisis looks like. It’s not like a stock market crisis, where the scary plunge of stocks is obvious to all. The credit crisis has played out in places most people can’t see. It’s banks refusing to lend to other banks — even though that is one of the most essential functions of the banking system. It’s a loss of confidence in seemingly healthy institutions like Morgan Stanley and Goldman — both of which reported profits even as the pressure was mounting. It is panicked hedge funds pulling out cash.
# In their rush to do something, and do it fast, the Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Henry M. Paulson Jr. concluded the time had come to use the “break the glass” rescue plan they had been developing.
# “If we don’t do this,” Mr. Bernanke said, according to several participants, “we may not have an economy on Monday.”
jegan
October 2nd, 2008 at 8:59 pm
[...As J.D. put in his post The Market Meltdown, when things are getting more and more gloomy, it comes down to a matter of principles...]
I couldn’t agree with John B. Egan more. The financial market is collapsing and help is needed. A pork-filled bill is better than no bill at this point.
I just wrote a post about this tonight:
http://stayingafloattoday.blogspot.com/2008/10/economic-crisis-to-be-avoided.html
October 2nd, 2008 at 11:06 pm
I second Todd’s recommendation above and encourage everyone here to check out at least a handful of the articles in:
The Bailout Reader
Keep an open mind and dive in.
October 2nd, 2008 at 11:54 pm
I just can’t see how any “bailout” can help at this point…it’s like the boy holding his finger in the dike. Our country is so saddled with debt and living life on credit, this is the beginning of the end for the US we now know. The Roman Empire didn’t last forever either. We had a free market economy and lived life on credit….it was not sustainable.
On the good side, maybe this will force people to live within their means now and give our children something more attainable to look forward to. My businessman grandfather would roll over on his grave seeing all these companies surviving on credit. It obviously doesn’t work when the chips are down.
October 3rd, 2008 at 12:20 am
The Bail Out Plan definitely has its pros and cons. It was already approved by the US Senate. Will it really be beneficial just in case the US Congress approved it?
http://www.myentrepreneurph.com/2008/10/us-bail-out-plan-approved.html
October 3rd, 2008 at 4:12 am
Thanks JD for another great post. I could not agree with you more. Sound financial skills are the same no matter what is going on with the economy. I like to call these skills principles: earn more than you spend, learn to value a simple lifestyle, maintain generosity as a practice etc.
Crisis is a great revealer - it will expose the current state of things in our lives. It is during crisis that the basics become more valuable to us and we move back into them. I think it is appropriate that your blog is entitled Get Rich Slowly as opposed to get rich quick. I believe the whole get rich quick mentality is a major part of the meltdown we are seeing.
I ran a series of articles on the FDIC right before the push to raise the limits. Anyone interested can check it out over at my blog.
I would encourage your readers not to get caught up in a lot of political grandstanding. The bailout will happen - there really is no other option at this point.
I am going to check out all the links in the post - especially the one on the history of recessions.
Thanks again.
http://www.drjimcollier.com
October 3rd, 2008 at 6:24 am
This somewhat has to do with I guess a recent article you wrote about throwing good money at the bad. I think this bail out could be the same thing, there is nothing that says that this will even fix the problem. The root of the problem is everything costs more and the average Americans are losing there jobs and not spending money because they don’t have it which = more jobs lost and less growth, so if they want to fix the mess it really needs to start with the everyday person and work its way up.
What really bothers me about this whole mess is that this started years ago and where were the federal regulators and politicians then? Burying there heads in the sand? Why do we have to wait till it becomes a “crisis” before we try to do something?
I really don’t think there is an easy solution for this, but I believe that bailing out companies because it would be “systemic” to let them fail is wrong. Companies that become big can be monopolies, and by not allowing the companies to fail, says that our millions of small businesses are worth nothing.
October 3rd, 2008 at 6:28 am
“… focus on the basics: spend less than you need…”
I think you actually mean, “spend less than what you earn…”
Also, what really gets on my nerves is the fact that everyone seems to have forgotten about the $300B “Housing Rescue Bill” passed back at the end of July.
Why are they pushing so hard for new legislation when they have this bill just sitting there?
October 3rd, 2008 at 6:40 am
Thanks, Rob. I’ll make that correction.
October 3rd, 2008 at 7:35 am
I agree with Todd and anyone else who chimed in the Von Mises site: http://mises.org/story/3128
Read the article about Causes and Cures of Depressions, the solution is for Gov’t to NOT DO A THING, NO bailouts! Let the market correct itself otherwise they just make it worse.
October 3rd, 2008 at 7:37 am
I have news for Michael Moore. Going into bankruptcy and having your house foreclosed on are two different things. Yet he equates the two so he can blame medical bills for the housing crisis. Say what?
I’m sure there is anecdotal evidence of people losing their homes due to illness and being unable to work. But the overwhelming vast majority of people in trouble made bad decisions. Period. Whether that bad decision was getting too big of a mortgage or living beyond their means or not saving for a rainy day.
If people can generate “good luck” by seeking opportunities then the contrary should also be true. Generating “bad luck” just happens to be a lot easier to do.
October 3rd, 2008 at 9:08 am
This is my last post on the subject of the Bailout and probable meltdown of our economy. Two pieces of news occurred today:
1) September jobless claims far exceeded Augusts. Bear in mind that our government only counts people actually claiming unemployment. (That means that people who have exhausted unemployment payments, those who have given up looking and those that have taken jobs at McDonalds are not included.) Nationwide we are now at a 6 year high. California is now over 7%.
2) Governor Schwartzenegger has asked the Treasury for a $7 Billion loan as California cannot find money to borrow.
——- quote —————————-
California State Treasurer Bill Lockyer issued a statement a day earlier saying because of the national financial crisis, California “has been locked out of credit markets for the past 10 days.”
California’s governor warned that a number of states are facing the same cash flow crunch this month, but his state is “so large that our short-term cash flow needs exceed the entire budget of some states.”
Lockyer said that unless the national economic crisis subsides and California can secure private short-term loans “the State’s cash reserves would be exhausted near the end of October.”
“Payments for teachers’ salaries, nursing homes, law enforcement and every other State-funded service would stop or be significantly delayed,” Lockyer said. “And California’s 5,000 cities, counties, school districts and special districts would face the same fate.”
——————————————
California produces 12% of the GNP for the US and **was** the 7th largest economy in the world. I believe we ranked just under France at my last reading.
It is not acceptable to sit on our thumbs and do nothing ‘after all, it doesn’t look like it will help anyway’, or ‘No-one would bail me out if I defaulted’. This is way beyond that.
jegan
October 3rd, 2008 at 9:34 am
If $1 now is worth $0.50 two years from now, how good of a decision was it to not spend that $1 when you could?
Just something to think about…
October 3rd, 2008 at 9:54 am
http://baselinescenario.com/
October 3rd, 2008 at 10:44 am
I highly highly recommend checking out the “This American Life” article. Either listen to the podcast or read the transcript. It gives a comprehensive and accessible explanation of the forces behind the financial crisis.
October 3rd, 2008 at 11:37 am
All these comments provide much feedback, it’s great =)
I’m able to keep up-to-date mostly through reading WSJ and watching CNN an hr or so a day for my political and economic news.
October 3rd, 2008 at 11:52 am
@26 — depends on what you’re talking about. Either way it’s good for me to not drink a $1 soda pop today.
October 3rd, 2008 at 1:44 pm
Hey. Not sure if you have seen this yet, but this site is a must see. Watch the whole crash course. Frigging excellent. You should have your readers aware of this site.
http://www.chrismartenson.com/crashcourse
October 3rd, 2008 at 1:56 pm
@ Jericho Hill, Post 9.
“When the average family carries 10K in CC debt and has no clue how to manage personal finances, how do we expect our elected leaders to act?”
The average family doesn’t have the luxury of just printing more money on a whim like the government can. That family has to pay that back themselves while the government just takes money from the people to pay that back to the central bankers so they don’t have to worry.
The elected officials know how the system works, all the average family knows are the lies spread by the elected to keep them in the dark. It’s time they learn and wake up how we’re all being lied to and manipulated.
October 3rd, 2008 at 8:16 pm
@John B. Egan: Totally agree. It amazes me how many people still think - even after reading today’s unemployment report - that the bailout is about “saving a few bad banks” and not about preventing total collapse.
Regarding your story in post #5. A somewhat similar story. A couple of (very well off) friends of mine just bought a vacation home with the mortgage of around 300K. They could have just paid cash, but they believe we’ll get higher inflation and that it is to their advantage to have a mortgage at current fixed rate. Both have excellent credit, high income, large down payment, no debt other than fixed rate 4.5% mortgage on primary residence - the home cost twice as much as the mortgage, easily affordable on one of their salaries - all the normal good stuff. In addition, they sent the bank where they were applying to the mortgage a print out from one of their investment accounts with the balance of 900K. Most of the money in gold ETF, cash, and ultra short funds: they got out of the market in non-retirement accounts last year. Told me about it too, and stupidly I didn’t listen - but this is beside the point. So they showed the bank they have 3 times the value of the mortgage. The bank still gave them hard time, asked for a bunch of papers, many years of W-2, than asked my friend who has worked for the same large company for 15 years to explain why her income jumped twice by 14% and 12% during this time, and only increased by 3-4% at other times…. So her husband wrote them a letter how when you work for a company, people sometimes get small raises but sometimes get promoted, and that promotions come with larger raises. This satisfied them.
@Mike. Regarding to solution being “no bailouts”.
This is exactly what happened in 1929. No bailout. Let’s get “the rotenness out of the system” or however they put it. Except that the year after people said “it’ll serve them right”, they had to close their small businesses or be out of a job. I don’t know how you can say that the history of depressions taught us “no bailouts” when this one great lesson taught us what can happen where there is indeed no bailout. Every crisis is different. In 1929 it was tightening credit rather than easing. Now it is different. But the underlying logic is the same - “no bailout” can have devastating consequences. Do you know that it took the second world war for the economy to improve? Incidentally, the second world war might not have happened were it not for the great depression and its effects on other countries. So, “no bailouts” can have serious consequences too.
October 3rd, 2008 at 8:24 pm
@# Veteran Military Wife at … “My businessman grandfather would roll over on his grave seeing all these companies surviving on credit”
“surviving on credit”? Do you understand how banks and companies work? Do you expect businesses to keep piles of cash they may need for expenses or even to pay your salary in multiple checking accounts each under 100K rather than have the money invested in business?
For example, what do you think a bank is supposed to do with your deposit money? Put it in a vault where the money don’t bring any interest and pay you 4% just because you are nice or the bank needs to fill up space in the vault? How do you think any bank could earn any money doing that? So banks invest the money, right, into loans that bring them more than 4% they are paying you. Now, what do you think happens if more people than usual come to withdraw their deposits? This is what interbank loans are for. The banks normally lend money to each other at very low rate - until recent crisis it was 2% - then when they get their revenue, they repay. But right now these loans are at 4%, and they are hard to get. So when the “runs on banks” happen - and they were happening - the bank may have difficulty paying you. It may fail if it cannot timely meet its obligations, even if it has assets that it has no time to sell.
What about shipping companies which get paid after they deliver the goods yet have to pay their crew before they leave the port? Construction companies that need to pay their workers’ salaries first, yet get money only after the building is done. Other businesses that may not get timing of the money they receive be perfectly synchronized with the time they need to pay for expenses? What if business wants to expand to earn more money?
Credit isn’t all about living beyond one’s means. Credit allows companies to earn more money and to give jobs to people.
Even on the individual basis - how do you expect anybody but very rich become doctors without student loans?
October 3rd, 2008 at 8:52 pm
Today on a 5 hour flight I listened to all of the podcasts here:
http://www.npr.org/blogs/money/( free iTunes downloads)
I highly recommend if you found The Giant Pool of Money as compelling as I did.
October 3rd, 2008 at 9:31 pm
Kitty, well said. This is really why the bailout has to happen.
I do think that many if not most of the companies that have done tons of unsavory loans are going to end up failing, whether they just get bought out or end up in the hands of the FIDC. Things will continue to weed out the bad. That is how it should be.
But your local companies often borrow to pay there employee’s, because there payments are coming three weeks from now. If they don’t have credit, they can’t pay there employee’s. In the world market that we live in, that is how it has to be.
I’m still waiting for them to completely change how mortgages are done. That’s the legislation I want to see. No more:
No Down Payment loans
100% interest
Balloon payment arms.
Arms that can change with quarterly, monthly ,weekly, daily.
None of these are good and should be ended period. People either get into a loan they really can’t afford or they have no vested interest in keeping the house, as they’ve put no meaninful money into the house.
It amazes me, watching the little programs on TV for those foreclosing on there mortgage of people who are walking away, not because they can’t afford it. But because they’ve lost equity. Sorry but it should not be that easy. I’m sorry you got some crazy loan for a million dollar two bedroom house and now it’s not worth that much, too stinking bad. Sorry but I just don’t feel sorry for stupidity. If it smells like a skunk, it’s a skunk. Something needs to be happen to these people so they think twice before walking away.
I think those with balloon loans really why on earth did the banks not figure out that they need to renegotiate the loan before now.
Finally, I watched a program with Bill Clinton. He refused to lay blame on our current president for this mess. He made it very clear that he (Bill Clinton) tried to make changes to Freddie Mac and Fannie May during his presidency and congress would not touch it with a 10 foot pole. We know John McCain also tried to change freddie and Fannie and no luck. Those that just throw it at George W. don’t understand how the goverment works. The president can’t just say “say it so” and it be so. If congress won’t deal with it, there’s not much you can do.
October 5th, 2008 at 9:36 am
This was systemic. And now the system is correcting itself.
What evidence is there that its “correcting itself”? There are still several trillion dollars in real estate losses that someone is going to have to own. Whoever that is, whether the taxpayers or the lenders or the people who borrowed, is going to be in desperate straights.
The fact is the most important correction, allowing bankruptcy courts to refinance mortgages, has not been taken. It is not in the interest of the lenders or the borrowers for all this real estate to foreclose, but there is no way for them to avoid it with the mortgages being owned by thousands of different lenders and owners of CDS’s. Until some mechanism is made for them to renegotiate these deals the uncertainty of who owns those losses is going to poison the financial markets.
Far from correcting itself, the system is sinking fast and seems to be unable to correct itself. Both Washington and New York are dominated by industries, finance, media and politics, where appearances ARE reality. Unfortunately this isn’t one of those cases. The real estate losses are both real and permanent.
Worse, it is not clear that the real estate bubble was the only phony wealth being created as companies bought stock in companies who owned the mortgages at prices inflated by their real estate bond holdings. As those companies start to own their losses their stock falls. In turn, the underlying value of the companies that own their stock falls and their stock price falls along with it. That spiral is nowhere close to bottom and likely won’t be until the real estate market hits bottom.
According to the MPR story linked above the global pool of capital doubled from 2000 to 2006? Does anyone seriously think we produced as much in those six years as had been produced in human history?
October 5th, 2008 at 11:03 am
+1 for the simplicity of Austrian Economic Theory
http://mises.org/story/3128
Note the dates on many of the articles.
October 6th, 2008 at 6:09 pm
The only difference between a rut and a grave is the depth of the hole. Are economy will pull though this but not before at least another 100 banks fail.
A lot of people are thinking the sky is falling. We just have to realize it hasn’t moved at all.