This is a very nice visualization of the Credit crisis in America that explains just what has happened and why. Perhaps someone will do one of these for what is going on in Korea but then, “Minerva” got arrested for talking about economic trends, thus I don’t think anyone would be willing to have a go at it knowing that they could be busted for saying the wrong thing.
Also consider what Capital Markets Subcommittee Chair, Rep. Paul Kanjorski of Pennsylvania says in this YouTube link at 2’30″ about the resulting electronic run on American banks as a result of this screw-up.
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Financial Crisis blame game.
http://www.time.com/time/specials/packages/article/0,28804,1877351_1877350,00.html
You decide…
Hey!… the video makes people in my industry out to be the bad guy!
It’s not quite that simple. The video is only one side of the story.
What about Fannie Mae that, under pressure from the government, took a lot of sub-prime loans? What about loosening of bank regulations?
That is true enough “wangkon”. All of these players knew there was a problem lurking there and the SEC and the government is ultimately to blame, though it is difficult to decide just which of the ten commandments anyone involved broke. Perhaps “coveting thy neighbor’s wife’s rate of return” or “Thou shalt have no CDOs before me” (?).
Still, just what what should one expect to run into when they book passage on a pirate ship?
so based on that video I blame the global financial crisis on fat, drunken smokers with too many kids who can’t make their damn house payments.
Bastids!
I thought the Kanjorski/ CSPAN bit was debunked:
http://www.portfolio.com/views/blogs/market-movers/2009/02/11/kanjorski-and-the-money-market-funds-the-facts
Didn’t see the graphics, but I just listened to the narration while Mrs. Linkd was watching. I think it’s excellent, and recommend it highly.
I might have missed it, but I don’t think it mentioned the egregious errors of the corrupted ratings agencies and the breakdown of risk management systems within financial institutions, but you can’t put everything in one video.
A partial answer to WangKon’s somewhat valid complaint comes from the Time article he links to. Ongoing voting may change the rankings, but currently the top two “blame-ees” are the chairman of the senate’s banking oversight committee and the former head of the SEC. I’m impressed by this bit of crowd wisdom, given that hedge fund managers and investment bankers are easier targets for public outrage. I’m also impressed to see that China ranked very low on the list of blame-ees, since they’re also an easy target and protectionist elements are getting stronger lately.
This video link is for eujin (47 minutes long, sorry, but an excellent answer to many of yesterday’s questions): Money as Debt
If I was an American, I would not trust any of the banks (not one). Except for few changes for daily living expenses, I would take all the money and investments out and put it into short term US Treasury for safe keeping. The interest rate suck, so you won’t make any money. But the name of the game today is to keep your money safe and not lose it. When the shit hits the fan (and it will sooner or later), you still have checks being mailed to you by the US government.
There are even better blogs on the ongoing economic crisis than many people realize. Calculated Risk is the best of the lot, and the comments section is better still! Naked Capitalism is good too, though more pessimistic. RGE monitor is for those that want to sign up. Mish is now kind of “meh” as I think he went off the deep end. Also some other notables such as Angry Bear, or Option ARMageddon (cute pun).
If you read them all, you’ll come away with a certain sense of foreboding and despair in that things (such 4% unemployment) will never be the same again in the U.S. Whats happening is not so much of a crisis, as an unwinding of a multi-decade asset/credit bubble that began under Reagan that gave Americans the illusion of more prosperity than they themselves had created thanks to financial wizardry and dollar hegemony. U.S. standards of living are being reset to a more realistic level and any attempts to forestall such a decline will be both non-productive and simply shoveling the (growing) problem down to the next generation of American workers. This unwinding in the U.S. is also sending reverberations around the world as the demand push caused by the bubble recedes and the global oversupply of production is exposed.
As an elementary school teacher, I feel queasy about our long-term future when I look at the generation of workers who will support my retirement. We are seeing an increasing number of high-needs children who cannot function in a school environment. They get out of control frequently, compelling school personnel to spend time removing them from the classroom and address these children’s problems. Even on medication, some kids still cannot walk in a straight line in the hallways. They are literally bouncing off the walls and must be escorted hand-in-hand with the teacher. When they’re not on meds, they’re much worse. A kid in an after-school program last week just shook his head back and forth repeatedly. It was disturbing to watch. So many of these non-functional and semi-functional kids will be net consumers, not net producers, receiving public assistance or spending time in prison. A nation with an average IQ of 98 cannot expect to maintain a very high standard of living.
visualized with words?
I have to agree with you “cm”. I do not trust American banks and have not for years (considering how they engage in predatory practices) and have, as of late, begun considering American business groups (food industry, pharmaceutical industry, etc.) in the same negative light, meaning, these groups promote their business interests ahead of the interests of society, thus the long-term results of such are problematic.
Take “Sonagi”s concerns: how much of this could be linked to a poor food culture, driven by the industry? Where does the steady increase in obesity, diabetes and other health problems originate? Poor living conditions? Bad genes? Though some illnesses can be linked to such, it’s seeming more and more to be the accumulative affects of industrialized food culture that promotes an unhealthy diet.
But Brendon said it was fat bitches on food stamps.
The bottom is long ways off, and this bear market is going to be with us for a long long time. There are no bargains right now.
If you want to make some big money during this implosion of global monetary system , bet against the Euro. They are going to sink big time. And that means only one thing for the US dollar. The only way is up. A lot of eastern and western European countries are going to collapse in the coming months. Watch Britain, as well as countries like Austria and Switzerland very closely.
Yup, true that. And #7 by Jing above is excellent overview, i think.
Sonagi & Elgin: yup, high-fructose corn-syrup and etc — America’s least-recognized Deal-with-Satan. A few walk away wealthier while a couple entire generations are sacrificed. I avoid that shit like the plauge, stick with whole food AFAP…
Good ol’ Frank Zappa way back in 1966 —
and how very appropriate for us again today…:
Well I’m about to get sick
From watchin’ my TV
Been checkin’ out the news
Until my eyeballs fail to see
I mean to say that every day
Is just another rotten mess
And when it’s gonna change, my friend
Is anybody’s guess
So I’m watchin’ and I’m waitin’
Hopin’ for the best
Even think I’ll go to prayin’
Every time I hear ‘em sayin’:
That there’s no way to delay
that trouble comin’ every day
No way to delay that trouble comin’ every day
Do not expect the today’s children will be able to provide you for your retirement, Sonagi. American government won’t be able to provide much to its pensioners in 30 years time. I think America in particular will have a very tough time in the next 5 to 10 years. One in ten mortgage holders is either their home foreclosed or more than three months behind in payment. One in five is under water, meaning their home is worth less than the mortgage amount. Most major American banks are insolvent, as is American government. You have only yourself to rely on for your future.
Per “Sonagi” and #13 “sanshinseon”, here are a few interesting links regarding big agri-business, corn-syrup, etc:
http://www.megnut.com/2006/07/agribusinesss-lab-rats
http://www.nytimes.com/2006/07/02/business/yourmoney/02syrup.html?_r=1&pagewanted=all
http://www.nytimes.com/2006/04/23/books/review/23kamp.html
(ADM and the politics of agri-business)
http://www.grist.org/news/maindish/2006/12/06/ADM/
It’s not only about taxes that support Social Security and Medicare. It’s also economic productivity and growth that support retirement investments both public and private. Much of our economic growth over the past two decades has been fueled by population growth through immigration. When one factors that out, Japan’s economic growth during its lost decade was actually higher than ours.
It’s called the curse of longevity and antibiotics. One hundred years ago, many of these young handicapped drains on society wouldn’t be making it through childhood, but thanks to an abundance of cheap food and medicine, more and more are able to join the fittest in the quest for survival. Just think about it, how in the world would eight kids being born at one time ever have survived at all in the past. They wouldn’t have. Sadly, many of those eight born recently will never be fully normal either, as they were delivered so prematurely. They also have the added burden of being born to a mother that already had six children, some of whom are themselves disabled, and who is definitely operating on too few cylinders and without a viable means of supporting herself.
Then there are the health food fanatics who are more than ready to blame corn and sugar for fat kids. The problem is that kids are no longer working on farms (or at all for that matter) and now live the urban, sit-on-your-rear and eat all day while playing video games and texting lifestyles. They’ve had it too easy compared to those who have come before them, and those struggling in other parts of the world. Their lifestyles, and the choices associated with them, are more to blame than the food we eat. I wish that those with their own yards would rip out their manicured lawns and oak/pine/elm trees and plant vegetable gardens and fruit trees in their places instead, but people are too busy with Facebook, iphones, gaming systems, and other time wasters like porn to be bothered to not only exercise but to eat healthier while doing so. Conveniences are something we have grown dependent on: remote controls for everything from TVs to the entire house, laptops, 7-11s, refrigerators, cell phones, cars, Wal-mart, etc. Having to go out and ride a bike or weed a garden would be akin to a death march for some.
But don’t worry; once food gets too costly in this economic downturn, there will be a lot of weight lost. It is just unfortunate that most of the food that won’t be purchased will be fruits and vegetables, but man cannot live without liquor, carbonated drinks, cigarettes, and porn.
I just hope that we have come far enough along in our evolution that the next great world war won’t be what is needed to pull us out of this downward spiral. It was circumstances like these that were part of the cause of the last one.
To sum it all up, second financial crisis coming soon which could be even much worse then the first one. This time from Europe, and in America. Banks like the Citigroup and Bank of America are bleeding red. How long can they go on? Uncle Sam should get all his money printing presses out. Does the IMF even have enough money to be able to bail out all these countries? What happens if a dozen countries go bankrupt all at once? What happens if Britain goes bankrupt and they need IMF help? Does the IMF even have the resources to help such a large economy?
Another reason for plump kids and diminished work/study habits:
http://www.msnbc.msn.com/id/29328966/
I wonder if they will do a story about the frequency of which some leave comments on websites and blogs. There are some here that could give these texters a run for their money. I’m off now, some actual books need reading.
Corn syrup is evil.
Go to Google and type in “IMF needs”, with the quotation marks.
They have about $250b.
If you’re really concerned about your future, you might want to spend a few minutes here:
http://www.youtube.com/watch?v=uFjToJx7KyQ&feature=channel
If you want to watch the subsequent parts, you can find them at the “more from” column next to the video.
. . . stiff upper-lip? The Brits can eat each other for all I care.
Here, there could be a surge of people leaving Seoul (no work) and, instead of going back to their hometowns, new collectives would be built back out in the country that are more self-sustaining. Many of the unsold apartments and the poured concrete complexes would end up looking like part of Gwangju look already, with faded 임대 signs or worse, hanging from them. At least the chaebol/construction company-sponsored idea of “development” would be dead (I hope).
Thanks for the link Linkd. Fortunately I really was taught about monetary theory in high school and we watched a similar video but without all the conspiracy talk, images of the grim reaper and people trying to use IOU hammers. We even calculated money multipliers from the fractional reserve ratio. I wonder where Paul Grignon went to school.
It still doesn’t answer my question of where the Central Bank is getting the money from to buy the Treasury bonds (the original issue we discussed). From the video I’m guessing you think that they’ll just increase M0, which as you pointed out earlier, ultimately just causes inflation.
By the way, one of the books I was reading over Christmas was The Rise and Fall of Monetarism. I picked it up and started reading because it was a shock to me that monetarism had “fallen”. Good to see that you still think along similar lines.
The other curious idea I’ve been thinking about recently is whether it makes sense to try to bolster domestic demand in an export driven economy like Korea’s. It might be a better idea for the Korean Government to give their stimulus spending directly to the American consumer. At least Americans will go out and spend it.
Elgin also owes you some sort of hat tip for the Kanjorski story which you had mentioned some weeks back. After you posted about it I went and listened to the original tape and thought there must be something wrong. Thanks also to Bess460 for providing the Felix Salmon link.
Darn, I didn’t realize “linkd” mention the Kanjorski C-span interview.
Well, it is frightening to hear the fellow talk about what just about happened.
Elgin, I hope you’re checking out Bess460′s link @#5 as well.
http://www.portfolio.com/views/blogs/market-movers/2009/02/11/kanjorski-and-the-money-market-funds-the-facts
A couple of points about ratings agencies for Linkd: Back in 2001 when KPN were headed down the gutter, the rating agencies’ stubborn refusal to downgrade them to non-investment grade was probably what saved them. In an objective sense they probably should have been downgraded, but a lot of their bondholders were not allowed to own non-investment grade paper and would have had to dump them, leading to almost certain bankruptcy. If KPN had gone down they probably would’ve taken France Telecom with them and possibly the whole European telco market. Whether it was political interference that saved KPN at the rating agencies I’m not sufficiently inside to say, but whatever it was avoided a catastrophe.
Secondly, as mentioned above, the main role of rating agencies is that many fund managers are simply not allowed to own paper below a certain ratings class. Anyone who was managing serious money and relying on rating agency models or analysis for portfolio decisions needs a serious clip round the ear hole. These ratings rules are even written into legislation in certain jurisdictions. Of course this means that there’ll always be a market for “ratings arbitrage”, but it’s not so much the rating agencies’ fault, as the perennial problem of how to write regulations that are easy to enforce without being prohibitively expensive. Blaming the rating agencies is like blaming spam-filters for the increasing sophistication of spam.
The argument that the rating agencies were somehow corrupted to overvalue products because the investment banks were paying their fees is fallacious for similar reasons. If you look back at what an S&P AAA or a Moody’s Aaa rating has meant over the years, it has never meant that the probability of default was 0.
I wish I can start out the day with some cheerful news for my American friends, but things are looking terrible this morning.
I have just gotten an urgent email from a trusted source that mega American banking institutions are about to collapse in matter of days and that we should get ready for it. This will happen despite the US federal bailouts, and it will take out the main stream American economy.
Get ready for another major collapse in stock prices soon. That should just about finish off all the European and Asian countries that are on the brink currently.
It looks like our lives, the way we knew it, is coming to an end. The troubling question is, how are we going to deal with it.
Ohhhh shit, better take money out of stocks like right now. Paul Krugman also is saying some scary things in today’s op-ed.
Whatever you got, sell now. Because they are predicting as much as 40% drop in the American stock exchange.
It’s over.
Hey, any chance in hell emerging market stocks will come out of this ok?
Grim reaper, indeed? Well, it’s been a couple of years since I watched it. Don’t recall it being that dramatic.
The Fed of course is the clearing house for all commercial banks, which are private businesses and exist to make profits. In the simplest model, they make profits by taking in depositors’ money and lending it out, making a profit on the interest rate spread. Simple. Now with financial engineering, they can get into all sorts of other businesses, too, but basically their product is money, and the source of money is deposits.
If they think the opportunity exists to really make some good coin, say, by issuing a whole bunch of subprime mortgages, but they don’t have enough deposits on hand, then they can borrow from the Fed, which sets the interest rates. As far as I know, this is the only interest rate the Fed, controls – the rate at which it will lend money to commercial banks.
But, you want to know, where does this pool of money come from that the Fed has? It comes from the click of a mouse. The Fed is basically the final reservoir of all the US’s money, pulling cash in from the commerical banks (by selling them T-bills in exchange for cash) when it thinks the economy is too hot, or by buying their T-bills in exchange for cash when it wants to give them more money to pump into the economy. When the Fed buys T-bills from a commercial bank, it just credits that bank with the ‘cash’ dollars. Click. Just like that.
ratings agencies: risk has a price. when a bond (CDO,CMO, etc) is sold with a yield just a few dozen points above a T-bill, the buyer expects that the risk of default is very low. Of course I agree that the buyers deserve blame too, but the ratings agencies, I believe, willfully altered their models and knowingly passed off large bundles of risk as being ‘diversified’, when they were just bigger piles of shit. As a 3-company oligopoly, the ratings agencies were in a position to grossly mis-price risk and distort markets.
I don’t blame them for this, actually. Their industry’s incentives are unfortunatley set up that way. Nonetheless, they played a crucial role in the whole subprime mess.
Why would you think emerging market stocks will be OK, when all the developed markets are going to be clobbered? We’re all in this together. It’s called the folly of global economy.
The system is doomed and so is the US economy as well as her superpower status. US can’t create money without debt, but they can’t get rid of that debt or else they’ll get rid of the money itself.
This really is horrendous. When will I EVER find me a better job in this kind of environment?!?!
GAAAAAHHHH
Of course they can. If you owe me a dollar and I owe you a dollar, we can just cancel each other’s debt. Poof! two dollars have just ceased to exist. That’s something Paulson was working on before leaving Treasury, was getting the investment banks to “net out” their counterparty derivative obligations to each other. I haven’t read anything about that since Geithner, though.
I think I’ll be even more explicit:
When I buy a beer from you, I get the beer, you get the cash, but also you have lost the beer and I have lost the cash. When the Fed injects cash into the economy by buying T-Bills, it doesn’t LOSE cash. It creates it.
Thus, US government spending (T-bills) have been the ultimate source of cash creation, and it has been up to the Fed to mop up that cash if it seems to be getting so excessive as to be inflationary.
Between these two players has been The Market, which buys the T-bills using existing dollars in open auction, providing valuable feedback on the demand for (and faith in) new US government debt. This mechanism puts some sort of rationality into the whole process of creating fiat currency, because the government STILL has to raise existing dollars through taxes or new borrowing to pay the interest and principal on existing T-bills. If Treasury sells directly to the Fed, then it’s not getting existing dollars, it’s getting new dollars, meaning that the government is taking over control of money supply, which is supposed to be the independent Fed’s prerogative.
Oh yeah, dos guys. I heard that!
No, everyone is going to die.
If you heard about it, it would have already happened by now.
damnit! And here I am in Korea, thousands of miles away from my concrete storm shelter and stacked cans. Not to mention my trusty shotgun.
What a fool I was to travel overseas.
Stay calm folks. The Dow dropped 3.41%, but Bank of America closed up 3% and Citigroup was up 10%. JP Morgan slashed their dividend by 87% but it’s not yet the end of the world. The share price only fell 2% and people are still predicting a positive EPS. Both BoA and Citi have already cut their dividend.
Krugman is talking about the cost of welfare and the IS curve. The cost of welfare is old news (on the back of an envelope as he calls it). The IS curve is technical stuff that doesn’t require you to start stockpiling canned food or booking the next flight home. Yesterday (Sunday – US time) he was plugging the case for nationalizing the banks, but that’s been bouncing around for a while. Even Letterman’s been talking about it.
cm, I suggest you keep your panic mongering to yourself and if you are receiving insider information from trusted sources I’d rather not know. These are serious times, let’s not start joking around.
Seriously. Now, in lighter news, R.Elgin will share my delight in learning that General Growth Properties has announced that the shopping mall is dead!!
Or, at least, America’s second largest owner of shopping malls is tits up in default on billions in loans, and now just waiting for its creditors to rip its Chinese-made-plastic-junk-infused carcass limb from credit-card-debt-financed limb.
This dude thinks they’ll be OK, though, since their assets are ‘of the highest quality’. Sure, if ugly strip mall venues designed for selling fatsicles and disposable everything to the most HFCS-saturated people on the planet are a high quality asset to someone, let them buy – prices are a steal.
I’ve already posted elsewhere about malls in the states “linkd”. I hope some are left even though their way of doing leasing should change. Many of these malls have much potential, IMHO, when they are used in ways that they were not originally intended.
Regarding the C-span video: some have tried to debunk Kanjorski’s comment as being incorrect, however, I have read others argue that there is some truth to it as well. As for how much, I do not know.
It’s nice to see a more nuanced discussion of the issue. On one of these threads I tried to explain some of the economic fundamentals to a neophyte who was intent on scapegoating, for some reason that was not explained or defended, homeowners for the problems resulting from the high-level creation of the financial instruments that precipitated the current correction.
It is also interesting that Obama’s speech today touched on the fact that the economic decline didn’t happen overnight. Despite the various bubbles and corrections, there are fundamental issues that underlie a steady trend of economic misdirection. Unfortunately, you’ve got to look beyond the headlines and the common wisdom to grok some of the underlying trends and causes.
Another comment of Obama that caught my attention was his statement that Detroit would be introducing revolutionary electric cars but that “they will be powered by Korean batteries.”
This alludes to the fact that govt. fiscal, economic and regulatory policy and incentives plays a key role in shaping the larger economic environment.
The myth of “free enterprise” has been used as a canard to promote a radical redistribution of wealth to the top 5%. While this charade didn’t exactly begin with Reagon, it was under his administration that the deceipt was given wings and became somehow respectable. It culminated with the crblatently iminal acts of Bush and Cheney.
While we often critique the infamous Korean lack of transparency, Americans enabled a similar corporatist lack of transparency under each of the administrations that followed Reagon’s. However, in the US, it was more cynical and sophisticated. The corporatists were extremely successful in coopting popular sentiment. Somehow, they managed to convince otherwise intelligent people that corporate welfare, cronyism, redistribution of wealth, the dismantling of US industry and the working class was a good thing. The smoke and mirrors of Voodoo economics concealed the fact that so-called “booms” were not in fact booms but bubbles led by financial instruments rather than by the production of real value.
In that light, the correction was inevitable, and any thoughtful analyst would have known that, given the extent of the deception, the correction would have to be quite fierce.
The silver lining? There is now a man of vision, honesty and integrity in office who is educating the public to the fundamental economic causes and solutions to these long-term trends.
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