"The collapse of so many major financial institutions in the past year, and over the past few days especially, is hard to fathom in its enormity. Sometimes you need a good visual to put things in perspective. The New York Times has an interactive graphic up on its site that pretty much says it all. It shows that $4 trillion has been wiped off the total market capitalization of the U.S. stock market since last October. Of that, nearly $1 trillion is from the decline in the financial sector alone.
Each box in the graphic is proportional to the size of the market capitalization of the biggest financial firms then and now. As you mouse over the squares, you can see how much each value each company lost between October 9, 2007 and September 12, 2008. Here are some of the individual losses by market cap:
Citigroup: $236.7 billion to $97.8 billion. Bank of America: $236.5 billion to $150.2 billion. AIG: $179.8 billion to $32.3 billion Goldman Sachs: $97.7 billion to $61.3 billion American Express: $74.8 billion to $45 billion. Morgan Stanley: $73.1 billion to $41.1 billion. Fannie Mae: $64.8 billion to $700 million. Merrill Lynch: $63.9 billion to $24.2 billion Freddie Mac: $41.5 billion to $300 million. Lehman Brothers: $34.4 billion to $2.5 billion. Washington Mutual: $31.1 billion to $2.9 billion
It is staggering when you look at it all together, and when you realize that the companies still standing like Bank of America and Citgroup, have seen bigger market cap declines than some of the institutions that have gone under (Lehman Brothers) or that had to be bailed out (Fannie Mae, Freddie Mac). For the estimated 150,000 financial sector employees who have already lost or will lose their jobs this year, the outlook is bleak. (Although, First Round Capital and Union Square Ventures are already openly trying to recruit a select few of them for their portfolio startups—quant jocks are especially welcome)."
Although it says $4 trillion, apparently it's $5 trillion now.
On September 18 2008 08:51 kpcrew wrote: the financial sector is only a small part of the economy, but the government shouldn't keep bailing out these companies. "moral hazard"
the problem is, every sector in the economy relies on the financial sector. only a very very selected few companies have no bank loans (or dont need one. ie microsoft and berkshire hathaway). most companies rely on bank's money to finance their operations and growth. if the financial sectors get raped up the ass, guess how are they gonna make up for it?
bailouts are a moral hazzard but the US gov have no choice. loans and mortgages are backed by collaterals and are teh most secured of all investments. if the US gov dont back em, no other investment in the US is safe. foreign investors are gonna doubt the US econ too. China and Japan will stop buying US bonds (cause the US gov wont back em up) when that happens... the US econ will b fucked beyond anything you can imagine.
On September 18 2008 08:43 thoraxe wrote: Don't worry, Bill Gates will save us.
He's rich as fuck but he doesn't have that much money unfortunately. His net worth is like 50-something billion $$$. Which is a penny compared to 4 trillion O_O
On September 18 2008 08:54 Caller wrote: buy gold and silver
people have been saying to buy gold for some time now but ive never quite understood why. can you or someone else explain please?
gold and silver are the universally accepted currency. the US dollar is backed by the US econ, when the US econ fails, US dollar is just paper money. gold and silver is different. the price of gold relative to US dollar changes each year due to strenght of US econ, but if you compare gold to bread and butter, you will see that the value of gold always raises consistently or stay about the same. 1 once of gold can buy u 100 loaf of bread in 1900, it can still buy you 100 loaf of bread today. in contrast, 1 us dollar buy you 10 loaf of bread in 1900, it buy you 1/2 of a loaf of bread today. thus, when in doubt, covert you cash to gold.
thus, unlike paper money (ie US dollar), gold is a hard asset. gold also has alot of industrial and commercial use, so the value of gold never plumets in real term.
i know. i said shouldn't because they only encourage risky behavior but i do understand that the government has to, to prevent an economic meltdown. but if the next crisis is even worse, and people expect the government to bail these institutions out again, then there might be no solution to the problem and the only outcome would be economic failure.
also people say buy gold because gold retains its value, currency does not due to inflation. currency is a guarantee by the government that this rag contains purchasing power and you can exchange it for goods and services
On September 18 2008 09:08 kpcrew wrote: i know. i said shouldn't because they only encourage risky behavior but i do understand that the government has to, to prevent an economic meltdown. but if the next crisis is even worse, and people expect the government to bail these institutions out again, then there might be no solution to the problem and the only outcome would be economic failure.
also people say buy gold because gold retains its value, currency does not due to inflation. currency is a guarantee by the government that this rag contains purchasing power and you can exchange it for goods and services
the problem with the US dollar now is that with so much gov debt outstanding, you need to pay alot of interest on that money and so with many companies to bail out, you need even more money. the amount of output in the US econ is relatively fixed in the short run (ie +/- 4% year over year). if the US needs another $500B to bail out companies, the US econ needs to produce $500B worth of goods to back it up. if not, then there will be inflation.
this is a downward spiral. because after the US gov bail em out, the US gov incur more debt. the debt incur more interest, the gov will be forced to print more money, which lead to even higher interest and even more debt and we are back to square 1.
On September 18 2008 08:54 Caller wrote: buy gold and silver
people have been saying to buy gold for some time now but ive never quite understood why. can you or someone else explain please?
If you have physical gold and silver, when the fiat currency we now have becomes worthless, you will still have a viable source of money. That's the idea.
To the OP it's not just one person that is responsible. It's the heads of unimaginably greedy companies that made loans, which should never have been made, to make their own pockets fatter. They were giving 200k+ loans to people who made 30k a year. How the fuck are they going to pay that off? Especially when that 2.5% APR jumps to a 9.5%?
I read this somewhere, and I thought it was a really good assessment of the actions of the Fed on investment companies. The Fed's new motto?
Privatize gains, socialize losses.
By not letting risky firms fall we are saving a credit crash, but also giving a bad message to corporations that if they make enough and factor in large enough to the American economy, they can take all the risks they want.
a bunch of managers walked into a bank, blew open the vault to enrich themselves. they tried to walk out with the money, but failed. now they hold the public as hostage and threaten to kill the US econ. the Feds had no choice but to grant amnesty. the managers walk away free and the public ends up paying for all the damage.
On September 18 2008 09:45 dybydx wrote: you know, this is kinda like bank robbery.
a bunch of managers walked into a bank, blew open the vault to enrich themselves. they tried to walk out with the money, but failed. now they hold the public as hostage and threaten to kill the US econ. the Feds had no choice but to grant amnesty. the managers walk away free and the public ends up paying for all the damage.
as an addendum, the managers actually walk away free and with an endless amount of green
Well, it depends, really. I think people have learned from their lessons, for one, Fuld's reputation is permanently ruined. Not many people would be likely to try to follow in his footsteps. Merrill Lynch's CEO before Thain (forgot his name, anyone recall offhand?) got sacked with the beginning of the housing issues, etc. Fannie, Freddie and AIG are all set to practically dismantle themselves, at that, we might well stand to gain a profit from AIG given how it is merely illiquid (or is supposed to be, God help us with accounting). For all the constraints placed on the administration given an election year, I think Paulson has managed a fairly impressive job thus far.
The market has been punishing itself, really, top executives might've got away with it mostly unscathed (in a way) this time, but they won't be allowed to pull stunts like that again. The Fed's concerns should be about keeping the economy in a better overall condition rather than giving messages about individuals running their companies - the companies will most likely avoid this kind of risk taking from now on. With the fallout of Lehman, I wouldn't be surprised to see more companies building in safety mechanisms and have lower tolerance overall for the kind of risky behaviors that has led us up to this point.
lawlz and we think enron was bad. looks like wall street showed us kuzka's mother.
it be interesting to see by the end of all this, how much money did each group of ppl lost. the managers definitely came out on top. even after getting sacked, their prior year bonus, stocks (if they sold it early enuf) and raw salary still put em far ahead of everyone else. certainly way ahead of suckers who got their homes taken away.
It isn't like there is any real way you can regulate such things by law instead of having companies dealing with it internally. Without stepping into some pretty scary ideas like the windfall tax it is simply too difficult for regulations to be able to do much about it.
its insane how the executives still pull away with huge bonuses after they presided over what could have been a complete destruction of their respective companies, which could have dragged down the entire economy. some people have called this this worst financial disaster since the great depression
you CAN regulate it. in the early days, the gov prevented banks from overlending by keeping a reserve ratio. the Fed also has a regulation that automatically loan banks money and guarantee deposits up to 100k. all these are regulations aimed that protecting the public and prevent bank failures.
likewise, you CAN regulate mortgages by forcing banks to keep a reserve if need be. (ie if u have 100B mortgage outstanding, u need a minimum cash balance of 100M.
Much bigger version Enron and Ken Lay, with all their funny accounting to sell risky and junk mortgages as AAA investment vehicles. We don't seem to learn.
As they say, moral hazard. so all these CEOs, executives, brokers are still going to walk away with hundreds thousands up to hundreds of millions bonus and commissions made directly off of junk mortgages because of US government's active involvement in encouraging loose lending and accounting practices. Unlike Ken Lay and Jeffrey Skilling end up jailed, broke or dead.
On September 18 2008 10:24 dybydx wrote: you CAN regulate it. in the early days, the gov prevented banks from overlending by keeping a reserve ratio. the Fed also has a regulation that automatically loan banks money and guarantee deposits up to 100k. all these are regulations aimed that protecting the public and prevent bank failures.
likewise, you CAN regulate mortgages by forcing banks to keep a reserve if need be. (ie if u have 100B mortgage outstanding, u need a minimum cash balance of 100M.
100M isn't shit in comparison to 100B. That's the equivalent to saying if you have 1k you need to keep one dollar. A 1/1000 ratio isn't high enough. Unless 100B was a typo for 1B, and you meant they needed 10% saved.
On September 18 2008 10:30 NoName wrote: Yeah,
Much bigger version Enron and Ken Lay, with all their funny accounting to sell risky and junk mortgages as AAA investment vehicles. We don't seem to learn.
As they say, moral hazard. so all these CEOs, executives, brokers are still going to walk away with hundreds thousands up to hundreds of millions bonus and commissions made directly off of junk mortgages because of US government's active involvement in encouraging loose lending and accounting practices. Unlike Ken Lay and Jeffrey Skilling end up jailed, broke or dead.
Yeah, but if the crisis isn't solved, their money won't be worth anything at all. There's a much bigger problem than a few guys scamming the system this time.
On September 18 2008 10:24 dybydx wrote: you CAN regulate it. in the early days, the gov prevented banks from overlending by keeping a reserve ratio. the Fed also has a regulation that automatically loan banks money and guarantee deposits up to 100k. all these are regulations aimed that protecting the public and prevent bank failures.
likewise, you CAN regulate mortgages by forcing banks to keep a reserve if need be. (ie if u have 100B mortgage outstanding, u need a minimum cash balance of 100M.
100M isn't shit in comparison to 100B. That's the equivalent to saying if you have 1k you need to keep one dollar. A 1/1000 ratio isn't high enough. Unless 100B was a typo for 1B, and you meant they needed 10% saved.
the fed forces banks to keep a money supply of at least 10% on hand, not only "in the early days", but today as well
On September 18 2008 10:31 SweeTLemonS[TPR] wrote:
On September 18 2008 10:24 dybydx wrote: you CAN regulate it. in the early days, the gov prevented banks from overlending by keeping a reserve ratio. the Fed also has a regulation that automatically loan banks money and guarantee deposits up to 100k. all these are regulations aimed that protecting the public and prevent bank failures.
likewise, you CAN regulate mortgages by forcing banks to keep a reserve if need be. (ie if u have 100B mortgage outstanding, u need a minimum cash balance of 100M.
100M isn't shit in comparison to 100B. That's the equivalent to saying if you have 1k you need to keep one dollar. A 1/1000 ratio isn't high enough. Unless 100B was a typo for 1B, and you meant they needed 10% saved.
the fed forces banks to keep a money supply of at least 10% on hand, not only "in the early days", but today as well
10% used to be a reasonable reserve level for demand funds, a mortgage is not usually due on demand, thus a lower reserve level is appropriate. realistically i m thinking of 1%.
but in practice, these companies like fannie and freddie, which are involved in $trillions of mortgages usually have much much less than 1% of that (1% of 1 trillion is 10B cash) on hand.
dybydx, it is one thing to do that with commercial banks in terms of lending, it is another thing to do it with leverage. Bank runs and insolvency are quite different, the latter is something that can be very well controlled by safer business practices that we didn't see. Leverage has always been a business option to be abused given the flexibility it gives to the company, the problem at hand is the kind of risky behavior promoted for the sake of personal gain rather than a problem with leverages themselves. To pin regulations on leverages is fairly pointless, imo, should the companies themselves refrain from this kind of behavior. Given the kind of situation that they see themselves get into, I stand by my previous statement.
Probably doesn't factor in the actual direness of the situation, but it is hilarious. Who cares about the United States economy; China can take over anyways. Far East Asia shall take over the world! It is already starting.
World Economy: China Inventions & Innovation: Japan Technology: S. Korea That "political issue" country: N. Korea Cyber Gaming: S. Korea
To explain more about the Cyber Gaming community, and how it is taking over... think about Spirit Tournament. They are taking the best from the rest of the world, and containing them in S. Korea training houses. They hire thousands of Dark Archons (As seen in OSL commercials) to maelstrom the pro-gamer material foreigners while the rest of the world deteriorates. They take over, and Far East Asia owns everything, the best of the best of every thing possible on Earth. GG
well the canadian banking system has stronger regulations with respect to mortgages. lending transactions typically require the original lending bank to bear a greater portion of the risk compared to the US scheme. so regulating does work. or so i heard. let see who goes for bankruptcy next. lol
The risk is there, don't you see the underwritings that these companies took that beated them into the ground? People simply ignored the risk, many can argue they didn't even see a risk in the model.
Are we entering like, a great depression situation?
I mean, it seems hard to believe that 5 trillion dollars can just be brushed off casually, that it will only cause a recession in america, and a slow down else where- I think the effects will be BIGGER. Hopefully not great depression big, but still...scary thought.
its somewhat inaccurate near the end. typically institutional investors are insulated and have indeed purchased an AAA quality mortgage. the original lender is usually the first to get arse raped.
its somewhat inaccurate near the end. typically institutional investors are insulated and have indeed purchased an AAA quality mortgage. the original lender is usually the first to get arse raped.
On September 18 2008 10:24 dybydx wrote: you CAN regulate it. in the early days, the gov prevented banks from overlending by keeping a reserve ratio. the Fed also has a regulation that automatically loan banks money and guarantee deposits up to 100k. all these are regulations aimed that protecting the public and prevent bank failures.
likewise, you CAN regulate mortgages by forcing banks to keep a reserve if need be. (ie if u have 100B mortgage outstanding, u need a minimum cash balance of 100M.
Well, in theory you can regulate it, but in practicality you can't. The problem with regulating the financial industry is that it changes quicker than the government can keep an eye on it. The government can only do so much because they rely strictly on auditing to see what is going on inside these companies; by the time all the forms are looked and and processed, the data is half a year old and 500 billion dollars undervalued. When you're not working with physical capital, it's very difficult to keep track of everything and thats where the government is limited in it's ability to regulate it.
On September 18 2008 08:54 Caller wrote: buy gold and silver
people have been saying to buy gold for some time now but ive never quite understood why. can you or someone else explain please?
gold and silver are the universally accepted currency. the US dollar is backed by the US econ, when the US econ fails, US dollar is just paper money. gold and silver is different. the price of gold relative to US dollar changes each year due to strenght of US econ, but if you compare gold to bread and butter, you will see that the value of gold always raises consistently or stay about the same. 1 once of gold can buy u 100 loaf of bread in 1900, it can still buy you 100 loaf of bread today. in contrast, 1 us dollar buy you 10 loaf of bread in 1900, it buy you 1/2 of a loaf of bread today. thus, when in doubt, covert you cash to gold.
thus, unlike paper money (ie US dollar), gold is a hard asset. gold also has alot of industrial and commercial use, so the value of gold never plumets in real term.
This is the psychological belief people have behind purchasing gold and silver, but for all intents and purposes, the USD is not just a piece of paper. If the US econ fails and the USD becomes worthless, you will have a lot more to be worried about than just the little hoard of gold you have...which leads to my next point. When you buy gold, you're not actually buying physical gold but a contract that says you own a portion of gold--on the market. If the US economy fails, you can pretty much kiss your contract goodbye as the whole financial system would go down with it.
In the larger picture, "buying" gold and silver doesn't really hedge against stock (or other assets). The US, EU, and other players have been pumping so much liquidity into the market the last couple decades that even physical assets and commodities have become as easy to buy and sell as cash. That's kind of what happened with the housing market--because mortgages (which are traditionally long term assets) were so liquid, people swapped and over speculated their actual value.
On September 18 2008 08:54 Caller wrote: buy gold and silver
people have been saying to buy gold for some time now but ive never quite understood why. can you or someone else explain please?
gold and silver are the universally accepted currency. the US dollar is backed by the US econ, when the US econ fails, US dollar is just paper money. gold and silver is different. the price of gold relative to US dollar changes each year due to strenght of US econ, but if you compare gold to bread and butter, you will see that the value of gold always raises consistently or stay about the same. 1 once of gold can buy u 100 loaf of bread in 1900, it can still buy you 100 loaf of bread today. in contrast, 1 us dollar buy you 10 loaf of bread in 1900, it buy you 1/2 of a loaf of bread today. thus, when in doubt, covert you cash to gold.
thus, unlike paper money (ie US dollar), gold is a hard asset. gold also has alot of industrial and commercial use, so the value of gold never plumets in real term.
This is the psychological belief people have behind purchasing gold and silver, but for all intents and purposes, the USD is not just a piece of paper. If the US econ fails and the USD becomes worthless, you will have a lot more to be worried about than just the little hoard of gold you have...which leads to my next point. When you buy gold, you're not actually buying physical gold but a contract that says you own a portion of gold--on the market. If the US economy fails, you can pretty much kiss your contract goodbye as the whole financial system would go down with it.
In the larger picture, "buying" gold and silver doesn't really hedge against stock (or other assets). The US, EU, and other players have been pumping so much liquidity into the market the last couple decades that even physical assets and commodities have become as easy to buy and sell as cash. That's kind of what happened with the housing market--because mortgages (which are traditionally long term assets) were so liquid, people swapped and over speculated their actual value.
my friend, ever been to viet nam? when they say "buy gold" they literally have that bright yellowish dense metal that you can bite into. other nations that had war and inflation troubles often turn back to the gold standard. trust me, it works. just make sure u remember where u buried it and pay ur property tax. ^^
On September 18 2008 10:24 dybydx wrote: you CAN regulate it. in the early days, the gov prevented banks from overlending by keeping a reserve ratio. the Fed also has a regulation that automatically loan banks money and guarantee deposits up to 100k. all these are regulations aimed that protecting the public and prevent bank failures.
likewise, you CAN regulate mortgages by forcing banks to keep a reserve if need be. (ie if u have 100B mortgage outstanding, u need a minimum cash balance of 100M.
Well, in theory you can regulate it, but in practicality you can't. The problem with regulating the financial industry is that it changes quicker than the government can keep an eye on it. The government can only do so much because they rely strictly on auditing to see what is going on inside these companies; by the time all the forms are looked and and processed, the data is half a year old and 500 billion dollars undervalued. When you're not working with physical capital, it's very difficult to keep track of everything and thats where the government is limited in it's ability to regulate it.
1. in practice, canada regulated it and so did the brits. 2. investors rely on the latest info, often that isnt the audited financial statement. 3. the issue on hand is that these investments are not a direct investment itself. its a derivitive and that translates to higher risk. anyone who isnt willing to bear the risk shouldnt buy it. for this purpose, some investment firms require an acid test before accepting clients. their clients know well what kind of shit they put themselves up against.
On September 18 2008 08:54 Caller wrote: buy gold and silver
people have been saying to buy gold for some time now but ive never quite understood why. can you or someone else explain please?
gold and silver are the universally accepted currency. the US dollar is backed by the US econ, when the US econ fails, US dollar is just paper money. gold and silver is different. the price of gold relative to US dollar changes each year due to strenght of US econ, but if you compare gold to bread and butter, you will see that the value of gold always raises consistently or stay about the same. 1 once of gold can buy u 100 loaf of bread in 1900, it can still buy you 100 loaf of bread today. in contrast, 1 us dollar buy you 10 loaf of bread in 1900, it buy you 1/2 of a loaf of bread today. thus, when in doubt, covert you cash to gold.
thus, unlike paper money (ie US dollar), gold is a hard asset. gold also has alot of industrial and commercial use, so the value of gold never plumets in real term.
This is the psychological belief people have behind purchasing gold and silver, but for all intents and purposes, the USD is not just a piece of paper. If the US econ fails and the USD becomes worthless, you will have a lot more to be worried about than just the little hoard of gold you have...which leads to my next point. When you buy gold, you're not actually buying physical gold but a contract that says you own a portion of gold--on the market. If the US economy fails, you can pretty much kiss your contract goodbye as the whole financial system would go down with it.
In the larger picture, "buying" gold and silver doesn't really hedge against stock (or other assets). The US, EU, and other players have been pumping so much liquidity into the market the last couple decades that even physical assets and commodities have become as easy to buy and sell as cash. That's kind of what happened with the housing market--because mortgages (which are traditionally long term assets) were so liquid, people swapped and over speculated their actual value.
hey so I have a couple of questions. Monetary theory confuses the shit out of me. Can you explain exactly how the performance of the economy and the value of currency is linked? Why was the dollar on the decline for so long? Why is it going up again?
What do you mean by pumping liquidity into the market? is that the same as having lots of very liquid assets? How are mortgages liquid? How does that liquidity lead to overspeculation?
just curious, is there anything you can buy other than gold and silver? i know gold is probably the most "reliable global currency" but i was also thinking about the usefulness of it.
say, "buy crude oil barrels and hide em in your basement" or "buy plutonium and don't tell your neighbours why their lawn is glowing"
Probably doesn't factor in the actual direness of the situation, but it is hilarious. Who cares about the United States economy; China can take over anyways. Far East Asia shall take over the world! It is already starting.
World Economy: China Inventions & Innovation: Japan Technology: S. Korea That "political issue" country: N. Korea Cyber Gaming: S. Korea
To explain more about the Cyber Gaming community, and how it is taking over... think about Spirit Tournament. They are taking the best from the rest of the world, and containing them in S. Korea training houses. They hire thousands of Dark Archons (As seen in OSL commercials) to maelstrom the pro-gamer material foreigners while the rest of the world deteriorates. They take over, and Far East Asia owns everything, the best of the best of every thing possible on Earth. GG
Wow.. didn't I drift off topic....
Yeah.. losing money 'n stuff, US in debt. Bad.
You do realize that if the US economy fails, no one will be buying goods anymore, right? We consume 75% of everything, and are China's biggest customer. If we fail, the whole world is fucked.
On September 18 2008 13:39 Not_Computer wrote: just curious, is there anything you can buy other than gold and silver? i know gold is probably the most "reliable global currency" but i was also thinking about the usefulness of it.
say, "buy crude oil barrels and hide em in your basement" or "buy plutonium and don't tell your neighbours why their lawn is glowing"
platinum is also good, but its price tend to vary a bit more than gold. platinum itself has industrial use, so its value is justified. like gold, platinum do not "rust" and is much rarer than gold.
btw diamond on the otherhand is NOT a good purchase because it can be produced and has little industrial value (other than diamond drills).
alternatively, if u got the balls, buy urself a few nuclear weapons. they sell for high prices on the black market. =) and if u cant find a buyer, u can always blackmail someone for money.
On September 18 2008 13:39 Not_Computer wrote: just curious, is there anything you can buy other than gold and silver? i know gold is probably the most "reliable global currency" but i was also thinking about the usefulness of it.
say, "buy crude oil barrels and hide em in your basement" or "buy plutonium and don't tell your neighbours why their lawn is glowing"
On September 18 2008 13:26 ahrara_ wrote: hey so I have a couple of questions. Monetary theory confuses the shit out of me. Can you explain exactly how the performance of the economy and the value of currency is linked? Why was the dollar on the decline for so long? Why is it going up again?
What do you mean by pumping liquidity into the market? is that the same as having lots of very liquid assets? How are mortgages liquid? How does that liquidity lead to overspeculation?
economy and us dollar 1. suppose the only thing the US econ can produce is bread, and the US produce 100 bread this year. if there is only $100 USD out there, then 1 USD = 1 bread.
next year, the economy becomes "stronger" and US produced 200 bread. this will allow the US gov to print another $100 USD, for a total of $200 USD, and we still have $1 = 1 bread.
but if the econ goes shit.... and no bread is produced. then $100 USD is just paper with no value.
also if ppl have strong belief that the USD is backed by bread (ie $1 USD = 1 bread), they are sometimes willing to overpay for the USD for the security. this is why the US dollar was going up alot in the 90's
2. lately, the US econ has largely stopped growing, but because of debt, the US gov needs to pay interest. but since the US econ didnt generate more bread, the US gov essentially "printed more money". so now theres $200 USD buy only 100 bread. bread now cost $2 each. so the dollar has declined.
3. in the last few months the USD went up because Feds raised the interest rate. this cause other banks to lend out less money. with less money in the market, the value of each USD goes up.
liquidity 1. liquidity means how much cash u got. pumping liquidity means the US gov is loaning money out to the banks, since the banks now have more money, they can lend more money out to borrowers like home buyers, thus more money is available to everyone. mortgages are not liquid because a $1M mortgage takes like 20 years to pay off. so it takes a long time to collect all that cash.
having high liquidity is good financial health. low liquidity is bad health. however, having low liquidity allow you to make more money, at the risk of going bankrupt. =)
dybydx, if we are going to point at physical objects, it is by far more practical to have life necessities than gold in the case of a financial failure. Should the US financial system crash, even gold in physical form won't be particularly useful. I for one would much rather have stores of food and other necessities to barter with. Caller when he brought up the gold/silver point was much more likely to be pointing at it as a kind of security against inflation rather than the kind of medium of exchange you are suggesting.
ahrara, forex is rather weird like that. Currency theoretically reflect the strength of the economy backing, but really it points closer to the relative strength of the particular economy in comparison to another. The decline earlier in the year, particularly from the period after Bear Stearns rescue was due to the relative strength of Europe in comparison to America, and that showed in Q1 growth as well. The recent boom of the dollar was much due to the slowing of growth in Europe as people switched to greenbacks for better security, and as we see now people are switching to the Japanese Yen in favor of the dollar.
I am not quite sure as to why gchan worded that part about liquidity like that though, so I'll leave it to him to explain that part better.
Not_Computer, crude oil is in many ways more reliant on the industry than gold and silver.
EDIT - dybydx...when was the last time we raised rates.
And I wouldn't define liquidity like that either. That kind of generalization about liquidity is also particularly misleading.
On September 18 2008 08:54 Caller wrote: buy gold and silver
people have been saying to buy gold for some time now but ive never quite understood why. can you or someone else explain please?
gold and silver are the universally accepted currency. the US dollar is backed by the US econ, when the US econ fails, US dollar is just paper money. gold and silver is different. the price of gold relative to US dollar changes each year due to strenght of US econ, but if you compare gold to bread and butter, you will see that the value of gold always raises consistently or stay about the same. 1 once of gold can buy u 100 loaf of bread in 1900, it can still buy you 100 loaf of bread today. in contrast, 1 us dollar buy you 10 loaf of bread in 1900, it buy you 1/2 of a loaf of bread today. thus, when in doubt, covert you cash to gold.
thus, unlike paper money (ie US dollar), gold is a hard asset. gold also has alot of industrial and commercial use, so the value of gold never plumets in real term.
This is the psychological belief people have behind purchasing gold and silver, but for all intents and purposes, the USD is not just a piece of paper. If the US econ fails and the USD becomes worthless, you will have a lot more to be worried about than just the little hoard of gold you have...which leads to my next point. When you buy gold, you're not actually buying physical gold but a contract that says you own a portion of gold--on the market. If the US economy fails, you can pretty much kiss your contract goodbye as the whole financial system would go down with it.
In the larger picture, "buying" gold and silver doesn't really hedge against stock (or other assets). The US, EU, and other players have been pumping so much liquidity into the market the last couple decades that even physical assets and commodities have become as easy to buy and sell as cash. That's kind of what happened with the housing market--because mortgages (which are traditionally long term assets) were so liquid, people swapped and over speculated their actual value.
my friend, ever been to viet nam? when they say "buy gold" they literally have that bright yellowish dense metal that you can bite into. other nations that had war and inflation troubles often turn back to the gold standard. trust me, it works. just make sure u remember where u buried it and pay ur property tax. ^^
Well, some people may actually keep physical gold around as security, but the vast majority of people do not. I think most physical gold is actually held by governments or large organizations (like the IMF, World Bank). But thats besides the point; my point was that dumping a bunch of USD for gold (or other commodities) really does nothing because if the USD defaults/goes bankrupt (which is next to impossible), the rest of the world is pretty much fucked as well. It'll be the equivalent of an economic nuclear holocaust. Case in point, this image indexes the ratio of Dow Jones/ounce of gold. They pretty much, in the long run, go hand in hand
On September 18 2008 14:02 Ecael wrote: dybydx, if we are going to point at physical objects, it is by far more practical to have life necessities than gold in the case of a financial failure. Should the US financial system crash, even gold in physical form won't be particularly useful. I for one would much rather have stores of food and other necessities to barter with. Caller when he brought up the gold/silver point was much more likely to be pointing at it as a kind of security against inflation rather than the kind of medium of exchange you are suggesting.
ahrara, forex is rather weird like that. Currency theoretically reflect the strength of the economy backing, but really it points closer to the relative strength of the particular economy in comparison to another. The decline earlier in the year, particularly from the period after Bear Stearns rescue was due to the relative strength of Europe in comparison to America, and that showed in Q1 growth as well. The recent boom of the dollar was much due to the slowing of growth in Europe as people switched to greenbacks for better security, and as we see now people are switching to the Japanese Yen in favor of the dollar.
I am not quite sure as to why gchan worded that part about liquidity like that though, so I'll leave it to him to explain that part better.
Not_Computer, crude oil is in many ways more reliant on the industry than gold and silver.
EDIT - dybydx...when was the last time we raised rates.
1. food doesnt last very long. it is not a good store of value. gold does not rust, so it stores for a long time.
2. the recent raise in USD isnt just against euro. the USD also raised against gold. i think it has to do with fed raising the rate as well.
Practicalities, a financial system collapse won't leave you any use with your gold. The US's finances collapsing won't be just a regional thing where such rare metals will retain value due to the rest of the world having a necessity for them.
The recent raise in USD is indeed not just against the Euro, but Europe as one of the largest economic entities has been lagging, which attributes to the dollar's rise there. I am simply contrasting that with the Yen's latest growths to demonstrate the point of relative security vs actual economic strength.
On September 18 2008 14:08 gchan wrote: Well, some people may actually keep physical gold around as security, but the vast majority of people do not. I think most physical gold is actually held by governments or large organizations (like the IMF, World Bank). But thats besides the point; my point was that dumping a bunch of USD for gold (or other commodities) really does nothing because if the USD defaults/goes bankrupt (which is next to impossible), the rest of the world is pretty much fucked as well. It'll be the equivalent of an economic nuclear holocaust. Case in point, this image indexes the ratio of Dow Jones/ounce of gold. They pretty much, in the long run, go hand in hand
u'd be suprised how many ppl buy bullions. in addition, u have to understand the goal of buying gold is not to make a gazillion dollar, its for protection. (hence u only do it when ur scared, ie in viet nam)
in general, even very large investors (ie gov't of USA, China, etc) has a practice of holding gold.
On September 18 2008 14:14 Ecael wrote: Practicalities, a financial system collapse won't leave you any use with your gold. The US's finances collapsing won't be just a regional thing where such rare metals will retain value due to the rest of the world having a necessity for them.
well, the econ in viet nam collapses all the time. viet money is literally paper. u think germany was insane when they measure money with a weight scale? in viet nam, they use a meter stick. (too lazy to put it on a scale). yet gold still proved its worth there. viet nam is not alone in this practice. lots of ppl in China used to buy gold when inflation was insane in 194X.
On September 18 2008 14:36 mahnini wrote: are you actually advocating the use of gold as a currency? if not, i don't really see why you're discussing ths.
u dont have to use the full gold standard. as i said, many investors, ranging from viet nam refugees to the gov't of USA buys gold as a store of value. u dont see the US gov pulling trucks out of Fort Knox every day do u? its just for protection.
On September 18 2008 14:36 mahnini wrote: are you actually advocating the use of gold as a currency? if not, i don't really see why you're discussing ths.
u dont have to use the full gold standard. as i said, many investors, ranging from viet nam refugees to the gov't of USA buys gold as a store of value. u dont see the US gov pulling trucks out of Fort Knox every day do u? its just for protection.
you didn't answer my question, using gold as a store of value and using it as currency are two very different things.
Vietnam's economy collapsing cannot be compared to America's economy collapsing. If we want to talk about hyperinflation, Zimbabwe is a much better example than Vietnam, but this isn't about hyperinflation or a stagflation, but rather a major global meltdown in finances. The US economy collapsing would have way too much of an effect on the worldwide industry to allow for the kind of liquidity that you want from an exchange medium to be found in gold.
As for China, yes, KMT brought a large supply of gold with them when they escaped to Taiwan, which jump started the Taiwanese economy in many ways. That, however, isn't a case where the world is disrupted economically. The point is that the failure of the finances of the United States will disrupt markets and industries around the world so much that gold loses its value as an universal currency.
I think in the election Obama will have the upper hand here. He is known for his specific economic views and Mccain is known for being less of an economic stickler/republican dick. Whats happening here is the market for huge loans has been corrupted/declining and these major companies that give out gigantic loans (Fanny mae and Freddie Mac) just cant keep up with the forclosures and bankruptcy either caused by the bad economy or a series of financial mistakes. What this means is that they are getting fucked out dey minds and its bringing down everyones economy, so yes we are in a recession. As soon as they hit rock bottom it will begin to go up, so expect some expensive fucking bread.
On September 18 2008 14:40 Ecael wrote: Vietnam's economy collapsing cannot be compared to America's economy collapsing. If we want to talk about hyperinflation, Zimbabwe is a much better example than Vietnam, but this isn't about hyperinflation or a stagflation, but rather a major global meltdown in finances. The US economy collapsing would have way too much of an effect on the worldwide industry to allow for the kind of liquidity that you want from an exchange medium to be found in gold.
As for China, yes, KMT brought a large supply of gold with them when they escaped to Taiwan, which jump started the Taiwanese economy in many ways. That, however, isn't a case where the world is disrupted economically. The point is that the failure of the finances of the United States will disrupt markets and industries around the world so much that gold loses its value as an universal currency.
i agree that nothing u can do with gold will solve the economic troubles in the US. but the issue was brought up by someone asking why ppl should buy gold. i answered that it was to protect their savings.
i do agree that its not in everyone's interest for the system to collapse, but someone needs some brutal spanking for putting the world's population at peril and i m pointing my fingers on some selected few americans. lawlz.
On September 18 2008 08:54 Caller wrote: buy gold and silver
people have been saying to buy gold for some time now but ive never quite understood why. can you or someone else explain please?
If you have physical gold and silver, when the fiat currency we now have becomes worthless, you will still have a viable source of money. That's the idea.
To the OP it's not just one person that is responsible. It's the heads of unimaginably greedy companies that made loans, which should never have been made, to make their own pockets fatter. They were giving 200k+ loans to people who made 30k a year. How the fuck are they going to pay that off? Especially when that 2.5% APR jumps to a 9.5%?
Very important note here. Paper gold and silver (futures/stocks) can crash as well. There is much more paper out there than the real thing, and when crunch time comes, all the physical will be long gone.
This is evidenced by the decoupling of the spot of physical and paper. Go ahead, you can buy paper at the current prices all day long, however, you go into a coin shop or an online vendor, and you will pay some pretty steep premiums, because they themselves can't get it at "spot". Just evidence of market manipulation.
But yes, buy physical gold and silver. In hard times, its one thing no one can take away from you. Empires and currencies rise and fall, companies go bankrupt, but gold has always been worth something. Not to mention the (massive) inflation which by all rights should have cause gold and silver to go way up in price a long time ago.
Btw, gold and silver have dramatically dropped in price in recent weeks, even though we are currently in very troubling financial times. One of the reasons for this strange situation is because there are a lot of hedge funds in trouble right now, and they are selling off their commodities to stay afloat.
On September 18 2008 08:54 Caller wrote: buy gold and silver
people have been saying to buy gold for some time now but ive never quite understood why. can you or someone else explain please?
gold and silver are the universally accepted currency. the US dollar is backed by the US econ, when the US econ fails, US dollar is just paper money. gold and silver is different. the price of gold relative to US dollar changes each year due to strenght of US econ, but if you compare gold to bread and butter, you will see that the value of gold always raises consistently or stay about the same. 1 once of gold can buy u 100 loaf of bread in 1900, it can still buy you 100 loaf of bread today. in contrast, 1 us dollar buy you 10 loaf of bread in 1900, it buy you 1/2 of a loaf of bread today. thus, when in doubt, covert you cash to gold.
thus, unlike paper money (ie US dollar), gold is a hard asset. gold also has alot of industrial and commercial use, so the value of gold never plumets in real term.
This is the psychological belief people have behind purchasing gold and silver, but for all intents and purposes, the USD is not just a piece of paper. If the US econ fails and the USD becomes worthless, you will have a lot more to be worried about than just the little hoard of gold you have...which leads to my next point. When you buy gold, you're not actually buying physical gold but a contract that says you own a portion of gold--on the market. If the US economy fails, you can pretty much kiss your contract goodbye as the whole financial system would go down with it.
In the larger picture, "buying" gold and silver doesn't really hedge against stock (or other assets). The US, EU, and other players have been pumping so much liquidity into the market the last couple decades that even physical assets and commodities have become as easy to buy and sell as cash. That's kind of what happened with the housing market--because mortgages (which are traditionally long term assets) were so liquid, people swapped and over speculated their actual value.
hey so I have a couple of questions. Monetary theory confuses the shit out of me. Can you explain exactly how the performance of the economy and the value of currency is linked? Why was the dollar on the decline for so long? Why is it going up again?
What do you mean by pumping liquidity into the market? is that the same as having lots of very liquid assets? How are mortgages liquid? How does that liquidity lead to overspeculation?
Well, the first few questions are actually contest in academic economics because in theory, if an economy is doing well relative to others, the value of its currency goes up. The problem is that this applies only to the real exchange rate (the true value of the currency), but measuring real exchange rates is near impossible to do and what is actually reflected in the markets is the nominal value. The data on nominal exchange rates doesn't really match the theory so macroeconomists don't really know what to do; some economists like Milton Friedman and others mathematically showed that monetary policy is neutral and doesn't really affect the real exchange rate (I tend to follow this school of thought). As for why the USD was on decline for a while, it was mainly because the Fed cut interest rates and the mini commodity bubble. Back in January/February, the Fed cut interest rate by a considerable amount and this increased the money supply a ton (which lowered it's relative value). That plus lots of people put their USDs into commodities which decreased the demand for the USD. Increasing supply + decreasing demand = drastic drop in price. But of course, this was purely nominal as the USD economy didn't really decline that much (unemployment increased only about half a percent in the period--not really enough to account for a 20%+ loss in exchange rate). When people realized this, people rebought USDs so demand went up for it (that and the commodity bubble burst).
Making the market more liquid means making assets easier to sell/buy. Generally this means money, but when the Fed was under Alan Greenspan, he made virtually all assets easy to buy/sell. For example, when Alan Greenspan cut the interest rate down to 0.75%, he highly encouraged people to refinance with variable rate mortages. This creates liquidity as the cash flow from mortages is no longer fixed but rather float around with the conditions of the market. I think he did this too with equity too during the dotcom bubble, but I'm not sure exactly how. As for why liquidity increases speculation, it's because when assets like mortages are easier to trade/sell, people expect higher cash flows in the future (with thinner margins), and bankers embed this into their present valuation of the asset. Of course at some point, they valued these assets too high and paid the price for it now.
On September 18 2008 14:02 Ecael wrote: dybydx, if we are going to point at physical objects, it is by far more practical to have life necessities than gold in the case of a financial failure. Should the US financial system crash, even gold in physical form won't be particularly useful. I for one would much rather have stores of food and other necessities to barter with. Caller when he brought up the gold/silver point was much more likely to be pointing at it as a kind of security against inflation rather than the kind of medium of exchange you are suggesting.
I agree, food is much, much better than gold. Ammo is probably better too.
On September 18 2008 08:54 Caller wrote: buy gold and silver
people have been saying to buy gold for some time now but ive never quite understood why. can you or someone else explain please?
gold and silver are the universally accepted currency. the US dollar is backed by the US econ, when the US econ fails, US dollar is just paper money. gold and silver is different. the price of gold relative to US dollar changes each year due to strenght of US econ, but if you compare gold to bread and butter, you will see that the value of gold always raises consistently or stay about the same. 1 once of gold can buy u 100 loaf of bread in 1900, it can still buy you 100 loaf of bread today. in contrast, 1 us dollar buy you 10 loaf of bread in 1900, it buy you 1/2 of a loaf of bread today. thus, when in doubt, covert you cash to gold.
thus, unlike paper money (ie US dollar), gold is a hard asset. gold also has alot of industrial and commercial use, so the value of gold never plumets in real term.
This is the psychological belief people have behind purchasing gold and silver, but for all intents and purposes, the USD is not just a piece of paper. If the US econ fails and the USD becomes worthless, you will have a lot more to be worried about than just the little hoard of gold you have...which leads to my next point. When you buy gold, you're not actually buying physical gold but a contract that says you own a portion of gold--on the market. If the US economy fails, you can pretty much kiss your contract goodbye as the whole financial system would go down with it.
In the larger picture, "buying" gold and silver doesn't really hedge against stock (or other assets). The US, EU, and other players have been pumping so much liquidity into the market the last couple decades that even physical assets and commodities have become as easy to buy and sell as cash. That's kind of what happened with the housing market--because mortgages (which are traditionally long term assets) were so liquid, people swapped and over speculated their actual value.
hey so I have a couple of questions. Monetary theory confuses the shit out of me. Can you explain exactly how the performance of the economy and the value of currency is linked? Why was the dollar on the decline for so long? Why is it going up again?
What do you mean by pumping liquidity into the market? is that the same as having lots of very liquid assets? How are mortgages liquid? How does that liquidity lead to overspeculation?
Basically the the power of the dollar is our government saying "don't worry, we're good for it. We may have a lot of debt, but we're good for it." When the economy is doing well, that statement becomes more believable.
Liquidity essentially refers to cash flow. Just like credit card companies don't care how much debt you have as long as you have good cash flow, people aren't worried about having dollars as long as its easy to buy and sell fast. You wouldn't feel so confident if it took you a month to cash out, would you? Would you put your money in the bank if it wasn't liquid? I don't think so.
On September 18 2008 14:02 Ecael wrote: dybydx, if we are going to point at physical objects, it is by far more practical to have life necessities than gold in the case of a financial failure. Should the US financial system crash, even gold in physical form won't be particularly useful. I for one would much rather have stores of food and other necessities to barter with. Caller when he brought up the gold/silver point was much more likely to be pointing at it as a kind of security against inflation rather than the kind of medium of exchange you are suggesting.
ahrara, forex is rather weird like that. Currency theoretically reflect the strength of the economy backing, but really it points closer to the relative strength of the particular economy in comparison to another. The decline earlier in the year, particularly from the period after Bear Stearns rescue was due to the relative strength of Europe in comparison to America, and that showed in Q1 growth as well. The recent boom of the dollar was much due to the slowing of growth in Europe as people switched to greenbacks for better security, and as we see now people are switching to the Japanese Yen in favor of the dollar.
I am not quite sure as to why gchan worded that part about liquidity like that though, so I'll leave it to him to explain that part better.
Not_Computer, crude oil is in many ways more reliant on the industry than gold and silver.
EDIT - dybydx...when was the last time we raised rates.
2. the recent raise in USD isnt just against euro. the USD also raised against gold. i think it has to do with fed raising the rate as well.
Please stop saying this. The Fed has not raised the interest rate in any shape or form in the last half year. If you're talking about relative interest rates, this hasn't happened either. The Bank of England, Bank of Japan, and European Central Bank (the three largest free floating currency countries invested in the US) havn't decreased their interest rates one bit in the last half year either.
i think greenspan spoiled the americans. and the subsequent jacking up of the rate at such a high pace doomed the homeowners. blame it on bernanke. many of homeowners suddently had to pay 5% more than they originally might have guessed. they got raped bad.
and now the bail outs will only mean... you guessed it, they get raped even more with taxes!
On September 18 2008 15:08 gchan wrote: Please stop saying this. The Fed has not raised the interest rate in any shape or form in the last half year. If you're talking about relative interest rates, this hasn't happened either. The Bank of England, Bank of Japan, and European Central Bank (the three largest free floating currency countries invested in the US) havn't decreased their interest rates one bit in the last half year either.
when the rate gets changed, it take some time for the market to adjust - lag issues.
2years is a lot of lag time for our currency to be responding to an "increase" in the rates. We literally have just been dropping rates/keeping them constant for the past year.
The homeowners needing to pay more isn't a huge deal, the fact that they were getting mortgages in the first place is the issue. The idea was that everyone deserved a home...but no, not every family in the United States deserve to own a house, some people should be happy they are capable of renting in the first place. While the nature of subprime lending didn't give these people a lot of manuever room to work with, it is much less the problem of the nature of the loans than the underqualified getting them.
Before you complain about the bailouts, AIG might yet turn out to be fine, Bear Stearns' securities would fare a lot better in the case that the market improves, which is the original intention in aiding the purchase at all - to buy time and allow for stable market conditions and thus give these securities their proper value.
gchan, I thought the access to equity during the dotcom bubble was much more due to the explosion of VC activity during that time than monetary policy, rates were holding about 5% until the bubble burst.
On September 18 2008 15:09 dybydx wrote: i think greenspan spoiled the americans. and the subsequent jacking up of the rate at such a high pace doomed the homeowners. blame it on bernanke. many of homeowners suddently had to pay 5% more than they originally might have guessed. they got raped bad.
and now the bail outs will only mean... you guessed it, they get raped even more with taxes!
Greenspan rightly lower the rates in 200-2001 to stimulate the economy after dotcom bust; Greenspan rightly raised the rates in 2003-2007 to control inflation and decrease the size of the housing bubble; if he didn't raise it at the rate he did, we would be in a lot more trouble than we are now.
And no, the bail outs do not mean more taxes. Both presidential candidates favor tax cuts for the poor and middle class.
dropping the overnight rate do lead to flooding the market with money. so soon we will see the US dollar depreciate. although possibly in conjunction with the economic decline if the banks continue to fail.
On September 18 2008 15:33 gchan wrote: Greenspan rightly lower the rates in 200-2001 to stimulate the economy after dotcom bust; Greenspan rightly raised the rates in 2003-2007 to control inflation and decrease the size of the housing bubble; if he didn't raise it at the rate he did, we would be in a lot more trouble than we are now.
And no, the bail outs do not mean more taxes. Both presidential candidates favor tax cuts for the poor and middle class.
greenspan was late on the rise and bernanke is late on the drop. while both candidates say they oppose tax raises, the reality of the matter is, money has to come from somewhere. if they dont raise taxes, they will have to "print more money".
it takes a while for the economy to adjust to the rates. namely someone has to file a loan, get it approved, get the money from the bank, which borrows from the fed (if need be). take that money to buy machinery, produce goods, sell it and repay the loan. a typical 1-2 year lag on the econ is common. although i did expect a faster impact on the exchange rate.
Ecael, I'm not sure I completely understand it either but one of my professors mentioned it. I think it went something like it was because he didn't raise the interest rates, and US economy was growing, theres was an increase in money supply. With this large amount of accumulated capital, people bought a bunch of stock and thus overinfalted their value. That plus EFTs became really popular so your joe schmoe sitting at home could easily trade with his home money.
Not that I understand much of unrestrained capitalism, stock exchange systems, speculations and financial markets, but i do believe the following: The quest of building a financial perpetuum mobile without the actual creation of value was doomed to fail from the very beginning. These shares and stuff those guys are trading with, their "value" is based solely on a dynamic of trust, expectations and fear, and doesn't actually exist. It's no surprise to me that the gamblers' fortune has to burst like a bubble at some point, and it serves them right. Unfortunately, the price for this lesson is that we are all screwed.
On September 18 2008 18:31 kemoryan wrote: When willl people stop letting private institutions manage the monetary system and let a public one do it instead.
Stocks represent owning of assets, the problem is that money have no cover in assets (some gold is stored but not nearly enough), and the banks can borrow money that they have no assets for (little more complex but in big part true) so they generate more money in the market causing inflation. Government can also decide to print more money causing inflation. Also If there would be gold standard for example, then starting war for country like USA would be almost impossible since people would have to allow government for big tax increase, now the cost are hidden.
Private institutions only do what government allow them to. Private banks are not the problem, the problem is that they are allowed to make money from air.
On September 18 2008 20:07 Polis wrote: Also If there would be gold standard for example, then starting war for country like USA would be almost impossible since people would have to allow government for big tax increase, now the cost are hidden.
Yeah, no wars on gold standard. Except that really big one called World War I.
On September 18 2008 20:07 Polis wrote: Also If there would be gold standard for example, then starting war for country like USA would be almost impossible since people would have to allow government for big tax increase, now the cost are hidden.
Yeah, no wars on gold standard. Except that really big one called World War I.
Completely diferent situation, you think that USA citizens would allow war whit Iraq to happen if they taxed would be increased by 50% becouse of it? Definitly less likely.
On September 18 2008 20:07 Polis wrote: Also If there would be gold standard for example, then starting war for country like USA would be almost impossible since people would have to allow government for big tax increase, now the cost are hidden.
Yeah, no wars on gold standard. Except that really big one called World War I.
Completely diferent situation, you think that USA citizens would allow war whit Iraq to happen if they taxed would be increased by 50% becouse of it? Definitly less likely.
No, it's exactly the same situation. It's because all the European currencies were pegged to the gold sterling, that when WWI broke out/finished, all the countries were massively in debt and had rampant inflation. To try to fix this, the governments, in a very Keynesian way, taxed the corporations (90%+ on corporate profits) and the rich and redistributed it to the poor. With no corporate incentive, the US and Europe was stuck in depression for more than a decade. It took another World War to revive the economies. Reality is that nations declare war first, pay for it second. Unpegged floating exchange rate allow central banks and private banks to mediate excess spending and inflation a hell lot better than a pegged exchange rate could.
On September 18 2008 18:31 kemoryan wrote: When willl people stop letting private institutions manage the monetary system and let a public one do it instead.
1917, Russia.
There's a difference between a communist country were all goods are managed by the centralized State (Russia), and a capitalist country were government controls the economy (inflation, deflation, etc.) and actually prints the money (instead of private central banks). And no, I'm not saying that no banks should exist, I'm saying that Federal Reserve should not exist because it's private!
Think about it. It is far more logical that the government itself prints the dollars and makes the decisions about the country's economy, since its the only institution that works trully for the benefit of citizens and not for their own benefit such as the Fed Reserve, etc.
The huge US public debt is just one of the consequences of having a private institution manage the monetary system.
On September 18 2008 18:31 kemoryan wrote: When willl people stop letting private institutions manage the monetary system and let a public one do it instead.
On September 18 2008 18:31 kemoryan wrote: When willl people stop letting private institutions manage the monetary system and let a public one do it instead.
1917, Russia.
And we all know how well that worked out.
Did you just read what I replied to that? (hint: two posts upwards).
I mean guys, Ron Paul is also against FEderal Reserve and lol, he's not a communist right?
how badly is this going to affect other nations? will i have to throw in the towel on my education and get out there and start planting potatos and beans?
edit: i have pretty elementary knowledge of economics
Um, my god. I'm no economics expert, but holy hell, if anyone believes half the crap in this thread, Sharpe's assumption that "investors are rational" is so far wrong we may as well start buying gold.
Starting from the bottom up: "I'm saying that Federal Reserve should not exist because it's private!" Fed Reserve is a government department essentially. It is not for profit, and controls the money supply. Not quite sure how you can suggest that's private. (This is just nitpicking) The idea of having semi private organisations fannie and freddie is admittedly a little less justifiable.
dybydx, starting from your initial reasoning for why to buy gold, ie purchasing power parity. This is fundamentaly incorrect. The reasoning that someone used with the Vietnamese economy is also flawed, because the issues are completely different. In an environment of high inflation then yes, actual physical goods are worth holding so as to maintain real value (or indeed other, stable countries. south east Asian third world countries use mainly USD because their own currencies inflate so much). The reason why people tell you to buy gold STOCKS (not gold physical) is because it acts as a hedge to market fluctuations. The co-variance on gold stocks is very low compared to that of the market wide movements, so will help to lessen the risk on any portfolio. This is the theory behind markowitz's nobel prize winning thesis (which has been criticised, but whatever).
Home owners weren't screwed over by bernanke ("blame it on bernanke. many of homeowners suddently had to pay 5% more than they originally might have guessed. they got raped bad.") This was dodgy lending practices from third party lenders that subsequently securitised bad debt and sold it on to credit markets. The rates started at a fixed low, such that people were able to service them initially and then jumped after a few years to rates which were totally unpayable by these individuals. The real issue is the "sub-prime" mortage market which began the spiral of debt underwriting in the US market (brought on in part by falling house prices due to slight cool off. incidentally that comic someone posted gets the idea across pretty well), and the lack of regulation on how and to whom these loans were made.
The real answer to the main issue at the moment is don't be skittish. Non-banking stocks are for the most part still the same companies they were 6 months ago, and unless they are highly geared, the effect on their actual business model is not that considerable (on their actual business, certainly macroeconomic factors are an effect, but the US economy is continuing to grow last i heard...). Dont dump all your money from stocks into plutonium to maintain "real" value. That sort of herding behaviour causes faster drops in the stock market (like say the 26 billion odd wiped from the australian market today, or the 20% wiped from one of our investment banks because of short selling).
oh lastly, liquidity isnt "cash flow" its how quickly your assets can be realized as cash, and at what cost. So cash is perfectly liquid, government bonds are nearly perfectly liquid, bank deposits are perfectly liquid. Mortgages (as the asset that the bank holds over your house) is highly illiquid, for the same reason your house is highly illiquid, its hard to sell it.
Edit: more lastly: as the hitch-hikers guide to the galaxy says: DONT PANIC. I lost nearly 4k today from stock market losses. BUT, its 4k i wasnt going to see for 20 years anyway, and in the grand scheme of 20 years the short run fluctuations (which is what this is) is DWARFED by the long run growth. We go through these fluctuations all the time. The dot com bust was (i dont know exact figures, so im widely speculating) probably just as bad. It was a similar situation in that companies (now stocks) were vastly overpriced (now over-credit rated) which led to huge losses when those stocks corrected and/or the business models of the companies failed (now, as the debt was defaulted on). We recovered fine from the dot com. Short term, yes those running closer to the line and/or highly geared will suffer. Long term, shit be easy.
On September 18 2008 10:16 kpcrew wrote: its insane how the executives still pull away with huge bonuses after they presided over what could have been a complete destruction of their respective companies, which could have dragged down the entire economy. some people have called this this worst financial disaster since the great depression
Like Obama....He called it that....
He also said that in 2001...and some other things in that speech he claimed to be fact, even though there is no real knowledge of the issue he was talking about... + Show Spoiler +
washingtonpost.com Quit Doling Out That Bad-Economy Line By Donald Luskin Sunday, September 14, 2008; B01
"It was the worst of times, and it was the worst of times."
I imagine that's what Charles Dickens would conclude about the current condition of the U.S. economy, based on the relentless drumbeat of pessimism in the media and on the campaign trail. In the past two months, this newspaper alone has written no fewer than nine times, in news stories, columns and op-eds, that key elements of the economy are the worst they've been "since the Great Depression." That diagnosis has been applied twice to the housing "slump" and once to the housing "crisis," to the "severe" decline in home prices, to the "spike" in mortgage foreclosures, to the "change" in the mortgage market and the "turmoil" in debt markets, and to the "crisis" or "meltdown" in financial markets.
It's a virus -- and it's spreading. Do a Google News search for "since the Great Depression," and you come up with more than 4,500 examples of the phrase's use in just the past month."
Overall, the pessimists are up against an insurmountable reality: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That's virtually the same as the 3.4 percent average growth rate since -- yes -- the Great Depression.
Why, then, does the public appear to agree with the media? A recent Zogby poll shows that 66 percent of likely voters believe that "the entire world is either now locked in a global economic recession or soon will be." Actually, that's a major clue to what started this thought-contagion about everything being the worst it has been "since the Great Depression": Politics.
Patient zero in this epidemic is the Democratic candidate for president. As it would be for any challenger, it's in his interest to portray the incumbent party's economic performance in the grimmest possible terms. Barack Obama has frequently used the Depression exaggeration, including during a campaign speech in June, when he said that the "percentage of homes in foreclosure and late mortgage payments is the highest since the Great Depression." At best, this statement is a good guess. To be really true, it would have to be heavily qualified with words such as "maybe" or "probably." According to economist David C. Wheelock of the Federal Reserve Bank of St. Louis, who has studied the history of mortgage markets for the Fed, "there are no consistent data on foreclosure or delinquency going all the way back to the Depression."
The Mortgage Bankers Association (MBA) database, which allows rigorous apples-to-apples comparisons, only goes back to 1979. It shows that today's delinquency rate is only a little higher than the level seen in 1985. As to the foreclosure rate, it was setting records for the day -- the highest since the Great Depression, one supposes -- in 1999, at the peak of the Clinton-era prosperity that Obama celebrated in his acceptance speech at the Democratic National Convention late last month. I don't recall hearing any Democratic politicians complaining back then.
Even if Obama is right that the foreclosure rate is the worst since the Great Depression, it's spurious to evoke memories of that great national calamity when talking about today -- it's akin to equating a sore throat with stomach cancer. According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure. During the Great Depression, according to Wheelock's research, more than 50 percent of home loans were in default.
Moreover, MBA data show that today's foreclosures are concentrated in that small fraction of U.S. homes financed by subprime mortgages. Such homes make up only 12 percent of all mortgages, yet account for 52 percent of foreclosures. This suggests that today's mortgage difficulties are probably a side effect of the otherwise happy fact that, over the past several years, millions of Americans of modest means have come to own their own homes for the first time.
Here's another one not to be too alarmed about: Obama is flat-out wrong when he frets on his campaign Web site that "the personal savings rate is now the lowest it's been since the Great Depression." The latest rate, for the second quarter of 2008, is 2.6 percent -- higher than the 1.9 percent rate that prevailed in the last quarter of Bill Clinton's presidency.
Full disclosure: I'm an adviser to John McCain's campaign, though as far as I know, the senator has never taken one word of my advice. He's been sounding a little pessimistic on the economy of late, too. And to be fair, he isn't immune to the Depression-exaggeration virus, either. At a campaign news conference in July, my fellow adviser Steve Forbes warned that Obama was seeking "the biggest tax increase since Herbert Hoover and the Great Depression." Factual? Almost certainly not.
But at least Forbes wasn't dissing the economy -- he was dissing Obama. And Obama's infection by the Depression-exaggeration bug goes way back. His first outbreak came on Oct. 2, 2002, in his famous speech opposing the invasion of Iraq, delivered when he was an Illinois state senator. He said that the invasion was "the attempt by political hacks like Karl Rove to distract us from" a litany of economic troubles including "a stock market that has just gone through the worst month since the Great Depression."
Quite an exaggeration. When state senator Obama made that remark, the Standard & Poor's 500 had just dropped 11 percent for the month of September 2002. But stocks dropped twice that much in October 1987. Since the Great Depression, the stock market has had bigger one-month drops on four occasions. Obama's pessimism on stocks then happened to be as ineptly timed as it was factually incorrect. Exactly one week later, stocks hit bottom, and over the next five years the S&P 500 more than doubled, surging to new all-time highs.
So much for Obama's hyperbole about our terrible economy. But what about the media's?
A housing "slump," a housing "crisis"? A "severe" price decline? According to the latest report from the National Association of Realtors, the median price of an existing home is up 8.5 percent from the low of last February. And according to the U.S. Census Bureau, the median price of a new home is up 1.3 percent from the low of last December. Home prices may not be at all-time highs -- and there are pockets of continuing decline in some urban areas -- but overall they've clearly stopped going down and have started to recover. So why keep proclaiming a "crisis" after it's over?
"Turmoil" in the debt markets? Sure, but we've seen plenty worse. According to the FDIC, there have been a total of 13 bank failures in 2007 and so far into 2008. There were 15 in 1999-2000, the climax of the Obama-celebrated era of Clintonian prosperity. And in recession-free 1988-89, there were 1,004 failures -- almost an order of magnitude more than today. Since the Great Depression, the average number of bank failures each year has been 94.
Despite highly publicized losses in subprime mortgage lending, bank equity capital -- the best measure of core financial strength -- is now $1.35 trillion, more than the $1.28 trillion level of mid-2007, before the "turmoil" even began.
Financial market "crisis" and "meltdown"? Yes, from all-time highs last October, the S&P 500 has fallen 20 percent. But that's nothing by historical standards. Stocks have often fallen more than that over comparable spans of time. They fell more than twice that much in 1974 -- which was truly the worst drop since the Great Depression. Even the present 20-percent loss isn't what it seems. The damage has been heavily concentrated in the financial sector -- banks, investment firms and mortgage companies. If you exclude that sector, stocks are off 14.8 percent.
Some economic indicators -- export growth and non-defense capital goods orders such as industrial machinery, for example -- are running at levels associated with brisk expansion. Others are running at middling levels, such as the closely followed Institute for Supply Management manufacturing index. But it's actually difficult to find many that are running at truly recessionary levels.
There have been 11 recessions since the Great Depression. And we're nowhere close to being in the 12th one now. This isn't just a matter of opinion. Words -- even words as seemingly subjective as "recession" -- have meaning.
In a new working paper, economist Edward Leamer of UCLA's Anderson School of Management shows that changes in the unemployment rate, payroll jobs and industrial production almost precisely explain every recession as officially determined by the National Bureau of Economic Research. At present, only the unemployment rate exceeds the recession threshold. The other two factors are far from it. According to Leamer's paper, we'll only fall into recession "if things get much worse."
This would suggest that anyone who says we're in a recession, or heading into one -- especially the worst one since the Great Depression -- is making up his own private definition of "recession." And probably for his own political purposes.
McCain campaign adviser and former U.S. senator Phil Gramm was right in July when he said that our current state "is a mental recession." Maybe he was out of line when he added that the United States has become "a nation of whiners." But when it comes to the economy, we have surely become a nation of exaggerators.
Granted....given that, my point isn't that the U.S. economy is headed in a good direction. Baby boomers are retiring....Entitlement spending will be higher than ever...and that isn't reported on the GDP of the U.S. because it isn't considered government spending for some weird reason.
Starting from the bottom up: "I'm saying that Federal Reserve should not exist because it's private!" Fed Reserve is a government department essentially. It is not for profit, and controls the money supply. Not quite sure how you can suggest that's private. (This is just nitpicking) The idea of having semi private organisations fannie and freddie is admittedly a little less justifiable.
On September 18 2008 08:54 Caller wrote: buy gold and silver
people have been saying to buy gold for some time now but ive never quite understood why. can you or someone else explain please?
gold and silver are the universally accepted currency. the US dollar is backed by the US econ, when the US econ fails, US dollar is just paper money. gold and silver is different. the price of gold relative to US dollar changes each year due to strenght of US econ, but if you compare gold to bread and butter, you will see that the value of gold always raises consistently or stay about the same. 1 once of gold can buy u 100 loaf of bread in 1900, it can still buy you 100 loaf of bread today. in contrast, 1 us dollar buy you 10 loaf of bread in 1900, it buy you 1/2 of a loaf of bread today. thus, when in doubt, covert you cash to gold.
thus, unlike paper money (ie US dollar), gold is a hard asset. gold also has alot of industrial and commercial use, so the value of gold never plumets in real term.
more or less, this is correct. If you're gonna buy gold or silver (and unless any of you have like 50k you're willing to dump away, you should by silver. $1,000 in silver will get you money much faster than $1,000 in gold will) you need to do it ASAP.
A day or two ago, gold hit the lowest mark it's been at in nearly a year. Silver plummeted too; it was up to $20 a few months ago and hit as low as 10.50 this week. (I wanted to shoot myself, because I've been investing in silver, as high as 16 and as low as 9.5, so I've lost all my profit and then some)
Yesterday, it jumped up and recovered a bit (kitco.com for prices; it raised exactly cuz what the guy i quoted said.) When we get our president situation solidified, it will jump again. Also, the holiday season, especially X-mas and such, is prime jewelry time, so the prices spike again (there's lots of other uses for precious metals, but this is still one of the biggest)
On September 18 2008 08:54 Caller wrote: buy gold and silver
people have been saying to buy gold for some time now but ive never quite understood why. can you or someone else explain please?
gold and silver are the universally accepted currency. the US dollar is backed by the US econ, when the US econ fails, US dollar is just paper money. gold and silver is different. the price of gold relative to US dollar changes each year due to strenght of US econ, but if you compare gold to bread and butter, you will see that the value of gold always raises consistently or stay about the same. 1 once of gold can buy u 100 loaf of bread in 1900, it can still buy you 100 loaf of bread today. in contrast, 1 us dollar buy you 10 loaf of bread in 1900, it buy you 1/2 of a loaf of bread today. thus, when in doubt, covert you cash to gold.
thus, unlike paper money (ie US dollar), gold is a hard asset. gold also has alot of industrial and commercial use, so the value of gold never plumets in real term.
This is the psychological belief people have behind purchasing gold and silver, but for all intents and purposes, the USD is not just a piece of paper. If the US econ fails and the USD becomes worthless, you will have a lot more to be worried about than just the little hoard of gold you have...which leads to my next point. When you buy gold, you're not actually buying physical gold but a contract that says you own a portion of gold--on the market. If the US economy fails, you can pretty much kiss your contract goodbye as the whole financial system would go down with it.
In the larger picture, "buying" gold and silver doesn't really hedge against stock (or other assets). The US, EU, and other players have been pumping so much liquidity into the market the last couple decades that even physical assets and commodities have become as easy to buy and sell as cash. That's kind of what happened with the housing market--because mortgages (which are traditionally long term assets) were so liquid, people swapped and over speculated their actual value.
hey so I have a couple of questions. Monetary theory confuses the shit out of me. Can you explain exactly how the performance of the economy and the value of currency is linked? Why was the dollar on the decline for so long? Why is it going up again?
What do you mean by pumping liquidity into the market? is that the same as having lots of very liquid assets? How are mortgages liquid? How does that liquidity lead to overspeculation?
Well, the first few questions are actually contest in academic economics because in theory, if an economy is doing well relative to others, the value of its currency goes up. The problem is that this applies only to the real exchange rate (the true value of the currency), but measuring real exchange rates is near impossible to do and what is actually reflected in the markets is the nominal value. The data on nominal exchange rates doesn't really match the theory so macroeconomists don't really know what to do; some economists like Milton Friedman and others mathematically showed that monetary policy is neutral and doesn't really affect the real exchange rate (I tend to follow this school of thought). As for why the USD was on decline for a while, it was mainly because the Fed cut interest rates and the mini commodity bubble. Back in January/February, the Fed cut interest rate by a considerable amount and this increased the money supply a ton (which lowered it's relative value). That plus lots of people put their USDs into commodities which decreased the demand for the USD. Increasing supply + decreasing demand = drastic drop in price. But of course, this was purely nominal as the USD economy didn't really decline that much (unemployment increased only about half a percent in the period--not really enough to account for a 20%+ loss in exchange rate). When people realized this, people rebought USDs so demand went up for it (that and the commodity bubble burst).
I agree with the classical stand point of money neutrality on real variables in the long run, however, I think there can be short term effects. Besides, I think ahrara is asking about the nominal exchange rate. The theory of international economics and trade has never been a strong point for me, but I would attribute economic expansion to changes in productivity. If you look up the Balassa-Samuelson effect you can read how this links to movements in the nominal exchange rate. The theory itself is a way to explain how inflation differentials between countries cannot entirely explain movements in exchange rates. I've assumed expansion caused by increased productivity but it depends on how the expansion occurs (e.g. expansionary fiscal policy decreasing national saving) and whether you're looking at the short run or long run.
Anyway. most importantly I think it should remember that while the Fed probably is under political pressure to print money to accommodate fiscal recklessness, the main reason money is printed is to prevent deflation in a growing economy. The high government spending now is most likely to be financed out of higher future tax rates rather than spirally inflation both of which are damaging but higher taxes probably less so. Also, remember that the absolute value of debt does not matter, but only the ratio of debt to GDP and how that changes over time. Sad to say, the debt ratio doesn't look like it will be improving in the near term.
As for the issue of moral hazard - the risks have already been taken and like the necessary government welfare after the Great Depression government action is again necessary in this current situation. What the government should say after this turmoil though, is that from some date onwards, no bailouts will be made. If a large bank is on the verge of bankruptcy then so be it. Of course, we then get the problem of credibility and time inconsistency.
Addition: Samuelson put it very nicely when he said we get recessions not because we can't produce enough, but because we can produce too much. The business cycle is linked to the credit cycle, but unlike Austrian economists I don't believe this to be the underlying cause, only an exacberating factor. When interest rates were low, risk was underpriced, assets and earnings were overpriced and as has been said everywhere mortgage lending was highly suspect. Now on the downturn of the credit cycle risk is overpriced and investors are too scared. Not because they don't believe that things will recover eventually but because many positions are relatively short term and taking too optimistic a view might lead you to insolvency before things recover. There's been a lot of anger at Wall Street traders but to me it is unjust. I can't remember which CEO said this after losing his job at the start of the credit crisis but "while the music's playing you have to keep dancing". If various fund managers are asking you for business you can't tell them you think they're taking too much risk and they should not engage in such a transaction. Given the competition between banks for clients this would've been commerically unfeasible.
It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.
Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.
A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.
The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.
It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.
Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.
during the early terms of bush, he should have just let the US econ go into a mild recession. the US econ needs some time to adjust to the world wide competition and reflect on what they can do to regain a competitive advantage. instead, greenspan just lowered the interest rate, allowing poor businesses that should have went bankrupt to continue. this is essentially providing a financial subsidie by giving away low interest loans. but since those companies are not competitive anyways, the economic output cant keep up with the flood of money.
once inflation exceeds the overnight rate, the overnight rate ceases to lower lending rates, instead it works in reverse and INCREASE then nominal interest rate. greenspan fucked up imo.
On September 18 2008 18:31 kemoryan wrote: When willl people stop letting private institutions manage the monetary system and let a public one do it instead.
1917, Russia.
There's a difference between a communist country were all goods are managed by the centralized State (Russia), and a capitalist country were government controls the economy (inflation, deflation, etc.) and actually prints the money (instead of private central banks). And no, I'm not saying that no banks should exist, I'm saying that Federal Reserve should not exist because it's private!
Think about it. It is far more logical that the government itself prints the dollars and makes the decisions about the country's economy, since its the only institution that works trully for the benefit of citizens and not for their own benefit such as the Fed Reserve, etc.
The huge US public debt is just one of the consequences of having a private institution manage the monetary system.
I'll bet you no one in Congress knows anything about how to run the economy. By public institution, I'm guessing that you mean publicly elected officials. Judging by this thread, however, you can understand why you wouldn't want something as delicate as the nation's economy to be, essentially, dictated by a bunch of retards. Also, can you explain how the fed is working for it's own benefit here? What good is the secret fed stash of a bazillion dollars if the us economy crashes?
On September 18 2008 20:07 Polis wrote: Also If there would be gold standard for example, then starting war for country like USA would be almost impossible since people would have to allow government for big tax increase, now the cost are hidden.
Yeah, no wars on gold standard. Except that really big one called World War I.
Completely diferent situation, you think that USA citizens would allow war whit Iraq to happen if they taxed would be increased by 50% becouse of it? Definitly less likely.
No, it's exactly the same situation. It's because all the European currencies were pegged to the gold sterling, that when WWI broke out/finished, all the countries were massively in debt and had rampant inflation. To try to fix this, the governments, in a very Keynesian way, taxed the corporations (90%+ on corporate profits) and the rich and redistributed it to the poor. With no corporate incentive, the US and Europe was stuck in depression for more than a decade. It took another World War to revive the economies. Reality is that nations declare war first, pay for it second. Unpegged floating exchange rate allow central banks and private banks to mediate excess spending and inflation a hell lot better than a pegged exchange rate could.
huh?
You're ignoring the economic prosperity of the twenties and getting the cause of the Great Depression wrong.
On September 19 2008 05:18 dybydx wrote: once inflation exceeds the overnight rate, the overnight rate ceases to lower lending rates, instead it works in reverse and INCREASE then nominal interest rate. greenspan fucked up imo.
Would you mind increasing the last part a bit more? I've always known it as inflation affecting the nominal interest rate, which in turn is what allows the classical dichotomy to hold in the long run. If the federal funds rate is set at a particular level and inflation expectations rise then the ex ante real interest rate falls. The federal funds rate is still the same for that month. Eventually, the nominal interest rate must increase, unless inflation expectations (and inflation) lower and perhaps this is what you are referring to. Then again, are you referring to the LIBOR? But that is linked to the rate at which the Central Bank lends to other banks, besides which increased inflation would lower the real cost of financing.
On September 19 2008 05:18 dybydx wrote: once inflation exceeds the overnight rate, the overnight rate ceases to lower lending rates, instead it works in reverse and INCREASE then nominal interest rate. greenspan fucked up imo.
Would you mind increasing the last part a bit more? I've always known it as inflation affecting the nominal interest rate, which in turn is what allows the classical dichotomy to hold in the long run. If the federal funds rate is set at a particular level and inflation expectations rise then the ex ante real interest rate falls. The federal funds rate is still the same for that month. Eventually, the nominal interest rate must increase, unless inflation expectations (and inflation) lower and perhaps this is what you are referring to. Then again, are you referring to the LIBOR? But that is linked to the rate at which the Central Bank lends to other banks, besides which increased inflation would lower the real cost of financing.
lemme give u a hypothetica scenario...
lets assume right now that inflation is 5% and overnight rate is is 10%, prime interest rate is at 15% (prime is always above the overnight rate). the fed has an opportunity to reduce the overnight rate to 5%. knowing this, banks will borrow money from the fed at 5% and loan it out at 10% and still make a profit, thus reducing prime to 10%. businesses see the interest went down (from 15 to 10) will start borrowing more money to finance growth. the economy will become stronger.
however, after a disaster (ie 9/11), Fed was scared the US econ will collapse, so he lowered the overnight rate to 1%, and Prime came down to 6%. business will borrow even MORE money to continue growth. however, growth opportunities are limited (ie increased demand for construction will cause increase in material costs, so profit eventually falls). eventually, with the interest rate low enuf, the business will borrow money faster than real growth in GDP. thus inflation occurs and assume it raises to 10%.
now, assume the fed keeps the overnight rate at 1%. the bank will continue to borrow money from fed at 1%, but because inflation is at 10%, to make a profit, the prime rate will have to be at least 11% (10% to cover inflation + 1% to cover interest paid to the Fed) for the bank to make a return.
Thus, when the overnight rate is below inflation for a long enuf time, it works in reverse to drive the interest rate up.
the reason the fed lowers interest rates is exactly to promote investment, so as to increase aggregate expenditure (following a loose keynesian model). The fed were probably scared following 911 that the US economy would seize up as people began to save more (an effect which greatly decreases short term output). Maybe this was justified, maybe it wasn't, i haven't got the figures. Clearly to anyone at the time the risk of US going heavily down was pretty realisitic (it certainly shed a crapload), and greenspan (if that was the fed chair at the time, i cant remember) probably had access to a whole lot of models and data that we don't, and he knows a shitload more than we do.
So im going to go with no, he didnt fuck up, he did what was necessary.
On September 18 2008 20:07 Polis wrote: Also If there would be gold standard for example, then starting war for country like USA would be almost impossible since people would have to allow government for big tax increase, now the cost are hidden.
Yeah, no wars on gold standard. Except that really big one called World War I.
Completely diferent situation, you think that USA citizens would allow war whit Iraq to happen if they taxed would be increased by 50% becouse of it? Definitly less likely.
No, it's exactly the same situation. It's because all the European currencies were pegged to the gold sterling, that when WWI broke out/finished, all the countries were massively in debt and had rampant inflation. To try to fix this, the governments, in a very Keynesian way, taxed the corporations (90%+ on corporate profits) and the rich and redistributed it to the poor. With no corporate incentive, the US and Europe was stuck in depression for more than a decade. It took another World War to revive the economies. Reality is that nations declare war first, pay for it second. Unpegged floating exchange rate allow central banks and private banks to mediate excess spending and inflation a hell lot better than a pegged exchange rate could.
huh?
You're ignoring the economic prosperity of the twenties and getting the cause of the Great Depression wrong.
The Roaring Twenties largely did not happen in Europe. Most European countries in the 1920s were still going through political instability, massive inflation, and rising unemployment (despite the large male population losses in WW1). And there was more than one cause of the Great Depression--monetary policy was one of them. Although I'd argue moreso monetary policy prolonged it.
On September 19 2008 07:37 gussy wrote: the reason the fed lowers interest rates is exactly to promote investment, so as to increase aggregate expenditure (following a loose keynesian model). The fed were probably scared following 911 that the US economy would seize up as people began to save more (an effect which greatly decreases short term output). Maybe this was justified, maybe it wasn't, i haven't got the figures. Clearly to anyone at the time the risk of US going heavily down was pretty realisitic (it certainly shed a crapload), and greenspan (if that was the fed chair at the time, i cant remember) probably had access to a whole lot of models and data that we don't, and he knows a shitload more than we do.
So im going to go with no, he didnt fuck up, he did what was necessary.
Hindsight always makes things easier.
the keynesian model states that yes, lowering interest DOES promote investment, however, there exist such thing as over investment. up to a certain point you get diseconomies of scale. u will still get some growth, but at the cost of massive inflation
he did fuck up and he realized it too. as i have demonstrated above, and greenspan personally recognized the danger of inflation as the reason why the feds tried to pump the rates up after 2003. he did it precisely to combat inflation. what he wasnt aware of was how late it was.
yes hindsight is 20/20, but his got paid to obtain this 20/20 vision, its stated in his job description. =)
dybydx, if you want to simplify the processes in between all the relationships that much, sure, you can make the claim that lowering the Federal Rates would eventually lead to an increase in real interest. However, that ignores so many of the interconnecting forces that eventually 'could' lead to that possible result that that statement might as well as be plain false in all practicality.
EDIT - That kind of statement about the abilities expected of a Fed chairman is completely bullshit, even if in jest. Hindsight evaluates a problem and gives you the 'proper' answer given the greater amount of information that you have. To demand that of an on-date decision that is pressured by time is nothing short of idiocy.
greenspan is paid to oversee the economy and observe the key statistics. he saw it coming, he made public statements about the concern on inflation. but he was too afraid to raise the rates.
changing interest rate usually take 1-2 yrs for it to have an impact on inflation, so by the time you see inflation start to go up, its already late.
basically hes the weather forecast of the economy. he saw it comming.
On September 19 2008 05:18 dybydx wrote: once inflation exceeds the overnight rate, the overnight rate ceases to lower lending rates, instead it works in reverse and INCREASE then nominal interest rate. greenspan fucked up imo.
Would you mind increasing the last part a bit more? I've always known it as inflation affecting the nominal interest rate, which in turn is what allows the classical dichotomy to hold in the long run. If the federal funds rate is set at a particular level and inflation expectations rise then the ex ante real interest rate falls. The federal funds rate is still the same for that month. Eventually, the nominal interest rate must increase, unless inflation expectations (and inflation) lower and perhaps this is what you are referring to. Then again, are you referring to the LIBOR? But that is linked to the rate at which the Central Bank lends to other banks, besides which increased inflation would lower the real cost of financing.
lemme give u a hypothetica scenario...
lets assume right now that inflation is 5% and overnight rate is is 10%, prime interest rate is at 15% (prime is always above the overnight rate). the fed has an opportunity to reduce the overnight rate to 5%. knowing this, banks will borrow money from the fed at 5% and loan it out at 10% and still make a profit, thus reducing prime to 10%. businesses see the interest went down (from 15 to 10) will start borrowing more money to finance growth. the economy will become stronger.
however, after a disaster (ie 9/11), Fed was scared the US econ will collapse, so he lowered the overnight rate to 1%, and Prime came down to 6%. business will borrow even MORE money to continue growth. however, growth opportunities are limited (ie increased demand for construction will cause increase in material costs, so profit eventually falls). eventually, with the interest rate low enuf, the business will borrow money faster than real growth in GDP. thus inflation occurs and assume it raises to 10%.
now, assume the fed keeps the overnight rate at 1%. the bank will continue to borrow money from fed at 1%, but because inflation is at 10%, to make a profit, the prime rate will have to be at least 11% (10% to cover inflation + 1% to cover interest paid to the Fed) for the bank to make a return.
Thus, when the overnight rate is below inflation for a long enuf time, it works in reverse to drive the interest rate up.
That overgeneralized chain of statements.
EDIT - and so Greenspan saw inflation coming, and then what? You forget that economists don't even fully agree on the relation of inflation to growth? Not everyone on the Fed are hawkish in terms of policy toward inflation, as we have seen with recent developments with concerns to inflation.
On September 18 2008 18:31 kemoryan wrote: When willl people stop letting private institutions manage the monetary system and let a public one do it instead.
yes, the fed is a private institution. however, it acts like a public institution in which, when given a choice between benefitting themselves or the public, they almost unswerving choose the path that would help the general public. the chairman does report to the president even though the fed is not a governmental department.
also, lowering interest rates promotes investment by allowing more companies to borrow money to invest. however, this process doesn't necessarily lead to immediate growth as companies also plan for the future with long-term investments (research into new products and such)
On September 19 2008 05:18 dybydx wrote: once inflation exceeds the overnight rate, the overnight rate ceases to lower lending rates, instead it works in reverse and INCREASE then nominal interest rate. greenspan fucked up imo.
Would you mind increasing the last part a bit more? I've always known it as inflation affecting the nominal interest rate, which in turn is what allows the classical dichotomy to hold in the long run. If the federal funds rate is set at a particular level and inflation expectations rise then the ex ante real interest rate falls. The federal funds rate is still the same for that month. Eventually, the nominal interest rate must increase, unless inflation expectations (and inflation) lower and perhaps this is what you are referring to. Then again, are you referring to the LIBOR? But that is linked to the rate at which the Central Bank lends to other banks, besides which increased inflation would lower the real cost of financing.
lemme give u a hypothetica scenario...
lets assume right now that inflation is 5% and overnight rate is is 10%, prime interest rate is at 15% (prime is always above the overnight rate). the fed has an opportunity to reduce the overnight rate to 5%. knowing this, banks will borrow money from the fed at 5% and loan it out at 10% and still make a profit, thus reducing prime to 10%. businesses see the interest went down (from 15 to 10) will start borrowing more money to finance growth. the economy will become stronger.
however, after a disaster (ie 9/11), Fed was scared the US econ will collapse, so he lowered the overnight rate to 1%, and Prime came down to 6%. business will borrow even MORE money to continue growth. however, growth opportunities are limited (ie increased demand for construction will cause increase in material costs, so profit eventually falls). eventually, with the interest rate low enuf, the business will borrow money faster than real growth in GDP. thus inflation occurs and assume it raises to 10%.
now, assume the fed keeps the overnight rate at 1%. the bank will continue to borrow money from fed at 1%, but because inflation is at 10%, to make a profit, the prime rate will have to be at least 11% (10% to cover inflation + 1% to cover interest paid to the Fed) for the bank to make a return.
Thus, when the overnight rate is below inflation for a long enuf time, it works in reverse to drive the interest rate up.
I always preferred to look at it from another perspective. A Central Bank cannot have a nominal interest rate anchor. If inflation rises then demand for bonds falls which raises the yield. The basic market mechanism keeps the real interest rate unchanged as classical theory says.
He isn't trying to suggest for immediate changes, but to allow for the effects to reach the Investment level and relating inflation to growth far as I can see. Note how he is talking about a particularly long lag period between a change of federal rates, the consequent effect on real interest and the effects that businesses have on the economy. Thus a complaint about the oversimplification of the interactions from my part.
On September 18 2008 18:31 kemoryan wrote: When willl people stop letting private institutions manage the monetary system and let a public one do it instead.
1917, Russia.
There's a difference between a communist country were all goods are managed by the centralized State (Russia), and a capitalist country were government controls the economy (inflation, deflation, etc.) and actually prints the money (instead of private central banks). And no, I'm not saying that no banks should exist, I'm saying that Federal Reserve should not exist because it's private!
Think about it. It is far more logical that the government itself prints the dollars and makes the decisions about the country's economy, since its the only institution that works trully for the benefit of citizens and not for their own benefit such as the Fed Reserve, etc.
The huge US public debt is just one of the consequences of having a private institution manage the monetary system.
I'll bet you no one in Congress knows anything about how to run the economy. By public institution, I'm guessing that you mean publicly elected officials. Judging by this thread, however, you can understand why you wouldn't want something as delicate as the nation's economy to be, essentially, dictated by a bunch of retards. Also, can you explain how the fed is working for it's own benefit here? What good is the secret fed stash of a bazillion dollars if the us economy crashes?
If I understand you correctly, you're saying, why give the power to manage economy to our representatives... why not better give it to some other dudes we don't really know to whom they serve? Also, you are calling 'retards' the poeple that represent your people... thats says a lot lol. And yes, it's something very delicate because it affects all, but thats precisely the main reason why only an institution that represent a whole nation (government in this case) should be in charge of it. And of course it should be composed by knowledgable people about economics and not a bunch of retards that don't know what they're doing.
On September 19 2008 10:11 kpcrew wrote: yes, the fed is a private institution. however, it acts like a public institution in which, when given a choice between benefitting themselves or the public, they almost unswerving choose the path that would help the general public. the chairman does report to the president even though the fed is not a governmental department.
The main stockholders of the fed are the member banks. And they are entirely private institutions. It's obvious that the decissions they make are not entirely aimed to benefit the public (if at all).
I mean where's the logic of having an independent institution decide over the monetary system?
How do you know their decisions don't actually benefit the coorporations that are built around it (banks) and not the population?
We use to give it to political means (in aus at least) the government used to control the supply of money. This lead to poor monetary policy because rates were used for political capital. Now the fed and the australian rba are run as seperate but public entities (like the courts - not controlled by the gov, but a public institution)
There is logic in having an independent institution because one, it is difficult to make money for themselves without the effects backlashing on them - unlike insider trading and such, monetary policy's effects are too widely spread for you to be able to benefit only a select group of people. Furthermore, such actions are readily visible to the public eye comparatively. Besides, people trying to benefit themselves is much better than the government trying to bribe the public with their own money, which would be the case should the government be in charge of monetary policy.
EDIT - and our representatives are supposed to be serving us? What is this, The Republic came real?
lawlz. mccain refuses to rescue the economy. he should know that if they fail, hes gonna have to lower the interest rate, spend a shitload to get the american economy out of a depression.
you know that the people of america are the blame for the bad economy?
i see most ppl say its the managers or even the new candidates for election. but it's the people who lean money from a bank. when there is more leant then a country can build then there's got to be a time when people want to get savings while a bank doesnt have moeny anymore.
a bank only has to have about 25% of the money they actually say they have. so if your backaccount says you have saved 50 000 dollars than you can get it all. but if an bank would have 1 million in the vault they could have 4 million divided over people. because they think people will not demand their money back all at the same time.
this is not breakable. this is not going away.. i think this is going to be the end of the capitalism in america. at least for now..
dude... what the fuck are you talking about, woopy?
anyway, i thought that the fed earns about 6 billion a year and donates its excess (after paying its workers and paying for its expenses) to government coffers. or at least, thats what they told me when i visited the fed building in boston
and one of the best reasons for not voting for mccain is that the would extend the bush tax cuts. with a projected 10 trillion dollar deficit by 2011, there is really no way that we can afford to not repeal the tax cuts, never mind extend them
On September 20 2008 23:50 kpcrew wrote: anyway, i thought that the fed earns about 6 billion a year and donates its excess (after paying its workers and paying for its expenses) to government coffers. or at least, thats what they told me when i visited the fed building in boston
Yes, but it's not about the direct benefit, which they give away. It's about their policy and decisions which benefit the corporations built around it indirectly, such as banks, which in fact are the true stockholders of it.
On September 20 2008 23:50 kpcrew wrote: dude... what the fuck are you talking about, woopy?
I think he's implying the end of capitalism will be caused by bank runs due to fractional reserve banking. I disagree.
I do agree that many people took out loans which they shouldn't have down so they could speculate on the housing market. However, the basic economic tenet that people respond to incentives is true in this case. If the banks feel risk is so low and allow people to borrow four or five times their income simply based on self certification then sure, why not? Even if the value of your house falls then you can always default. Not to say everyone likes to default, which is why mortgages on family properties are rated more highly in mortgage portfolios but if you're in negative equity then the incentive to default is certainly there. Especially if the original loan to value ratio exceeded 90%.
Alan Greenspan possibly kept interest rates too low for too long. Understandably, it is hard to recognize the difference between genuine increases in stock prices because of fundamental changes and a "bubble" and even if you could spot a bubble monetary policy is too "blunt" to deflate a bubble without affecting other areas of the economy which you may not want. I'm not sure how to go about deflating asset bubbles, maybe increasing capital gains tax and corporate taxes might provide the needed incentives but then again various perverse outcomes may arise as is often the case. The government's backing of Freddie and Fannie has been and is disgusting. From Steven Levitt's blog:
The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.
Similarly, the attitude large institutions involved in the financial system have regarding the possibility of rescue by the government leads to unacceptable moral hazard. Now the popular sentiment is greater regulation on all the banks. I'm fearful the size of government yet again increases just like it increased after the Great Depression. As I've said before, what has happened cannot be changed so in the current situation the government should act to help consumers and perhaps this means socializing losses through tax money, like the Great Depression led to demand for state welfare. However, after the problems are over (unlikely to be soon) the government will most likely take on an even bigger role. For example, Obama talking about how Freddie and Fannie can be restructured and kept under government control. According to this Obama received the third most amount of money from the two institutions. Top spot went to Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs. Which highlights the my main distaste for regulation: the large financial institutions can have a lot of lobbying power. Rather than helping consumers the politicians help the businesses. Stigler coined the term 'Regulatory Capture' back in the 1960s I think. It seems to be a very unrecognized problem.
in any case, i thought that the banking industry and housing industry were both regulated. why would the government decide that more regulation is the key to solving the current crisis, as well as the answer for future problems, rather than a complete restructuring of the system? Does more bureacracy improve transparency?
how key are freddie and fannie mae to the financial system? would the housing system completely collapse without these institutions? it bothers me that the greed of these corporations led to this financial disaster, and yet the taxpayer, most of whom dont own a single stock of these companies, have to bear the burden of their idiocy.
also, how can the government sustain the projected 10 trillion dollar deficit? if not, how would it go about paying off not only the interest, but also the debt? would raising taxes be the only way?
I remember one "bank robbery" as two normal guys walks into bank and ask for loan for about 50k euros (converted to euros as this happened 1990 or something) for each person. Because bank officials do get good bonuses giving more loans of course they will give. Bank did know that these guys didn't have any income to pay back but these guys vouched each others if they fail to pay loan back. So they left 50k each to drink or something :D
On September 20 2008 13:59 dybydx wrote: lawlz. mccain refuses to rescue the economy. he should know that if they fail, hes gonna have to lower the interest rate, spend a shitload to get the american economy out of a depression.
mccain needs a brain.
Not sure where you are reading your news, because that seems about 3~5 days out of date. McCain initially disagreed with the rescue of AIG, then changed his opinion the second day, and suggested before Paulson on an idea similar to the RTC-esque concept that the Treasury was supposedly working on. The overall cost of this measure could break even, if not end up with a profit for the government pending on the pricing mechanism they used. Anyhow, as far as I know both candidates at the moment support the kind of government bailout that is being placed, with McCain keeping a careful distance from Bush.
Rather unrelated, I am disappointed with how McCain sought to distance himself from Bush and his use of populist jibes. Calling to fire Cox was just...eh, wth, need someone to place the blame on much?
Milton - I agree with much of what has been raised about Freddie and Fannie, though it seems like we might be in a better position than previously anticipated. For all practical purposes we have nationalized Freddie and Fannie, as long as the lawmakers are willing to continue to take a tougher attitude toward these two companies. Personally, the backing for those two companies don't come close to the way that the government is so hard pressed to do anything to Social Security and Medicare. We can still touch those companies given a bad enough problem to act as an excuse, but we project endless problems with those two particular social projects and people are going to be stoned and crucified.
kpcrew - Because we can't restructure the system without it actually collapsing, every time we sought to simplify something some lobbying group works against it. Regulation has always been in place so that people can find loopholes about it while the public is sated by them. Well, that's an awfully cynical point of view and probably rather exaggerated, but the basic point remains.
At the moment, Freddie and Fannie are pretty much the cornerstone to the system. The housing system wouldn't completely collapse without those institutions, but that's only an extension of the cornerstone analogy - we can slowly pull out cornerstones while inserting supporting beams to help keep the foundation firm. However, should we seek to rapidly remove these companies (or in the case as feared, for them to face liquidation), that will cause a huge turmoil that could potentially break the whole system.
Tax payers probably own some part of Freddie and Fannie in one way or another, though. :p
As for national debt, it is reasonable to be scared by what it is and what it could mean. The problem is that we look to simply to try to strech it to the very point of breaking and get away with all the benefits associated with deficit spending. Raising taxes isn't the only way to counter national debt, as Clinton era should've showned, but overall it is an issue that's probably best dealt with by raising tax and decreasing spending - something that politicans particularly loath to do in spite of all their claims.
And what would feeding the entire continent of Africa for a generation do, and what portion of that money would actually go to the people it was intended for instead of the corrupted government officials there? It might not be fair that we who already have so much in comparison to them is spending that kind of money to deal with problems we have created, but Africa as it is won't be fundamentally changed even if we dump that kind of money at it. The efforts of people from other regions of the world working together with Africans contribute to much more, isn't the more efficient thing to do to allow for these people to have the support from a healthy economy to continue their efforts rather than satisfy your own ego by bringing up "we could be feeding the whole of Africa for years to come with this money"?
EDIT - About the package, Obama's claims about how the package should benefit both main and Wall street is disturbing, I can see it as nothing else but attempts to score political capital at a time of strife when the necessity of liquidity going into main street is still questionable. However, that's probably going to gain him more support than McCain's vague comments about how he looks forward to be able to review the specifics of the plan and all.
The government is in a very unique position right now though, and for all practical purposes, a good one. Even if it can't take this chance to essentially steal the illiquid assets at fire-sale prices due to its position, the kind of price they can get out of it could still be decent to good.
meaning that this amount is the maximum allowed by bush's proposal so although our debt ceiling is 11.3 trillion now, this doesnt mean that it will go that high. it is just a projection if the maximum amount of money is used by every company that is in trouble. however, if you take aig for example, the fed offered them $85 billion i think. but the fed is a lender of last resort because the terms arent that great. the interest is steep so the money is there if aig choose to use it, but it will use pretty much any other option first, before they consider the help of the fed
it doesnt really matter for AIG, its either use that money and pay the loan shark interest rate or go bankrupt the choice is obvious. besides, fed is the 80% shareholder, thus, 80% of the interest is paid back to themselves.
On the bright side of things, it looks like I won't have to start looking around for insurance anytime soon. The Feds just bought me mine (and all of America's for that matter).
no the dollar is more because to buy american stocks and bonds, they have to change their money to american dollars which strangely, inflates the value of the dollar instead of cheapening it. its a short-term phenomena, if companies start failing and the government cant save them...
On September 21 2008 07:08 dybydx wrote: i just heard it on the news now. bush is announcing a 700B package.
u know thats enuf to feed the entire continent of africa for what... a generation?
um, UM...
ya... but then again, he wouldnt do it because "george bush doesnt care about black ppl"
well, its always good to spend as much federal money (aka, it's not yours) as possible before your term runs out. i guess this was the best he could think of.
On September 20 2008 23:50 kpcrew wrote: dude... what the fuck are you talking about, woopy?
I think he's implying the end of capitalism will be caused by bank runs due to fractional reserve banking. I disagree.
I do agree that many people took out loans which they shouldn't have down so they could speculate on the housing market. However, the basic economic tenet that people respond to incentives is true in this case. If the banks feel risk is so low and allow people to borrow four or five times their income simply based on self certification then sure, why not? Even if the value of your house falls then you can always default. Not to say everyone likes to default, which is why mortgages on family properties are rated more highly in mortgage portfolios but if you're in negative equity then the incentive to default is certainly there. Especially if the original loan to value ratio exceeded 90%.
Alan Greenspan possibly kept interest rates too low for too long. Understandably, it is hard to recognize the difference between genuine increases in stock prices because of fundamental changes and a "bubble" and even if you could spot a bubble monetary policy is too "blunt" to deflate a bubble without affecting other areas of the economy which you may not want. I'm not sure how to go about deflating asset bubbles, maybe increasing capital gains tax and corporate taxes might provide the needed incentives but then again various perverse outcomes may arise as is often the case. The government's backing of Freddie and Fannie has been and is disgusting. From Steven Levitt's blog:
The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.
Similarly, the attitude large institutions involved in the financial system have regarding the possibility of rescue by the government leads to unacceptable moral hazard. Now the popular sentiment is greater regulation on all the banks. I'm fearful the size of government yet again increases just like it increased after the Great Depression. As I've said before, what has happened cannot be changed so in the current situation the government should act to help consumers and perhaps this means socializing losses through tax money, like the Great Depression led to demand for state welfare. However, after the problems are over (unlikely to be soon) the government will most likely take on an even bigger role. For example, Obama talking about how Freddie and Fannie can be restructured and kept under government control. According to this Obama received the third most amount of money from the two institutions. Top spot went to Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs. Which highlights the my main distaste for regulation: the large financial institutions can have a lot of lobbying power. Rather than helping consumers the politicians help the businesses. Stigler coined the term 'Regulatory Capture' back in the 1960s I think. It seems to be a very unrecognized problem.
I know that's you Moltke. It's ok. You have nothing to hide.
On September 18 2008 08:43 thoraxe wrote: Don't worry, Bill Gates will save us.
He's rich as fuck but he doesn't have that much money unfortunately. His net worth is like 50-something billion $$$. Which is a penny compared to 4 trillion O_O
EPT
![[image loading]](https://a248.e.akamai.net/f/248/1856/90m/www.wellsfargo.com/img/hp/logo_62sq.gif){kind=logo}
i guess this was the best he could think of.
