Economy in meltdown?

[powersam]

nb/ this has nothing to do with Russell Crowe's shocking maths

"Maths"?? Does Russell Crowe have more than one math?

bloody americans

 

[powersam]

The inevitable outcome of this would be inflation. The price index would increase at a rate equal to the amount of added currency, and the purchasing power of the market participants would decrease at a rate equal to the amount of currency added to it.

In all honesty i do not fully understand your explanation, but to me economics has always seemed to be half science, half art and half magic (intentional).

I don't understand why adding 700 billion to an economy by buying bad assets off banks would not have the same inflationary effect as simply giving consumers 700 billion which they would then spend, bolstering the economy....

 

[bubka]

Everyone in congress was obviously bribed to pass it even though over 90% of citizens did not want it to pass.

http://www.usatoday.com/money/economy/2 ... ults_N.htm

Nearly eight out of 10 Americans — 78% — say Congress should approve a historic bailout of the nation's financial markets, but most want lawmakers to significantly modify the Bush administration's $700 billion plan, according to a new USA TODAY/Gallup Poll.

Only 11% in the poll taken Wednesday night say Congress should take no action to ease the current credit crisis, which Bush has said could lead to a panic. Fifty-six percent of respondents say Congress should pass a plan that's different from the administration's proposal, while 22% want lawmakers to approve a plan similar to Bush's proposal to allow the Treasury Department to buy up to $700 billion in distressed assets from financial institutions.

 

[Aplunk1]

Interesting, I read a CBS/NYT poll around the third week of September that suggested a much smaller figure-- around 30%-- would support a House bailout bill.

 

[bubka]

I think CNN has a poll that was like 45 : 40; regardless, it was not 90%

 

[blueshard]

What do you guys think about Americans being terrified into supporting this bill? Economic terrorism?

Shouldn't we let the economy fail, and then build it up again with improvements rather than making the downfall even harsher by passing this bail out bill?

Isn't this going to make everything worse in the long run? Isn't this going to make the dollar worth even less?

What do you guys think about the New World Order? Congressmen are already starting to talk about it.

I am not here to angrily, say things back and forth. I want to learn what you guys think.

Thanks.

 

[joseph49853]

[youtube:30blhafa]http://www.youtube.com/watch?v=_MGT_cSi7Rs&feature=e%20mail[/youtube:30blhafa]

 

[CCS]

Was anyone else scared by the fact that Obama, Bush, and McCain all used the exact same words to describe what would happen if we did not pass the bail out? They say we still have a recession to deal with, but that it would have been a lot worse without it.

Truth. I'm wondering the same thing.

Frankly, I think that a "technical" depression might be inevitable, regardless of whether or not they did this bailout... which raises the question, why spend that much money delaying an inevitable deflation of credit? We may very well end up needing that money more on the back end of the crisis... $700B goes a long way to rebuild infrastructure, etc.

Why not just give federal loans to small businesses, since the distressed banks won't? That would have been a better use of the $700B.

 

[powersam]

just sell something to the chinese, texas maybe.

 

[The Gardener]

I don't understand why adding 700 billion to an economy by buying bad assets off banks would not have the same inflationary effect as simply giving consumers 700 billion which they would then spend, bolstering the economy....

Most folks outside of the financial world think of the economy as being a binary switch. If its good, then you need to slow it down. If its bad, then it needs stimulation. The problem is that the economy is more complex than that, and a recession, or a slowdown, is not the only "disease" that can strike an economy.

A recession is a slowdown in economic activity that halts growth and takes away jobs. While we are indeed in the middle of a recession, you need to realize that the recession is a secondary symptom of a completely different and more pernicious malady we are suffering. We are, technically speaking, in a mild depression. While a "recession" is marked by a market psychology where the participants are unwilling to spend... a "depression" is market by market psychology where participants are unwilling to LEND.

When you earn a dollar, you can do three things with it. You can keep it in your drawer, you can spend it, or you can lend it (put it in a bank, put it in a mutual fund, or put it into stock market). When you put your money in a bank account, or put it into the market, you are LENDING your dollar to someone else, and getting interest in return.

Now, during a recession, people are afraid to spend money, but they have no problem sacking that money away in a savings account. In our CURRENT situation, its quite different. People are increasingly taking their money OUT of their banks, and out of the market, because there is an increasing feeling of unknown risk and return on it. If allowed to fully play out, this can often times create a full blown "race to the bottom" where as people pull more money out, it makes stock prices go down and puts liquidity pressure on banks, which in turn scares people more and they go and pull MORE money out, and the whole thing spirals into a meltdown.

So, giving each and every person a ton of money would very much increase economic activity, but, if these folks just spend the money, it does no good in fighting the lending crunch. If we gave each person that same amount of money with the caveat that they HAD to invest it somehow... then that would definitely help! But, in effect, by the government putting the money straight into the banks themselves, it ends up with the same result on net.

Why not just give federal loans to small businesses, since the distressed banks won't? That would have been a better use of the $700B.

Because that would be socialistic.

Banks have an infrastructure where they give loans out to the most economically viable projects based on the relative risk and return of each investment, and given the relative creditworthiness of the borrower. Because competition and the profit motive forces them to maximize their efficiency in doing so, they have no inherent interest in playing favorites.

If the government gives out the loans directly, they would have EVERY reason to play favorites in determining who they lend to, because their decisions would be motivated by politics, who their campaign contributors are, etc.

just sell something to the chinese

That's probably what's going to solve this. MY opinion here: The US will be going through deflation, and prices of dollar denominated assets are going to fall. Those outside the US who are holding dollars will find their value make the US look like a yard sale for a few years or so. But that's good... because it would mark a floor price on assets, and would help restore lending... as at that point people would feel more comfortable to lend, now that they are assured that the collateral behind the loan isn't going to continue to deteriorate.

 

[CCS]

what Gardener says makes sense. But what do we sell to the chinese? Why didn't we sell the bad loans to them?

 

[The Gardener]

what Gardener says makes sense. But what do we sell to the chinese? Why didn't we sell the bad loans to them?

We did. Not the WORST of the junk, but they're sitting on tons of Freddie/Fannie paper, and they're pretty ticked off about it.

There are rumors, and very viable rumors, that this bailout was the result of political blackmail by the Chinese.

 

[JayBear]

Very interesting article. Can anyone who has experience in this area comment?

http://www.washingtonpost.com/wp-dyn/co ... inionsbox1

 

[Harie]

Sure is good the bailout package has pushed the DOW to new highs. :roll: Dow is below 10,000 for the 1st time in 4 years. And the govt just doubled the initial 150 billion bailout funds to 300 billion...And the DOW is still tanking. I think I'm going to go out and buy a new Ferrari and when I can't afford it, I'm just going to declare bankruptcy and have Uncle Sam bail me out too.

 

[The Gardener]

Very interesting article. Can anyone who has experience in this area comment?

http://www.washingtonpost.com/wp-dyn/co ... inionsbox1

That's a really good piece. It highlights how this crisis was not caused by some singular event, but rather, a convergence of a number of things.

Globalization has made regulation of these markets a much more complex task than it used to be. So much so, that you need to tread carefully where you decide to regulate, and where you decide to let the market forces build or destroy things. Regulation can be a two sided sword. You don't want to take an action that might seemingly solve a problem locally, only to find out later that on a global scale it caused imbalances that end up doing more damage than the initial problem you were trying to address.

The implication is that coordinated monitary policy amongst nations might be more commonplace in our future.

Jaybear, I know you're probably interested in the political slant on it... and I believe that the piece is saying that blaming this all on a lack of regulation by Bush is not necessarily true. The article isn't praising Bush, its merely saying that what caused this crisis is not a binary "do we regulate more, or do we not regulate more" decision.

 

[badasshairday III]

I don't understand, are we having inflation or deflation? Apparently the dollar picked up value against the Euro but lost value to the Yen. Gas prices are getting lower, but food prices are high. Gardener, what does this mean?

 

[The Gardener]

You are correct, in the past monts we were seeing inflation in some parts of the economy, and deflation in others. Inflation mostly seen in expenses (purchases that don't require credit), and deflation mostly seen in assets (items that require financing and credit to buy, cars, HOUSES, etc.)

At the moment, we seem to be experiencing a strong wave of DEFLATION. Remember last summer when oil prices and the stock market moved inversely to each other?... If oil price went up then stocks tumbled, and oil went down then stocks rallied? Well it looks like that rule has been seriously broken! Oil is tumbling, and stocks are also tumbling. Stocks and bonds normally have an inverse relationship, but not lately... bonds are tumbling too. So is real estate, so are most commodities... and in the money markets, the demand for dollar liquidity is far outstripping the system's willingness to lend them. Stocks, bonds, oil, real estate.. prices all tumbling right now, and the dollar is rallying (except against the Yen, but that has a separate story to tell.) That's classic deflation.

Now, next month this might all change. The world's central banks might embark on further intervention and a wave of inflation is released?

The real culprit that the central bankers are fighting is deflation. The tools the central bankers use to fight it are inflationary. So, most ALL analyses I have read warn to expect waves of inflation and deflation to sweep through various parts of our economy. There will be pricing instability until the right mix of lending and borrowing is restored and brought back to equilibrium.

Frankly, in my personal opinion, I think deflation will win out. Cash will be king.

 

[Slartibartfast]

Frankly, in my personal opinion, I think deflation will win out. Cash will be king.

Yes, cash... but which flavour?

 

[JayBear]

Very interesting article. Can anyone who has experience in this area comment?

http://www.washingtonpost.com/wp-dyn/co ... inionsbox1

That's a really good piece. It highlights how this crisis was not caused by some singular event, but rather, a convergence of a number of things.

Globalization has made regulation of these markets a much more complex task than it used to be. So much so, that you need to tread carefully where you decide to regulate, and where you decide to let the market forces build or destroy things. Regulation can be a two sided sword. You don't want to take an action that might seemingly solve a problem locally, only to find out later that on a global scale it caused imbalances that end up doing more damage than the initial problem you were trying to address.

The implication is that coordinated monitary policy amongst nations might be more commonplace in our future.

Jaybear, I know you're probably interested in the political slant on it... and I believe that the piece is saying that blaming this all on a lack of regulation by Bush is not necessarily true. The article isn't praising Bush, its merely saying that what caused this crisis is not a binary "do we regulate more, or do we not regulate more" decision.

I totally agree with you, and in fact, I would love to push the DNC's stance away from "regulation, regulation, regulation." Unfortunately, I'm still pretty low on the ladder, and I work mostly with social issues. While Bush may not have been completely responsible for the crisis occurring, the Bush administration did absolutely fail to see this coming and take significant preventative measures. I realize that a lot of us also didn't see this coming, but we weren't running the country at the time. I would like to think that increased regulation on the markets might have, if not prevented this crisis alone, given us earlier warning. I agree with you that the global market is getting more and more complex. We need someone who really understands global markets in a position to affect policy and, frankly, I don't think either Obama or McCain qualifies. I do know that Phil Gram is a disaster and needs to be fired immediately.

 

[bubka]

Why not just give federal loans to small businesses, since the distressed banks won't? That would have been a better use of the $700B.

Sounds like socialism to me.