Global Economy - Time to sound the alarm

[casperz]

Um....what?

Casperz - if they wanted to do nothing why did they sign a $1 trillion stimulus package?

You really think the stimulus package is going to solve anything? The real problem is in the banking system and the big banks balance sheets are certainly not going to be improved by the pork in the current stimulus.

I think the Obama plan is to apease the masses, make them think Washington is on top of things and basically do nothing until they see how this plays out. And I don't see that as a bad thing, if they do too much that can be just as bad as too little. The last stimulus did what again? How about nothing... at best it was a month of two bump in GDP if that. Ask yourself this: why is this stimulus going to solve all the problems where the last one did so little?

Here is the real issue: the US transitioned into a consumption economy the past ten years based on the ability of banks to manage risk through the use of credit default swaps. The market for those swaps is now from what I can tell TOTALLY wiped out because the assumptions were totally wrong about risk. The CDS market may come back in some form but it will never be what it was prior to the sub-prime meltdown. Everyone now realizes the math was wrong and they were pricing risk incorrectly and not even considering the possibility of a systemic meltdown where many
many players were not able to meet obligations all at once.

The economy we've had since the early nineties is something that I believe now was a once in a lifetime event and anyone living today may not ever see again in their lifetime. And BTW I don't think this is a partisan issue, I don't believe that either party had that much control over this and I don't really think that either party can fix it. It will have to play out over time and it's not going to be very pretty I'm afraid.

I'd like nothing more than for someone to show me this post a year or two from now and tell me how big an idiot I was but right now I don't see much upside and a fairly large downside. I can see the DOW at 2500 a lot easier than I can see it back at 10000. And the market being a leading indicator allows you to guess where the economy will be if it is at 2500 or even 5000.

 

[Harie]

The US is going to have to pay the piper eventually. All these bailouts and stimulus packages are doing is just delaying the inevitable...Which only serves to make us have to take even more lumps when it comes.

I think the stimulus packages were both a crock of sh*t laden with gobs of pork that served only to make the presidents homies happy. That first $350 Billion that was spent? What good did it do? Absolutely none...And where's the accountability in it? There is none.

Yes, I know - the 2nd stimulus package has supposed accountability in it. Right...It's not like numbers can't be faked or anything. Just another round of, "Lets rob the US taxpayers blind and hi-tail it out of office before they notice".

I say let it all burn. Let the economy go to complete sh*t...Let the world economy go to sh*t. Let us take our lumps now, rather than a few years from now. If we get it over and done with now, it will be much less severe than if we delay it by racking up even more debt that's financed by the Chinese...Because eventually, the house of cards will come tumbling down.

 

[Old Baldy]

Casperz, you just worded your original post a little confusing to me.

I now understand what you are saying and agree with you in the main. Time will tell though but I am, like you, very worried.

I believe, in a simple way, that this excessive problem we are experiencing was caused by fat cats and greedy consumers.

Too easy for people, who couldn't afford what they were borrowing, to get money from the fat cats. Who then turned around and flooded the derivatives market with VERY questionable paper asset values.

 

[The Gardener]

Well said, casperz, totally agree. It's actually a bit worse of a situation... not only is the CDS market toast, but the underlying structured finance market is completely nuked. The whole concept of "securitized finance", or the practice of taking loans and bundling them into securities so they can be sold in a secondary market is, for all intents and purposes, non existent.

Structured finance accounted for over 40% of all extended credit!

So, whatever loans the banks make, they can't sell them off anymore... they have to LIVE with the consequences of their lending standards... and because the CDS market is hosed, they can't hedge against default! The banks do have money and they are lending, but the net result is that lending standards are going to tighten up tighter than a kitten's spinchter.

Suddenly, what used to be a relatively risk free process for banks has become a potential minefield. AND not to mention the fact that 40% of the banks' access to capital has been shut down, thanks to the implosion of securitization.

In other words, when these markets imploded, the banks suddenly all had 40% less access to capital than they had a few years ago. Since banks all operate on a fractional reserve basis, this event, in effect, made them all broke!

Take ANY economy, and remove 40% of its working capital, and you get financial armageddon. No two ways about it.

The government can not solve this... unless they find a new way to take tens of trillions in questionable debts and "re-market" them in some fashion as to make them look like they are all AAA rated! The only way to reflate what, technically speaking, was a classic ponzi scheme is to replace it with another one. Who knows, maybe Geithner has a pet unicorn that exhales rainbow colored smoke.

 

[Cassin]

Well said, casperz, totally agree. It's actually a bit worse of a situation... not only is the CDS market toast, but the underlying structured finance market is completely nuked. The whole concept of "securitized finance", or the practice of taking loans and bundling them into securities so they can be sold in a secondary market is, for all intents and purposes, non existent.

Structured finance accounted for over 40% of all extended credit!

So, whatever loans the banks make, they can't sell them off anymore... they have to LIVE with the consequences of their lending standards... and because the CDS market is hosed, they can't hedge against default! The banks do have money and they are lending, but the net result is that lending standards are going to tighten up tighter than a kitten's spinchter.

Is this such a bad thing going forward in the long term?

 

[The Gardener]

Great question. Frankly, Cassin, I DON'T think its such a bad thing... the careless leveraging had to be cleared, which is for the best. It's all a matter of perspective, and, where you have positioned yourself employment-wise before the deflation began.

I think you'll appreciate this article:
http://www.counterpunch.org/ketcham02192009.html

I love that Counterpunch blog. Some really fascinating writing on a number of subjects and from numerous perspectives.

 

[Cassin]

ok good.

I mean what the hell is wrong with tighter loans and more responsibility.

I have taken care of my credit and sacrificed to protect it.

 

[The Gardener]

Keep your job, and you'll do just fine.

 

[Cassin]

Keep your job, and you'll do just fine.

If the company I work for goes out of business the US economy would be in far worse than ever imagined by even the most paranoid predictions.

 

[OverMachoGrande]

Trust me, I was laid off almost two months ago and it sucks. I was given a severance and my bonus but it devastated me.

 

[Old Baldy]

Great post Gardener (i.e., explaining the nature of this debacle).

Cassin, it's a good thing to get rid of what Gardener accurately calls a "ponzi" scheme.

That's what it was and it had to go IMHO.

It was "fake" accounting at worst and "inaccurate" at best.

(FWIW, I feel it was more like "fake" accounting and (1) some people should find themselves behind bars and (2) greedy consumers shouldn't be granted loans they have NO CHANCE of ever repaying.)

But, in the meantime, we're all suffering.

Why this happened, according to the talking heads, is there was monetary greed at the fat cat and greedy consumer level and political greed at the politician level.

Geez, how surprising.

 

[Old Baldy]

ok good.

I mean what the hell is wrong with tighter loans and more responsibility.

I have taken care of my credit and sacrificed to protect it.

You the man Cassin!! We needed about ten million greedy consumers to think like you.

 

[ali777]

(FWIW, I feel it was more like "fake" accounting and (1) some people should find themselves behind bars and (2) greedy consumers shouldn't be granted loans they have NO CHANCE of ever repaying.)

But, in the meantime, we're all suffering.

Why this happened, according to the talking heads, is there was monetary greed at the fat cat and greedy consumer level and political greed at the politician level.

Geez, how surprising.

Whoever is involved in false accounting should be imprisoned, I agree...

However, I do not agree with the way you think about the "greedy consumer". My bank used to be extremely trigger happy when it came to giving out loans. I have a small debt, it's nothing unmanageable but I always thought I don't deserve it. If I have to be frank, my bank should have told me to f*** off. Likewise, all those sub-prime mortgage takers bought into the dream of owning a house.

Big businesses supposedly employ finance experts that can see the numbers, and those people saw nothing wrong with borrowing. Why blame the uneducated? They were the customers that got tricked into buying something they couldn't afford. It should have been the finance policy regulators that didn't allow such practices.

Besides, post 9/11 and the Asian crisis around the same time, the western economy was based on consumerism. The central banks cut interest rates so low that it was impossible not to spend. If it wasn't for that spending spree the economy would have suffered 7-8 years ago and not now. It's all connected...

As a low-level consumer, I deny responsibility. The responsibility lies with the policy makers, it was their decision to lower the interest rates and give out cheap credit. They should have predicted that this whole episode was nothing but a ponzi scheme.... Unfortunately, the ponzi scheme goes on. Someone will have to eventually pay back this stimulus package, in effect we are mortgaging our future....

PS: Unfortunately, my ignorance is costing me as well.. I have the same attitude as those who borrowed. I do something today, and I completely ignore its consequences. I am arrogant and I think I can manage, but I haven't been good at till now... Life has taught me to be more humble....

 

[Old Baldy]

I couldn't disagree more Ali.

It doesn't take a rocket scientist to KNOW what you can or can't afford.

Giving these individual greedy borrowers an excuse, like you have done, only enables them to continue on and make excuses for their irresponsible behavior.

I can't believe you are blaming only the fat cats. It takes two to tango and these greedy consumers...... well I better not say what I want right now because it is this type of excuse making that boils my blood.

They are EVERY bit as much to blame as the fat cats. Individual responsibility Ali. Quit making excuses for their greedy, selfish behavior.

Example: "Oh don't worry Old Baldy, even though you make only $50,000 per year, you can afford a $500,000 home, with zero down, and just pay the interest, because you can just refinance when the value goes up or flip it".

Come on now Ali. If I said "yes" to that I'm just as much to blame as anyone for going bankrupt.

Why do you think Obama is saying to he** with those greedy consumers in his proposed new stimulus package?

Obama wants to protect the decent borrowers but does not like the selfish ones who tried to take advantage of the system. And that's what they did Ali (i.e., take advantage of the system - and they KNEW it).

 

[ali777]

I only know the British mortgage system and I don't know how it used to work in the US.....

The common sense says not to borrow more than 3-4 times the annual income and that's with 10-20% down payment. Anything beyond that the banks used to reject. But the likes of Northern Rock used to give 110-120% mortgages, and that was a bank that didn't actually have any reserves. They were digging a black hole. I blame irresponsible banks like Northern Rock for giving out that sort of money and the regulators for not monitoring the situation...

You have to understand that people are desperate to own a "home". Most people are aware of the risks, but the person in the bank that calculates the risks doesn't see any harm in giving loans to those people and that leads to a false sense of security. Even the government encouraged such spending. When the house prices were going up, home owners had a false sense of being rich and being secure with their future. Ie, they could always sell the house, cash in, and be happy in retirement... The governments loved it because the homeowners felt content and rich....

In my personal case, I'm not 100% irresponsible but I always think that I will find something to do and I will have money. It is this human arrogance that leads to careless spending. We take risks, and it's the regulators that stop us from taking unreasonable risks. That's why we have rules. I've never broken any rules... If the rules are too relaxed, many people will cross the line intentionally or unintentionally.... I still think most of the "greedy customers" were not 100% aware of the risks involved, they were the pawns in the game the big cats played.

It's in the human nature to think that we are better than the next person, and that we can stretch the rules of the game. It's a game we play with each other and some of us win and some of us lose... I'm still in the middle ground, but I do admit that there is careless arrogance in me. It's better than being miserable and negative

 

[ali777]

You also have to remember that it is this sort of spending that makes the American finance figures so big compared to the rest of the world. You personally benefit from it. Economy is all about the volume of money in the system, and your system is HUGE...

If you are benefiting from other people's spending, you can not pretend to be a 100% responsible consumer... However, as someone looking for stability, you should support policies that promote stability...

For example, did you stop to think why the Asian crisis in the late 90s didn't affect you? Maybe you should think about it from a wider perspective.

 

[casperz]

Well said, casperz, totally agree. It's actually a bit worse of a situation... not only is the CDS market toast, but the underlying structured finance market is completely nuked. The whole concept of "securitized finance", or the practice of taking loans and bundling them into securities so they can be sold in a secondary market is, for all intents and purposes, non existent.

Yep, I did not want to get into securitized finance because my post was so long but that is very true.

Is it a bad thing? I don't think the general public realizes what
that means going forward to the growth potential of our economy.
Certainly anyone reading this thead does but the people I work with
and friends really just don't get how bad this is. And from the
standpoint of economic growth losing the ability to wrap up a budle
of loans and make them into a trade-able security is a very very bad thing.

 

[CCS]

Eastern Europe, the biggest "subprime" investment of all, is about to collapse... and with it goes the EU banking system:
http://www.counterpunch.org/whitney02172009.html

US is on the path to wage deflation and national debt slavery, i.e. becoming a banana republic:
http://www.counterpunch.org/hudson02172009.html

Tragically ironic that the banking establishment is now "doing" to the US what the US has "done" to its third world colonies for decades.... hollowing out domestically controlled capital, and making us vassals to international oligarchs... A final "coup de grace" after a two decade-long orgy of excess.

Additionally, Ireland is on the brink of default, the UK isn't far behind. Any and all of these events carry massive counterparty risk that will generate tens of trillions in lost market cap, and a tsunami of bankruptcies. Fasten your seat belts, folks... and keep your eyes OPEN. The dam has a LOT of cracks in it at this point, and the situation is about as dangerous right now as it was last summer when the money markets almost completely ground to a halt.

Why can't we just let the people who made/took the bad loans responsible, and stop bailing everyone out? I'm so upset about all these bailouts. A lot of congress people should be hanged for grand theft.

 

[CCS]

I keep saying, uncontrolled capitalism is not good for the humanity. I do support rewarding hard work, but not at the cost of other people's welfare.

On paper there are many control mechanisms protecting the system, but those greedy bastards know how to exploit the systems through lobbing and stuff uke:

lobbying is a government thing. Why do you blame capitalism? It is the government cosigning on stuff with taxpayer money that caused this. The problem is fraud. And when we all must pay taxes to people who create fraud, the problems get much bigger.

 

[CCS]

I keep saying, uncontrolled capitalism is not good for the humanity. I do support rewarding hard work, but not at the cost of other people's welfare.

YES!!!! I couldn't agree more!

On paper there are many control mechanisms protecting the system, but those greedy bastards know how to exploit the systems through lobbing and stuff uke:

Indeed.

You say that because you don't trust some thieves in industry. What about thieves in congress? They can do even more damage than a bank can. I say let people pay for their own mistakes, and don't tax me for the mistakes. The only people left crying will be the foolish people who lived outside their means or the people dumb enough to loan them money. We need government to arrest thieves, but we don't need it to tax us for just anything the majority wants.