Economic Meltdown

Sorry for the dumb question, but where do you see a circular argument?

In the repeated statement, that the USA will end as third world country, without any logical reasoning why it should be so, after two other posters already explained two different reasons why it would not be so easy to even demote the USA to a developing country state.
 
In the repeated statement, that the USA will end as third world country, without any logical reasoning why it should be so.

Ah, OK, I'm not sure if the argument is circular, but I don't think the USA will end as a third world country any time soon. But perhaps if Mrs. Palin gets President and replaces education and science with some ancient Christian tribal rituals (just kidding)...
 
Here is my proposal for such program.
Rain adds liquidity to fixed assets like land...

Modern education on economics: "How to do rain dance to make money to rain"

RainDAnceBigJPEG.jpg
 
Ah, OK, I'm not sure if the argument is circular, but I don't think the USA will end as a third world country any time soon. But perhaps if Mrs. Palin gets President and replaces education and science with some ancient Christian tribal rituals (just kidding)...

Even that is not really enough to ruin a country, just look at Iran... and her Pseudo-religion is also something which IMHO can stay far away in the wilderness of Alaska, only sometimes disturbed by a Russian bomber on show tour.
 
The issue is not whether our "stuff" is still here -- the issue is whether we still have the "right stuff" in terms of a commercial culture.

And that's what worries me. I think that cultural defects are much of what's behind the current crisis. The big issue is not whether we have the "right stuff," but whether the crisis will make us realize that we don't have it and need to get it back, or whether it will drive us to further stupidity. And I'm not so confident.
 
The issue is not whether our "stuff" is still here -- the issue is whether we still have the "right stuff" in terms of a commercial culture.

I'm fort and i approve this message.
 
To get out of crisis, painful measures are needed:
1.Bring trade deficit to zero, if possible have some surplus.
2.Generate government surplus.
That would regain macroeconomical liquidity to economy.

What does it require?
1.Severe government spending cuts like:

a) Reduce military presence to the minimum (it causes currency leak that is not accounted in trade deficit but reduces liquidity)
b) Stop the war and bring troops back (that would reduce govt deficit significantly)
c) Infrastructure, educaction, health may also suffer cuts if military cut is not achieved or not enough.
d) Raise taxes on dividends to promote reinvestment of profit, instead of dividends that go out of companies.

Government surplus would allow more liquidity to other sectors, since time between tax collection and govt spending reduces speed of flow of money and adds inefficiencies.

2.Make exports more attractive than imports. It involves dollar falling like crazy (before yuan, euro, yen and any other currency of countries that generate trade deficit) and losing its value. It would be a hit to national pride, but it would promote exports and will make national products more competitive.

3.Generate employment. Start a program of incubation of companies, small american entrepreneurs, not owned by big companies, and root development programs to turn poor people into entrepreneurs. This will take at least 2 to 3 years to start to see results, and with current economy, mortality of new companies is deemed to be high.

US congress funded InterAmerican Foundation root programs for 20 years. There is a report called "Crecimiento y transformación" that contains lessons learned on root development. It would be useful to dig US congress files.

As you see, measures will require lots of work and some years of pain. It also requires careful execution, not to make mistakes. But also those measures will be impopular, for those groups of interest that had a huge gain with government contracts will suffer. And they might not want to absorb the cut.

So it will also be a fight between patriots and those big interest groups with support of politicians, which may want to keep leeching government.

The other choice is to nationalize everything (more bailouts), make government bigger (more military spending), make US government to work like a latin american socialist country (subsidizing triggered by political pressures), and follow Hugo Chavez path with 27% of anual inflation, high crime rates due to poverty, poor health system, and frequent blackouts due to infrastructure problems...
 
For what it's worth, I don't see it going into a third world country either, as the statement is true that we are not a developing country. What is sad though, is to see the diamond return to a pyramid. For quite a few years, we had a structure where most people were in the middle, a few on top, and a few at the bottom. This model is actually where that whole Thomas Sowell top 20% bottom 20% analysis fits. If this continues into a depression and some regulations are not changed or added, it will turn back into the pyramid, with a very few at the top and most on the bottom.

I am amused by the people both locally here and nationwide that want to blame this on the community reinvestment act. It's a 30 year old act. If it were going to be the cause of this, it would have been a long time before now. A huge portion of this is the repeal of the Glass-Steagall act which McCain supported. Mr. champion of deregulation. The same guy who now wants to regulate and use my money for bailouts. Obama wants to use it to, but he did not spend his career deregulating business and finance.

It is true that the CRI shares some blame. It has been abused, quite often by get rich quick scammers. The truth is though, if all the foreclosures had been the result of bad loans related directly to this under it's intended use, the market probably could have absorbed it and did absorb it for 20 years. No, the true meltdown culprits here are creative financing and borrowing for down payments with 80-20's and easy credit. The deregulation of banking and finance. After the dot com bubble burst, everbody thought the economic high could be saved by investing in real estate. I saw this with my own eyes while I lived in Loudoun Co. VA. When I first moved there in 2002, you could get a 1200 square foot townhome for $145,000. Three years later the same thrown together piece of junk went for $450,000. The ads all said "get if for x amonth" They were too afraid to tell you the actual cost. This had nothing to do with CRI, this had everything to do with greedy developers and amateur "investors" who had no business playing with fire.


-----Posted Added-----


Was that short enough for you Urwumpe? ;)

By the way, be nice, Germany is one of the places I have been checking out if Palin becomes president.......
 
With a few minutes to spare, I'm going to jump back in for a moment. Let me first say that I also don't think that the fundamental problem was the foundational subsidy on home purchases although, as I've written elsewhere, I strongly oppose all elements of legislative hocus-pocus that serve to mask that subsidy, including the individual tax credit method, and the even more problematic method of using fake-private entities like Fannie and Freddie to "increase liquidity." As I've said before, either subsidize what you want to encourage with expenditure, or not at all. Don't kid yourself that using some fancy gestures changes the fact that you're spending money -- tax money -- to do it.

Second, I do think the primary problem is what I described in my long post above -- the decoupling of basic mortgage lending underwriting from the finance function through hyper-syndicated mortgage-backed securities. If someone were to make me dictator for a day, I would simply prohibit that practice: If you make a mortgage loan, you have to keep it. This doesn't mean that lenders can't use loans as assets to ground their finance. It just means that you can't move them off the lenders' balance sheets. If the lender's underwriting practices are sound, let them use the credit of the lending institution itself to back a bond issue or, better yet, good old-fashioned equity investment.

Would this slow the flow of capital to real estate financing? Compared to the capital flow level that existed three years ago, yes. But that can't be a bad thing. Reintroducing the "baffles" that existed before the creation of multi-layered mortgage-backed securities is just sound "financial engineering" and merely serves to cut down on the level of "slosh" in the system -- which is what we're experiencing now.

As for what to do now ... We really only have a choice between bailing these institutions out or a deep recession. The only thing I'd do -- again as dictator -- is one by one review the compensation of all the major executives of the institutions that have to be bailed out and cut it wherever there were examples of specific people having loaded up on highly syndicated mortgage-backed securities.
 
As for what to do now ... We really only have a choice between bailing these institutions out or a deep recession.
This is where ideologies come to play.

Isn't this government intervention too socialist in a capitalist market economy that self-regulates? Isn't it better to take regulations and government interventions off the market? It should balance economy and will show the real status of US economy, according to ideologists around here.

Argentina president was shocked in UN as she said that US told them that market selfregulated itself, no government intervention of markets was needed during their deep crisis, and it is precisely US which does the most spectacular government intervention in the capital of world capitalism.

What answer does she deserve?
 
Reintroducing the "baffles" that existed before the creation of multi-layered mortgage-backed securities is just sound "financial engineering" and merely serves to cut down on the level of "slosh" in the system -- which is what we're experiencing now.

Yes, the lack of systems engineering (or understanding of complex systems in general) in the financial (and political) world is a really bad thing IMHO...

As for what to do now ... We really only have a choice between bailing these institutions out or a deep recession.

Once more showing my lack of knowledge about US politics but why it is necessary to bail out these institutions (and not for example the credit users / house owners)?

Cheers
Tschachim
 
This is where ideologies come to play.

Isn't this government intervention too socialist in a capitalist market economy that self-regulates? Isn't it better to take regulations and government interventions off the market? It should balance economy and will show the real status of US economy, according to ideologists around here.

Argentina president was shocked in UN as she said that US told them that market selfregulated itself, no government intervention of markets was needed during their deep crisis, and it is precisely US which does the most spectacular government intervention in the capital of world capitalism.

What answer does she deserve?

In an ideal world, the answer would be, yes, let the whole mess settle out on its own. Unfortunately, it's not an ideal world. For one, the state already has its fingers deeply into the pie through the mechanisms of Freddie and Fannie. To quote Colin Powell, if you break it, you buy it. For another, the United States hasn't been close to a "pure capitalist" country since the 1880s at the latest. We don't have nearly the level of state intervention in the economy that many European countries have, but we still have a LOT. While "in for a penny, in for a pound" isn't good logic by itself, the reality is that the political system won't be able to resist doing "something to help." Since this is inevitable as a political matter, it might as well be as wise and minimal an invasion as possible.
 
An old article that I read in 2007 evoking these figures of the diamond and of the triangle

LE MONDE | 05.05.07 |

The rhombus and the sand glass.

Eric Le Boucher

"If one wants to summarize with his atomic nucleus the debate which is posed in France, one can risk oneself there in the following way: the inequalities grow in the world under the combined effect of universalization ( mondialisation) and technologies. What to do ?

You find that the equality, cement of the social unit, must be preserved at all costs? Vote Royal. You find that egalitarianism is too expensive and that its excesses penalize us ? Vote Sarkozy.

Let us be more precise. Universalization (mondialisation) creates growth. As ever in the human history, of the immense countries could fill their delay of development in an accelerated way. Three billion individuals takes part today in the great play of the production and of the planetary trade against a billion and half twenty years ago. Reverse: this universalization digs the inequalities. Between the countries and within each country. The three billion caused producers is made competition between them on a "total" (global) scale: that weighs on the wages of all, except for most talented, of rarest, which are on the contrary everywhere required because the innovation, therefore the growth, depends more and more on them only.

In the United States, the consequence is limpid: between the upper class and the middle class, the inequalities exploded. From 1966 to 2001, the median income grew of 11%; that of the richest 10% of 58%, that of the richest 1% of 121%, that of the richest 0,1% of 236%, that of the richest 0,01% of 617%.

The large levelling machine that was the Welfare state created after the great crisis of 1929 is broken.

It is not the case in France. Not yet. The inequalities of incomes continue to drop. The richest 10% did not gain 4,8 times more than the poorest 10%, they did not gain any more but 3,5 times in 1984 and 3,2% in 2003 (the State of the inequalities in France, directed by Louis Maurin and Patrick Savidan, 2006, Editions Belin). Idem: poverty continued to move back in France.

Let us illustrate these evolutions by three diagrams. The industrial company type 1900 was a triangle: an acute point (middle-class) and a broad body in bottom (proletariat). Then with the era of the services, come about 1960, the company took the form of a rhombus (diamond as you say Replicant) with a broad body in the medium: the middle class. The social advancement was done automatically with the age for the employee and the diploma for his/her children. The date symbolic system is May 68.

Today, universalization stretches this rhombus in the shape of sand glass.

The middle class is cut into two, a small share of very qualified goes up towards top, a great part is aspired downwards. The debate of this presidential campaign was that of the rhombus against the sand glass.

Should the French rhombus be defended, i.e. a social continuum, guarantees of a possible promotion upwards? One will have recognized the model of Ségolène Royal. Should it on the contrary be considered that egalitarianism makes the bed of lazy and null and that it is time, finally! , to reward at their right price the merit, the effort and the talent, and, corollary, to accept that the inequalities grow? One will have recognized the ambition of Nicolas Sarkozy, including against May 68.

Let us be even more precise. The inequalities of incomes continue to be reduced in France but they do not make it any more that at very low speed and, for tomorrow, it appears difficult to go against the world tide (already in Germany, and even in Sweden, egalitarianism is in question).

If one takes into account the incomes of inheritance, inflated by the rise of the real prices and the Stock Exchange, the curves already had to be reversed. It should especially, as Louis Maurin and Patrick Savidan do it, be stressed that behind the equality of frontage of the French model true "inequalities of conditions" : of housing, education, sex, color of skin and address book.

Ségolène Royal understood perfectly. She wants to attack these concrete inequalities which count more for people than egalitarianism of frontage preached by the traditional left. It is its modernity there. Nicolas Sarkozy adapts, him, of the inequalities. It even wishes them! Because it hopes for of it a profit of growth of the economy as a whole, therefore purchasing power for all. In universalization ( mondialisation), he wants to allure the top, the investors, and one does not catch them with vinegar. But it matches these measurements for the top of the sand glass by others in favour of bottom: the popular class of which it took again the electorate with Jean-Marie Le Pen. By a speech ouvrierist, nationalist and protectionist, it defends the "victims" of the delocalized large-scale industry and promises to them that it will make it return.

To only see there a sort of bushism compassionnel is to forget that it joins again, by doing this, with the tradition gaullist of the compromises with the Communists. To politically bind the top and bottom, it is its force.

Modern or strong, the two candidates have each one a great intrinsic weakness to insert France in the era of the innovating mondialized economy and schumpéterienne. Her, because it conditions the defense of the rhombus to a "social dialogue" with old sensitive to the cold trade unions, slow process, so much of time tested and unfruitful. She risks the opposition to progress (immobilism ?). Him because in a sand glass the richness comes, as sand, from the top, from imagination,from the competition,from the opening. The state control and protectionism date, they were the weapons of defense of the triangle. They are mistaken in figure and time."

Other subject that i will not comment. I am not qualified enough .

http://www.nydailynews.com/news/pol...rudy_giulianis_crass_opportunism_reflect.html
 
Once more showing my lack of knowledge about US politics but why it is necessary to bail out these institutions (and not for example the credit users / house owners)?

A relatively small number of individual home buyers defaulting on mortgage loans isn't really the problem -- it's the impact of those defaults on the financial system from the lack of "baffles." If the specific mortgage defaults happened in a non-syndicated situation, there would be a relatively minor recession in the residential real estate market -- one that would hardly be noticed. It's the "sloshing" effect of those defaults through the mortgage-backed securities that are held by financial institutions that is causing an over-all "run on the banks." If you could unwind the layers of syndication and isolate out just the defaulting mortgages, then you could either support the individual mortgage borrowers and/or loan originators -- or not, depending on political will.

In other words, there are TWO problems -- an underlying problem of "bad loans" at the bottom, and an "infection" of those loans up through the whole financial system through the syndication behind mortgage-backed securities. And a HUGE part of the problem is simply that no one can actually predict the magnitude of the first problem; which uncertainty is one of the primary causes of the second part of the problem; again, it's a function of the mismatch of time scales between the two parts of the financial system.

Bear in mind that the fundamental proposal is basically to take the mortgage-backed securities into government hands. Ultimately, these securities may end up being worth much more than they are being valued RIGHT NOW. In the long run (5-20 years) this MAY NOT end up costing the US taxpayers much, if any money. Which raises the question of how much the government should pay for those securities RIGHT NOW. And therein lies the devilish details.
 
Bear in mind that the fundamental proposal is basically to take the mortgage-backed securities into government hands.

OK, looks like I don't really understand the bailout plan. Does that mean the government does not want to give the 700 B$ to the institutions (for nothing), just to save their existence, but the government buys (all? most of?) the mortgage-backed securities from them to the _current_ value, which is probably too low and which is not really a good deal for the institutions, not even guaranteeing their survival, but keeping the mortage loans itself "alive" (and thus the individual mortgage borrowers / house owners)?

Cheers
Tschachim

EDIT: Having said that, I'm struggling finding a good source explaining the plan in detail, does anyone have a good link?
 
OK, looks like I don't really understand the bailout plan. Does that mean the government does not want to give the 700 B$ to the institutions (for nothing), just to save their existence, but the government buys (all? most of?) the mortgage-backed securities from them to the _current_ value, which is probably too low and which is not really a good deal for the institutions, not even guaranteeing their survival, but keeping the mortage loans itself "alive" (and thus the individual mortgage borrowers / house owners)?

Cheers
Tschachim

EDIT: Having said that, I'm struggling finding a good source explaining the plan in detail, does anyone have a good link?

As of today, there's no "plan" -- this is coming 40 days before a US presidential election, so all sides are playing nuclear brinksmanship with the economy ...

But the core concept in all of the plans being floated is to get the mortgage-backed securities off the market, and replace them with cash. The exact mechanics of the transaction(s), and the valuation of the securities is all up in the air ...

To clarify, though, the banks don't get money for nothing -- they give up the mortgage-backed securities to the state.

If it was up to me (being dictator for a day, again), I'd value the securities at exactly as much as would be necessary to get the institutions through a short credit crunch, letting them take the loss as much as possible now. But again, even if face value is paid, the deal might end up being close to even or, at worst, not that bad for the taxpayers. Basically, we'd be "refinancing the refinancing." Of course, there's some serious time value of money involved there ... but that could be built in, as well -- maybe make the "bailees" provide some kind of adjustable debt instrument to cover that in whole or part.
 
The problem I see is: If the government buys these loans, they effectively give the money away for bad management. Which is IMHO a good reason to dislike the plan. The market needs a clean up. The whole loans which the government wants to buy, should not exist at all.

The direct solution would be, to punish banks as well as those who can't repay their loans. Of course, that is bad, as those who can't repay their loans, often had not been aware of that fact, when the bank gave them the loan offer. The responsibility is to 99% in the hands of the managers, as they shouldn't have been offering loans to such people at all. But instead, they really fought for such customers.

Basically, i don't think 700 billion is a high price for the damage caused. I don't think this is really enough (And imagine, 700 billion Dollar is the worth of all money printed and coined) for fixing all damage. But I think, the price would be far fairer, if they first strip all investment bank managers of the money they got for their magical profits.

Remember: These people will currently keep the money, they made by causing this situation. Just as well as many smaller people will not keep their house, they shouldn't be owning anyway.

The economy is just like Orbiter. You shouldn't praise the flight before the landing.
 
As of today, there's no "plan"...

Ahh, that reminds me of the government in my country... :lol:

To clarify, though, the banks don't get money for nothing -- they give up the mortgage-backed securities to the state.

GregBurch said:
The problem I see is: If the government buys these loans, they effectively give the money away for bad management. Which is IMHO a good reason to dislike the plan. The market needs a clean up. The whole loans which the government wants to buy, should not exist at all.

Well, in this case I think it largely depends on how much the government is going to pay for the mortgage-backed securities to the institutions and how much money is going to be used to keep the individual mortgage borrowers alive after that. For example if you pay (almost) nothing to the institutions and mainly try to support the house owners, it's still a very strong political intervention, but won't be as bad as just throwing money after the institutions IMHO.

Cheers
Tschachim
 
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