Posted on 09/18/2008 2:30:34 AM PDT by palmer
Go more basic - it will only end when housing stops declining in value, and that can only happen when the median house is valued at 2-3x the median salary. That means housing is going to fall about another 20% and this train cannot be stopped.
As I’ve said many times, it’s not a question of liquidity, it’s a question of solvency, and every financial institution including the Fed is insolvent. Right now.
mark
So, in essence, it's a lousy business to be in. The current players just skimmed fake profits and made assurances that they never expected to keep.
> I love your country! I wish it would experience it’s own reformation!
Cheers for that!
This is an election year, and with the help of God we will toss Helen Clark out of office and replace her with John Key.
He was a highly-successful merchant banker before entering politics, so he understands one or two things about money. Let’s hope so anyrate!
*DieHard*
bump
The probable error in his thinking is that we are having deflation not inflation. So his recommendation of hard assets may be flawed.
I looked around for an article about money and banking 101—why the money supply is contracting now, and what it means for the economy. I could not find what I wanted but the articles below get a flavor of the situation we are in now. The issue is that the Fed may not be able to prevent deflation and depression (however one might define that term).
Remember that the Fed does not print money. It injects reserves into the system by buying Treasury securities. This money goes into banks. But if the banks can’t or won’t lend it out, you have a situation that economists call “pushing on a string.” The Fed also lowers interest rates on fed funds to spur borrowing. But if businesses cannot invest the money profitably even at lowered interest rates, they will not borrow.
Currency only represents something like 2% of the total money supply. The rest is a mountain of debt created by people and businesses getting loans from one source, depositing money in another bank—which then loans it out again (subject to reserve requirement restrictions). So the money supply is really a mountain of debt.
So in a period of debt being paid off or defaulted, the money supply contracts no matter what the Fed does. When the money supply contracts, you have deflation. This whole process means we are in a period of severe contraction of the money supply as the mountain of debt in the system contracts.
When a deflationary spiral begins, it probably cannot be stopped. Banks are so damaged now that they can’t lend. The economy is worsening by the day and any loans outstanding are getting more and more shaky. Many will default. Consumers—suffering from too high debt and loss of home equity—are necessarily paying off debts or will be defaulting on debts. After the housing crisis, other crises will likely emerge—namely consumer credit problems.
http://www.financialsense.com/fsu/editorials/nystrom/2007/0831.html
http://www.nakedcapitalism.com/2008/07/does-m1-and-m2-contraction-signal-debt.html
http://economics.about.com/cs/inflation/a/deflation_4.htm
What we are talking about is a worst case scenario here. I do not know how to calculate the odds on the worst case scenario. I do think that risks remain high. Maybe it is only 20%. Maybe it is a lot higher.
Eventually, the international economy—namely the third world emerging economy—will regain strength and the upward cycle will begin. I think this is a ways off in time still, as the third world will also suffer economic problems for awhile as the major economies contract.
I’m not an economic wizard. In fact, I consider myself astoundingly ignorant of economics. Sometimes I have an intuitive grasp of some issues, but mostly I get lost in the fog.
However, it seems to me that one way bad debt is written off is through inflation. Devalue the debt and pay it off with money that is “worth less.” (So that’s where the term came from). Germany did that with their WW1 financial obligations in the 1920’s.
Is that not a possibility here? Instead of deflation, inflation?
Keep posting this, eventually some will start to understand. But don’t bet on it.
Well said.
I think we’ll get Jimmy Carter redux. High taxes, high inflation and high interest rates. And if the 0 makes it in look for it to be worse.
That has been our philosophy and we are comfortable with it but seeing everyone else getting such high “returns” sometimes made me wonder. But I wouldn’t do it any other way. I wonder how those of us who have been so cautious will fair considering the gamblers that we seem to be rescuing.
Facinating post...
I thought this was all due to subprime morgages...guess I was wrong.
My overall impression is that there are way to many levels between real wealth creation and those claiming ownership of the wealth. If’s it’s the FDIC, they are “insuring” banks/accounts that they don’t understand. If its social security, it’s the same concept. These people who provide “security” or “insurance” have no real wealth of their own.
It all stinks of socialism and communism.
One thing missed by the author is the threat present in the end-game of another Ponzi scheme, namely Social Security, a brilliant scheme whereby an entire generation has voted to enslave thier grandchildren, in the finest tradition of democracy.
Those Boomers who did actually bother to save and invest for their retirements will need to start selling their investments to generate ongoing income. Pulling all of that equity out of the markets will also, in addition to all the other stuff that is going on, put more downward pressure on the markets.
All in all, this is not going to be a particularly fun ride for many.
Do you know how volkswagon was formed? Hitler called it the peoples car, if you worked at volkswagon, you could have a portion of your wages withheld and when you had enough taken out you would have a new car that you built. When it came time to deliver the first car the program was suspended. Not one car was ever deliverd or money returned!
What does this have to do with whats happening today? We have millions of people who have saved for retirment, 401ks, retirment programes that companys are defaulting on ect... With no way to payout, this system has to find away to change the status quo, so that these people who have invested get very little in return. This money will probly just disappear and they (wall steet) will have single handedly readjusted the wealth of the world. And no one will be held responsible, after all it was market adjustment.
I pray that God does indeed bless you with righteous leadership. Yet, the change comes from bottom up, not top down. I pray he blesses your beautiful country.
Regards!
Yep, back to Mass where I grew up. I’m glad you enjoyed the article, it was an eye opener to me too.
There's not a lot of legally culpable parties. Some people made the assumptions that there would be no systemic risk because they knew the Fed would be intervening. The ratings agencies were making roughly the same assumption, after all if Treasuries are "AAA", why shouldn't every other American security be "AAA" also? But I would save the pitchforks and torches for going to Greenspan's house. That idiot was still touting these failed financial innovations this week.
My free investment advice is to diversify and keep some cash for now. My self-directed IRA is 1/2 cash, and the rest has quite a few mining and energy trust shares. Those haven't done too well, but the dividends are pretty solid unless oil goes back to $30. I've researched and bought a few smaller capitalization stocks in health care and technology. I've missed lots of potential gains including most of the dot-com boom (cashed out very early).
It's rarely a good idea to bail out of anything, but selling 1/3 or 1/2 might be prudent if you are heavy in something.
It was an eye opener but it’s strength is that it is so clear and readable. It drives home the thinking that could lead people to delusion so they are able to ignore such massive risks. And it is so clearly describes the entire process that lead to such massive leverage of risk.
You can’t read that article from start to finish and still not understand the dangers of the liquidity crisis and the foundation that risk is laid on.
There is another thread posted here that is a TIME article that is also brilliant in clearly describing the history and impact of the liquidity crisis. These 2 articles alone would form a magnificent foundation for anyone to understand the current crisis.
So many people seem to not understand the extreme systemic danger to our financial system. They innocently want to think this is a normal housing/stock market correction or want to believe this is a simple conspiracy. Anybody who reads these 2 articles from beginning to end will have to come to the stark realization that the massive risk in the financial system is very real and unprecedented in modern history. This is NOT a normal correction or “normal” anything. I’ve never in my life of 49 years seen this kind of credit bubble or the devestation and potential risk of economic collapse that this crisis poses and these 2 articles really clear up how this risk was initiated and what the danger it poses today.
This article and the TIME articles should be stickies on the FR home page with a note posted “Credit Crisis - Must Read” on them.
This is an excellent find and I’m grateful that you shared it with us. There is so much crap posted here and I’m to blame for some of it. Every once in a while something of paramount value is posted here and this article fits that category. Thanks.
I hope you enjoyed the trip back home. Massachusetts is a beautiful state to visit and it’s getting close to fall foliage time.
This article pretty much gets it all together in one place.
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