Perhaps you could bring some clarity to the point you are attempting to make. Insofar as each of these “crises” occurred prior to the Great Depression and their effects and causes are not really related to todays situation, why don’t you tell us what it is that is going to happen?
If I recall your original post, you were descbibing symptoms of the situation, not effects. So it sounds as though you wish to establish that the symptoms you describe are going to have a certain effect. Why don’t you set it out there?
Effects vary widely among the affected. You see, my father lived through the Great Depression in Montana and didn’t know it was happening. They just traded goods and skated on the frozen lakes in the winter. He recalled it as a pleasant time, but that was rural America. Not booming, but everyone ate well.
Now, if you are saying that this crisis of liquidity is going to bring that back, then I can better address your concerns. For me to discuss the National Debt versus the National Assets (wow, there’s one you never hear about) is still all rather academic (not that I am an academician). I can’t draw a bead on what you are wanting me to acquiesce to.
From my vantage point, I would say this present situation is going to cause some real hardship somewhere. We already see job loss and some folks losing their homes. I also see a lot of investors from overseas swooping in to take advantage of the bargain prices in real estate (especially Canadians, exchange rate and all) and a fair amount of new businesses starting. This makes it incomparable even to the Depression. Recall, store clerks were buying stock on the margin (10cents/$) anticipating daily rises. All air (like some real estate of the past couple years). But, the banks loaned this money with the stock as collateral and failed to some degree from these margin loans. That is all gone now. Will real estate run to zero? Probably not.
That makes bank losses limited to the delta between the foreclosed value and their loans. Okay, that hurts. But, lots of banks had nothing in that game and now are picking the pieces up from those that did. Still lots of horsepower and value in them, just a pile of loans with deltas. Remember, these are not bad business loans with no assets.
So, was the Tech wreck a financial crisis (2000)? It clobbererd me pretty good. So did the energy companies that followed (2001?). And, the building business and some investment real estate. But, that’s the game. Get in, get whacked, go home. Sometimes it works, sometimes it doesn’t. I just don’t want to argue ratios and percentages when there isn’t an effect to consider. So give us the effects.
And I don’t think you are any wordier than I am (is that the pot defending the kettle?). But, you are likely technically smarter than me.
The crash of the NASDAQ after the dot.bomb collapse was definitely a short, shallow financial crisis. The NASDAQ has never recovered and is still floundering at 1/2 the value it had in 2000. People threw real money into real losses.
The S&L crisis was more pronounced.
Recapping, I said I agree with those who are calling this liquidity crisis the worst financial crisis since the Great Depression and I’m saying the impact will be worse than the dot.com collapse, worse than the S&L debacle, and worse than the economic stagnation of 1973 to 1980.
So, you ask what are the effects of this financial crisis. I assume they will be the same as the effects of prior financial crises. Severe financial crises are deflationary. What are the effects of deflation?
First incomes deflate. People make less money so they buy less stuff. With less stuff selling, businesses order less stuff so businesses stop expanding, shut down stores and lay people off. With businesses ordering less, manufacturers cut back on production and lay people off, and some go bankrupt. With business and manufacturers closing stores and scaling back, they have no need to get loans from banks, so bank profits crash and they go out of business and lay people off. The more people get laid off, the less income there is to buy stuff at stores produced by manufacturers funded by the banks. Round 2 of the deflationary cycle. Cuts get deeper. Rinse. Repeat.
I am saying that the effects of this financial crisis will be the same as the ones I outlined in my prior post. Bank failures. Stock market crashes. Business failures. Layoffs. Rising unemployment. Same stuff.
I’m saying it won’t be nearly as bad as the great depression. I’m saying it will be the worst since the great depression. So the recession of 81-82 will be a cakewalk. It will be worse than the period of 73-80. That is my prediction. Or rather, those who are predicting that have convinced me they are right, so I am agreeing with them.
I agree with those who are saying that this will be the worst financial crisis, with the worst bank closings, worst stock market, worst business failures and worst unemployment since the great depression.
Now if we have a mild recession I am completely wrong. Or maybe the infinite ability of our increasingly socialist government to monetize these financial crisis into nothing more than a soaring of the national debt will continue to absorb all these crises and we will just go merrily on our way.
That is what the government is doing. They are absorbing the losses from Fannie, from Freddie, from IndyMac, from Bear Sterns to a great extent.
On the other hand, as financial crises go, we have already seen MASSIVE banking failures that have required the immediate dramatic intervention of the government. We have seen the 2nd largest bank failure of all time in IndyMac. We have seen investment bank Bear Sterns fail and even Ben Bernanke admitted that allowing such a failure could not be contained and would spread contagion throughout both the banking world and the real economy, dragging both down.
We have seen the failure of Fanny and Freddie, representing over $5 trillion in mortgages, which I think is some 80% of all mortgages on the books today.
We have SEEN these huge banks fail, and the bank failures are just beginning. Some silly person wrote “8 bank failures. Yawn.” This is like Robert E. Lee watching the morning skirmish at the Seminary at Gettsyburg and saying, “we lost 8 men. Yawn.” As if all the banks that will fail have already done so. The failure of hundreds of local banks that are not labelled “too big to fail” is only just beginning. There will be a wave of local bank failures.
I know you don’t believe this, but I can only state my view, I can’t provide proof in advance to what is to come that will be obvious in hindsight.
There is a severe SEVERE liquidity crisis. Collapsing home prices are resulting in waves of foreclosures that have ravaged both the total expected profits from mortgages as well as the highly leveraged securities on which those mortgages were based. Banks and investment firms have hidden the losses on their books because they don’t want to be held to account for those losses until they are forced to. Worse still, many banks have no clue what the street value of much of these investments is. They don’t know whether most of the mortgages are sound or only a few, until the defaults come rolling in. As long as the defaults don’t come rolling in, they are still terrified that they will come rolling in and ruin the value of these investments.
By hiding invesments they know are worthless, along with other investments they have with completely unknowable value, healthier banks are afraid to lend to any to anybody, for fear that they will be lending to insolvent banks that will just consume their money. Healthy banks don’t want to put their good money down a black hole.
In the meantime, all banks that have had losses are forced to lend way less than they used to be able to, because the losses are reducing their cash reserves and they are only allowed to lend in multiples of the cash they have on hand. So if a bank loses one billion dollars, they have 10 billion less they can lend, so businesses that might want that money lent to them are SOL.
The effect of this crisis will be the same deflationary effects of bank failures, stock market crashes (40% from peak is a bonafide crash), business failures, layoffs, rising unemployment, reduced tax receipts, reduced standard of living and increased pain for those living deep in debt.
That is what I mean when I agree with those who predict this will be the worst financial crisis since the great depression.
The overall affect of this leveraging of mortgage paper is described in Eugene Linden: Collapse of a Fiat Currency: The AAA-Rated CDO Tranche.
The first couple of steps in this financial alchemy are nicely explained in the YouTube video: subprime derivatives.
I don't know the numbers exactly (I doubt anyone does), but my recollection is that there is over $100 Trillion of this toxic paper, built in a Ponzi scheme on roughly $10 Trillion of mortgages. Our national debt is a similar $10 Trillion, and our Gross National Product (GNP) is perhaps $14 Trillion. The total unfunded liabilities of the U.S. government for future Social Security, Medicare and Medicaid is (my memory is fuzzy here) perhaps $50 Trillion.
The size of this Everest of toxic paper dwarfs all.