Dow 7,000 on Black Monday?
Here we go: Officials close to Paulson are privately painting a far bleaker portrait of the fragility of the global economy than that advanced by President George W Bush in his televised address last week. One Republican said that the...
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Rod, you really are the one horseman of the apocalypse.
how many people saying this does it take to unnerve everyone and flood the market with "sell" and no "buy" on Monday?
I don't know. But this could happen with NOTHING wrong.
Still, if it does... I have minimal debt. My own business - also not in debt, with minimal overhead. House almost paid for, car the same. Wife's in a career with almost no chance of retraction, and my business can handle almost anything.
I'm in good shape. We'll be in good shape.
The question is, WHO will not?
So, I'm not in a panic. If the market drops that big, we'll probably buy some more mutual fund shares...
I'm not selling. Not even if it drops.
This man has been through it all. Bankruptcy, family death, all but homelessness. These things don't scare me anymore. So stop letting them scare you. Besides, with God on your side, what have you to fear?
Pray for stability? You mean like Hoover and FDR tried to do? How'd that work? We only needed the biggest war ever to bail us out of that economic mess.
Bite the bullet, embrace the cross, take the crash...in 12 months we're out of this hole and better for it.
You seem to have a weird obsession with apocalypses and dour futures. Generally speaking, in my experience, conservatives are happier and more oblivious than average. You might be the only conservative I've seen, except maybe my Dad, who truly is bleak and dour.
Still this might be the one time you're not entirely wrong. I don't think we're heading for the next Great Depression, but I don't feel particularly confident of that.
The biggest indicator of just how serious Rod is about this is that his time stamp is 2:04 AM, which is about 1 AM local. He never does that... I think the latest I've ever seen him post is 10:30 or 11, and only if something is going on. This is huge, gang...
Well, prayer for this situation is ALWAYS a good idea, regardless of the truth on the ground.
I'm skeptical of this claim. Not everyone thinks this would happen. However, I'm not going to discount the possibility entirely - credit IS seizing up, and that's not good for the system.
No matter what happens to the economy, we have nothing to fear.
Habakkuk 3:17-19 seems appropriate to these times.
17 Though the fig tree should not blossom,
nor fruit be on the vines,
the produce of the olive fail
and the fields yield no food,
the flock be cut off from the fold
and there be no herd in the stalls,
18 yet I will rejoice in the Lord;
I will take joy in the God of my salvation.
19 God, the Lord, is my strength;
he makes my feet like the deer's;
he makes me tread on my high places.
Why, then, do they not just change the mark-to-market rules and let Wall Street work their own crap out? Guarantee things if we have to, but not throw 700b, or however much it winds up being, down the loo.
The problem with this whole "bailout" concept is that there's still no safeguard against something similar happening again. Those who messed up get to go on their merry way, while we (the taxpayers) end up holding the bag. I see nothing in this plan that would get Americans to break their debt habit *either* on the corporate or individual level. Our tax structure is set up to favor debt (by allowing write-offs for interest payments.) Consequently, many sound companies have it set up so that they're borrowing money - *even when they don't need to.* This is crazy.
I see nothing in this "bailout" that will encourage *less* consumerism. Every time you read a financial article, it seems, someone's whining about "how Americans aren't shopping as much;" "how it's going to be a bleak Christmas," etc. It's almost as if you're "unpatriotic" if you are out of debt and trying to save money.
Until these fundamental cultural assumptions change, any "bailout" is just gasoline onto the flames.
A few comments.
1. "If you subsidize something, you get more of it". As Stefanie says, as long as debt is tax-advantaged, people will be pushing the limit. This bailout will help, until the next debt-fueled crisis comes along.
2. Asian markets open late in the day Sunday, US time, we'll know before Monday if there is the kind of worldwide collapse RD refers to.
3. Make a screen shot of this posting; if the markets are relatively normal, use this as evidence that worst-case/apocalyptic speculations rarely come to pass... so there is little use in making such speculations.
Does anyone seriously believe that by purchasing 700b in bad mortgages this whole problem will just go away? And how many of you really think that this will end with a $700 billion purcahse? Within a matter of months we will be dealing with the same issue. We are not fixing anything-we are just time shifting it onto our kids, with interest!
The problem is much deeper than it is made out to be. We have been spending more than we produce as a society for many years, and at some point we will be forced to deal with the consequences of this. The more we put it off, with band aids of $700 billion "bailouts" which only make our deficit larger, the worse it will be when bailouts no longer work.
If you think this is serious, wait until Social Security and Medicare need to be bailed out. At some point we as a society won't be able to put it off any longer.
The bail out is bad policy and it will just make the impending reckoning worse.
Everyone seems to be in denial. I had a conversation last night where the person I talked to insisted that this proposed bailout was nothing more than a reward for the malfeasance of the Wall Street bigshots, and that credit has not in fact started to freeze.
My response is that when a car is careening toward you, even though you have the right of way, you need to make a decision as to what more important, being right or dead right.
Marc Faber estimates the true bailout tab at $5 trillion, not $700 billion. The government cannot save us. Real wealth has already been destroyed and it isn't coming back. We should have had a recession after the stock market crash and taken our lumps then, but instead Greenspan blew another bubble. Now we'll take the pain of Double Bubbles.
If we had that crash tomorrow though, it would be the bottom of the market and I would plow all of my assets into stocks.
Anything that was cobbled together this weekend and rushed to print and signature for Monday morning headlines is at best an anesthetic and a band-aid, and could perhaps worsen the injury by not letting air and sunshine and clean water - i.e., nature and the market forces - cleanse the wound. The latter may take longer and be more painful, but it ensures a better recovery and better long-term health.
I fear that whatever Congress in its wisdom and wrangling foists on the American people will only worsen things. Putting Congress and this President in charge of the economy will be a disaster.
Several things:
1. I posted that one so late simply because I had insomnia and cruised the Internet before trying to get back to sleep.
2. You seem to have a weird obsession with apocalypses and dour future.
Well, look, I can read the newspaper, and I have a deep mistrust of what I regard as naive American optimism. What you consider pessimism I consider realism. Plus, there were two events that shaped my orientation toward the world in this regard: 1) 9/11, and 2) the sudden death of my grandmother when I was nine. Nana was at the center of my life as a child, and she disappeared in an instant (she died of a heart attack). That event was so traumatic for me that I have lost nearly all my memories of her. I saw her nearly every day for nine years, and I can barely remember any of it. Since then, my default position is one of pessimism in the future. You never know when it can all be taken away from you, and you won't see it coming. 9/11 confirmed that. It's not that this attitude keeps me from enjoying the present -- I tend to enjoy things immoderately, you might say -- but the memory of all that functions for me like the slave that used to run alongside the chariots of victorious Roman generals, saying, "Remember you are mortal!"
3. The reason I don't know what to think about the prospect of bailout is that, like some of you, I don't have faith that this will right what's wrong with the economy. If this were to buy us some time to reform in a serious way, and to embrace a healing, sensible austerity, it might be worth it. But I don't know that it can, or will, or that we will collectively learn from our near-death experience and change our spendthrift ways. We have, as a nation, thought that we could defy the laws of gravity through our own cleverness and presumed blessedness. As the former diplomat Shashi Tharoor told me the other day (I blogged on this), Americans have been running up debt for so long at levels that economists would consider unsustainable if it were any other nation -- but hey, we're America, we're exceptional. Turns out that we're not. One way or another, we're going to suffer for our imprudence. I am tempted to say that we deserve what we have coming, but we can be confident that the good (which is to say, the careful and prudent) will suffer along with the bad, and there will be a lot of intense suffering, period.
On my block there's a family that lost their small business a couple of weeks ago. They've been having a rolling yard sale over these past two weekends, trying to raise cash. We went to buy some stuff from them that we really didn't need, and paid more than it was worth, just trying to help. I'm told by another neighbor that this family is in serious danger of losing its house (which is no McMansion, but a very modest bungalow). I suspect we'll see a lot of this if there's a crash. Another neighbor of mine works for an AIG subsidiary, and told me she was told one day a couple of weeks ago to come to work the next morning prepared to clean out her desk. The bailout came through the night before, and she got to keep her job. She told me, "If I'd lost my job, I'd have had to put my house on the market that day. As slow as houses are moving, and as bad as this economy is, I couldn't take a chance that I'd have a new job before I got to the point where I couldn't pay my mortgage."
Aside from the suffering of my friends and neighbors -- none of whom, as far as I know, took wild chances with their personal finances -- if we manage to get through the initial crash OK (and I think we would, because we're on pretty solid ground), our neighborhood would likely deteriorate as our neighbors who are on less solid ground got into trouble. We're not far at all from a bad neighborhood, so I wouldn't be surprised if crime rose (back in the 1970s and 1980s, our neighborhood was drug-gang turf). The value of our house would fall through the floor, and we wouldn't be able to get out of it and move to a safer place. And all this is assuming I keep my job in an industry that's already in trouble, and would be during good times, but which is especially vulnerable to bad economic times.
All of which is to say that I am doubtful there's anything we can do to escape some very serious reckoning. If this bailout could buy us a cushion for the crash, it might be worth doing. But my suspicion is the question will be moot real soon -- that events will outstrip the ability of the government to manage them.
"how many people saying this does it take to unnerve everyone and flood the market with "sell" and no "buy" on Monday?" -Cranky
Precisely. The economy rides on our confidence, or on our fear. Realism is one thing. Demonstrating fear is quite another. Do you think U.S. infantrymen demonstrate the slightest bit of fear when the go out on a patrol? No, not even at the worst of it, when you had a one in three chance of hitting a possibly deadly IED. We have no guarantee everything will be okay. But we can't let fear paralyze us either. The consequences will impact more than just us.
Maybe this bailout plan won't make everything perfect. But it stands a good chance of preventing complete collapse. Maybe it won't, but it's probably worth the risk. The rest of the world is a little rattled right now. They know they are too much tied into us for any decoupling. They stand to go down with us. And here we sit on the brink, bickering and hesitating.
When all is said and done, we really no longer have the right to preach anything but basic civil rights. We've proven we're not perfect at elections, and are far from wise in running an economy.
Rod, I hate to disagree on one point (because I wish I thought you were correct), but the idea that any government action can buy us time to reform our society is a pipe dream. The only thing that government action is going to accomplish is to make it obvious that more government action is needed, ad infitum, until people realize that government action is one of the main causes of this mess and what we need is to pay for the excesses of the past, as painful as that may be. I suspect, but can't prove, that allowing whatever will happen, happen, would be less painful to our society as a whole than to try and put it off.
I do agree that events most likely will outstrip the ability of government to pretend to manage them very soon.
We have made our bed. If you vote, you have voted for representatives who allowed and enabled the things we are now dealing with. If you didn't you allowed others to do so. It is our collective fault as a nation, and collectively we are going to suffer the consequences. I pray that they are not too severe. I fear that they will be.
Habakkuk 3:17-19 seems appropriate to these times.
Thanks for posting those verses. Very appropriate to these times.
A lot of people who say "let it crash" have never lived through anything like the early 1930s -- to really remember the depths of the Great Depression, you would have to be 80 or older -- and they must not have given much thought to the less physically compact and socially cohesive society we live in today.
How many extended families (the ultimate support structure) still live in one community? How many churches, charities, public health services and hospital emergency rooms could cope with sudden multiplication of the population in need?
How many people are truly independent of the larger economy? What kind of business can survive interruption of cash flow? (That has already begun to happen, with banks pulling back radically on credit lines and money market funds seizing up.)
How many erstwhile Davy Crocketts could survive a week in the woods with a knife and a rifle? (I'll bet you don't even have the boots for it, let alone the digestive tract.)
For better or worse, we function in an economy that is a complex weave of relationships with distant institutions, one that depends on mobility and access to credit. If that comes apart, everyone takes the hit.
Everyone. No exceptions.
Libertarian sentiments are plentiful in this space and elsewhere in the blogosphere. Libertarians promote a philosophy, a values system, an aspiration, that can have a salutory effect on the way people live and the way public and private institutions function. Like all the other philosophies and ideologies, however, libertarianism is not a substitute for reality.
We are confronting reality right now. For the time being, ideology is one of the luxuries we cannot afford.
A lot of people who say "let it crash" have never lived through anything like the early 1930s -- to really remember the depths of the Great Depression, you would have to be 80 or older -- and they must not have given much thought to the less physically compact and socially cohesive society we live in today.
We also didn't have FDIC in 1930. Most people will be just fine. If there's really an issue we could extend coverage past $100,000 in specific instances. I.e, don't reward the banks, just pay back the people after their bank fails.
People with investments or private social security accounts will lose them all, but only if they panic. (Oh, wait, us Democrats managed to stop that private social security account nonsense. Y'all can thank us later.)
And at what point do we lock Paulsen up for inciting a bank run? Seriously. 'The Dow' wasn't in trouble at all before his announcement...specific banks are in trouble. He's acting like the entire damn market is going to crash for no obvious reason.
Meanwhile, stock prices, as far as I know, have absolutely no bearing on the ability of a company to actually operate. So what, exactly, is supposed to be about to happen here? Everyone invested in those banks is wiped out?
I'm failing to see how that cause 'bank failures' in any way. How a company is run can effect the stock price, but the stock price cannot effect how the company is run, except indirectly by changing ownership and the inability to raise capital by selling new stock. A bank could be 'worth', according to its stock price, a dime, and still operate fine.
I am really really hoping that this deal doesn't happen, because I can't see any need for it except to bail out investors who were still stupid enough to have their money in troubled banks when we've known for a long time that they were troubled.
We are confronting reality right now. For the time being, ideology is one of the luxuries we cannot afford.
The mantra of "We need a $700 billion bail-out, or the market will collapse, for we're on the brink of economic Armageddon" is itself becoming an ideology, and the chant (at times a rant) reminds me of how quickly "global warming" became an unquestioned and unquestionable truth for many.
"If you're going to church tomorrow, it would be good to pray for stability. Not kidding."
Ahh, yes, prayer. It worked so well for all the Christians working in the twin towers who went to church the Sunday before 9-11, and all the believers living in New Orleans when Katrina hit, or for the parents of that diabetic girl who took the Bible literally and withheld medical treatment, because they had strong faith.
Prayer. Nothing fails quite like prayer.
"The hands that help are far better than the hands that pray".
- Col. Robert G. Ingersoll (1833 – 1899) Civil War veteran, American political leader, and orator during the Golden Age of Freethought.
Rod, you do dream of disaster. Eventually your dream may come true.
Bailout Haiku
Government, they said--
A problem, not solution.
Now they lick its shoes.
Man from Goldman Sachs
Says he can cure the crisis
He's rich from causing.
Give away the store
Investment bankers care less
If your children starve.
The Republic's dead.
Laugh, then set yourself ablaze;
Nothing left to do.
Some of you need to get clear on what this $700B bailout is designed to do: unfreeze the interbank credit markets so that the real economy can get the short-term credit it needs to function properly.
Businesses both large and small need short-term lines of credit to smooth out fluctuations in income and expenses and meet regular payments (payroll, utility bills, debt payments, etc.).
We are still going to pay a heavy price for decades of reckless debt expansion.
The choice (unless it is too late) is between a gradual unwind and a crash.
Some of you won't believe me, but after reading (virtual) stacks of articles on the current financial crisis in the past few weeks I still haven't learned anything I didn't already know two years ago.
There are A LOT of economists out there (like yours truly) who saw this crisis coming with laser-like clarity because it was the only outcome that makes any economic sense! However, since these economists weren't shills for a politician or a Wall Street banker, they were (largely) invisible to the MSM. Nothing they had to say was profitable. And the average schmuck -- usually a Republican -- who earnestly wanted to believe the something-for-nothing gospel of these shills and who are always favorably comparing the practical wisdom of Joe Sixpack to the theoretical obtuseness of pointy-headed economists literally considered people like me to be the craziest voice in the conversation.
It has been a very lonely and sad decade for me.
"No one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion." -- Ludwig von Mises
Thomas R. et al. "You seem to have a weird obsession with apocalypses and dour futures."
Denial ain't a river in Egypt.
tinyurl.com/3y5xd3
Pyrrho, thanks for saying that. I keep reading about how this was a big surprise and that nobody saw it coming, but there have been voices of reason all along. When the housing bubble was expanding full tilt and we got fliers touting insane loans in our daily junk mail ("Employment info... NOT REQUIRED. Income info ... NOT REQUIRED. Asset info ... NOT REQUIRED. Get up to $1,500,000!"), even then there was always the little nod to reality in every article and newscast: "Of course, this can't last forever." Did Wall Street think it would last forever?
Apparently the current proposal includes "reasonable" limits on executive severance packages for companies that take part in the bailout. That's infuriating. IMO, any company that takes part in the bailout should be required to FIRE the executive staff and the board of directors before they get a penny. No severance package whatsoever.
Pyrrho:
Congrats; looks like you were correct.
What's happening next and what should be done about it?
I find it so interesting how all "freethinkers" think pretty much alike.
Off-topic, from this morning's NY Times (link):
As a two-time chairman of the Indian Affairs Committee, Mr. McCain has done more than any other member of Congress to shape the laws governing America’s casinos, helping to transform the once-sleepy Indian gambling business into a $26-billion-a-year behemoth with 423 casinos across the country. He has won praise as a champion of economic development and self-governance on reservations.
“One of the founding fathers of Indian gaming” is what Steven Light, a University of North Dakota professor and a leading Indian gambling expert, called Mr. McCain.
We know already that McCain loves to hit the casinos and bet big money, but I didn't know this, nor did I know that more than 40 of McCain's top advisors and fundraisers have worked for the gambling industry.
A penny for your thoughts, Rod.
quote: "IMO, any company that takes part in the bailout should be required to FIRE the executive staff and the board of directors before they get a penny. No severance package whatsoever."
I find this far too generous. Any company that takes part in the bailout should have big back taxes (to help fund the bailout) slapped on the all the bonuses given out to the CEOs and corporate officials for all of the bad loans they been giving out these past five years or so. If these individuals have to go bankrupt, so be it. After all, many of those who took out these bad loans have lost their homes. If corporate leaders who got us into this get a free pass, we just see this happen all over again down the road.
rr
Like the billionaire Mark Cuban said a few weeks ago, no one has a clue what is really going on or what will happen, whether on Monday, or weeks, months, and years from now. The decisions of literally tens of millions of people every minute of every day will determine what happens in the main; Paulson and his buddies are merely tinkering on the margins. All of these millions decisions, over which no one has control, will be factored by the market, but panic is not called for. Negative or positive speculation is worthless. What is called for is plowing your own garden as best you can every day; that is the only thing you can do and all you can really know.
How many erstwhile Davy Crocketts could survive a week in the woods with a knife and a rifle? (I'll bet you don't even have the boots for it, let alone the digestive tract.)
For better or worse, we function in an economy that is a complex weave of relationships with distant institutions, one that depends on mobility and access to credit. If that comes apart, everyone takes the hit.
Everyone. No exceptions.
Libertarian sentiments are plentiful in this space and elsewhere in the blogosphere. Libertarians promote a philosophy, a values system, an aspiration, that can have a salutory effect on the way people live and the way public and private institutions function. Like all the other philosophies and ideologies, however, libertarianism is not a substitute for reality.
We are confronting reality right now. For the time being, ideology is one of the luxuries we cannot afford.
Posted by: allbetsareoff | September 28, 2008 11:10 AM
The boots in question, are Limmer Boots of Intervale, NH. Armageddon or no Armageddon, I'm buying some. They are repairable and if maintained should last 15 or even 20 years. They have a website, a bit of a cult following among through hikers of the Appalachian Trail.
The digestive tract... well it helps if your mother couldn't cook.
I'm being flippant. But I really do like the boots.
Anon at 1:17 pm:
We are STILL getting flyers like that and the Real Estate section of our local paper today is full of builder adverts touting 100% financing through their affiliated lenders. Just yesterday, we got something in the mail from the gentleman who originated our (conventional) mortgage two years ago, practically begging for referrals and touting his experience with "creative" mortgage financing. Ugh--"creative" and "mortgage" should never appear in the same sentence. I don't care how good a credit risk a potential homebuyer may be, lenders must require a stake in the purchase; aren't they learning anything from the "jingle mail" phenomenon? An ownwer-occupied house is a home. It might eventually become an asset but it's ridiculous to overleverage oneself and then consider it an "investment."
allbets:
If you are going to talk reality, what do you think are the odds this thing is going to work? I have already said I think it has close to zero chance of being successful.
And what comes next? Does this bailout solve our current crisis? Or does this put us in an even worse position with respect to our impending entitlement crisis?
I hope you can believe me when I say that I have considered what the consequences of a meltdown might be. I have the knowledge, experience, and equipment (including the boots!) to survive in the woods-if I had to. I've spent enough time there to know it is surely nothing to look forward to if you aren't doing it by choice. I like to have the chance to discuss this on the internet, and if the worst comes to pass, we certainly won't.
Government can't solve everything. My thinking that they can't solve this does not mean that I am wishing for anything bad to happen. My belief is that the correct response to this crisis is to deal with the fallout as it occurs as best we can. The sickness has to get out of the system sometime.
Who says the system will get rid of the sickness?
We aren't the same nation that survived the Depression and we aren't the same nation that won WWII.
We don't have the character anymore.
If you think we do, how many do you think would be willing to ship off and give up their SUVs, plasma TVs and 200 cable stations?
Not saying anyone is willing. I don't think there will be a choice.
fbc: "What's happening next and what should be done about it?"
Well, the easy part is over. Speculative bubbles follow a fairly predictable path. Right now, a lot depends on how the politicians and the electorate react.
The underlying economy is sound. I don't foresee an economic collapse. An L-shaped recession/depression is probably the most likely scenario. Once the downleg is over (20-30% off the major stock market indices?), we could have 10-15 years of anemic growth and mild recessions.
A lot of credit is going to be destroyed (obviously). I think the government is going to try a controlled crash by letting non-essential financial institutions go under, and protect depositors and recapitalize surviving institutions through monetization. Congress is going to spend, spend, spend. Look for lots of public works to "rebuild our infrastructure". Foreign creditors are not going to be recycling as many dollars back into government securities as in the past, so look for monetization there, too. (Don't panic. It won't end in hyperinflation. Japan did this sort of thing for years.)
We will have a lot of entitlement problems to deal with concurrently, and I don't know what we'll end up doing. That's one of many wild cards.
So much to say, so little space ...
DavidTC: "[S]tock prices, as far as I know, have absolutely no bearing on the ability of a company to actually operate. So what, exactly, is supposed to be about to happen here?"
You're right. People are looking in the wrong place. Credit spreads, LIBOR, etc. is what they should be looking at. It isn't pretty ...
I hadn't thought of this but this is from Bill Fleckenstein's weekly column and sounds like a likely unintended consequense of this bailout bill.
"You can expect to see all foreign banks move their toxic waste to their U.S. subsidiaries for delivery to Henry's Helpful Handouts."
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/whats-next-a-ban-on-stock-sales.aspx?page=2
If this is allowed to happen, it is travesty.
AnotherBeliever: "The boots in question, are Limmer Boots of Intervale, NH."
Last time I checked the waiting list was very long ... several years!
K: "We are STILL getting flyers like that and the Real Estate section of our local paper today is full of builder adverts touting 100% financing through their affiliated lenders."
Happily, almost nobody qualifies anymore!
We will have a lot of entitlement problems to deal with concurrently, and I don't know what we'll end up doing.
One solution seems obvious: Removing Medicare funding for most treatments (beyond basic care) after a certain age.
I actually had Amerigroup call me yesterday, explaining how they could get me a much better interest rate on my VA, 30-year-fixed mortgage (already at 6%), with no proof of income required.
I normally hang out, but this time I spent five minutes excoriating the guy that, with the situation as it is, they're still doing this crap.
I still don't think the second Great Depression is around the corner. But some hard times are.
It's not Rod's awareness of these serious problems that's troublesome...it's his constant fixation that the disaster of the moment is the final disaster, the big one, the one that's gonna bring it all down and leave us with his beloved "Benedict Option".
Peak oil, war with Russia, war with Iran, sexualizing of youth, economic bailout, global warming, Islamic fundamentalism, culture war...the never ending tirade of threats and dangers, each one of which is an existential threat to all that is good and righteous.
The simple reality is that neither individuals nor the world as a whole can afford to consider everything an existential threat. If everything is equally threatening, than nothing is threatening.
I actually agree that all of these things are threats. But they're by no means all equal threats. And some of them are frankly just overblown cultural issues that have no real bearing on the larger state of the world as a whole.
Dont forget the international fallout. What happens to all those marginal countries hovering just above failed nation status when they can no longer borrow to buy fertilizer, fuel and food? How will we continue to finance our foreign wars?
Steve
Regarding 7000 Dow, perhaps the Dow is overvalued and should fall from its present record highs.
Regarding home prices, perhaps the housing bubble has resulted in an overvalued housing market and prices should fall. Did anyone expect home prices to increase forever?
The sky is not falling, nor is it going to fall.
There may be a severe storm and lots of damage, but all the chicken littles in Washington need to understand that we don't believe you guys anymore. Dems want to blame it on "the last 8 years" (i.e., Bush) and refuse to explain why they did nothing about this during the past 2 years when they've controlled the House and the Senate, as well as a majority of State governorships and legislatures. Pass the buck, shift the blame, business as usual.
Sorry, not buying it. And I hope the holdout House Republicans don't buy it, either.
Let me also add for those who may be against this, that the Government has to do something. The credit markets have seized up, and this will impact virtually every American (99 + %). I'm not crazy about this, but the longer the credit markets are seized up the greater the damage will be. Last week, Caterpillar borrowed money at 200 basis point (2 percentage points) over where they had borrowed short money a few weeks ago. Credit is the mother's milk of our economy. I am totally 100% certain about the current status of the credit markets - almost nothing is getting done.
Pyrrho, you seem resigned to long term economic contraction...
1. why is that?
2. Why do you not think that some intelligent policy (tax and regulatory changes) cannot overcome inertia?
One thing is for sure; if the walls really do fall down it will force us to think about what really matters in life. This may be a greater challenge then getting the money back but at the same time it may be more valuable in the long run. Perhaps it would be good not just to pray for the stability of an economy but also for the wisdom to live as if what really matters, does.
Rod: I went out and worked on my RV roof to burn off my anger.
I'm still angry at you, even though you unpublished what I had to say.
This is serious stuff. I am dismayed at your doubts and fear. This is a time for leadership, not chicken little paranoia, and then justifying it with having had and witnessed a little hardship in your life and around you.
Have you ever lost your home? I have. I've even lost my way of life as a teenager, when sudden and completely disruption to our family and business vaulted me across the country into a situation I hated and I never was able to return to the life I still love. That was nearly 30 years ago. I've "lost" everything twice. I'm NO LONGER AFRAID. You should not be either, you have so little to fear.
Pyrrho @ 3:54 writes:
"The underlying economy is sound. I don't foresee an economic collapse. An L-shaped recession/depression is probably the most likely scenario. Once the downleg is over (20-30% off the major stock market indices?), we could have 10-15 years of anemic growth and mild recessions."
I'll go along with that, my friend. The US government and its provincial subsidiaries have a godawful lot of debt to work through. The heck of it is, they haven't finished adding to it. Quite a few provincial and county-level pension funds are not fully funded, so look for these lower-level Wonderful Gangs of Happy Monkeys to try to find new and exciting ways to tax their subjects to fund them.
"A lot of credit is going to be destroyed (obviously). I think the government is going to try a controlled crash by letting non-essential financial institutions go under, and protect depositors and recapitalize surviving institutions through monetization."
That's one way to boldly restate the blatantly obvious (to anyone with an economics background, that is). ;-) Credit isn't going to "destroyed" so much as rendered much less accessible. The reason for this, for all you non-Econ majors in Our Studio Audience, is that in the American system, banks are required to keep a certain ratio of capital to outstanding loans. One of the reasons why some of the bigger investment banks went ker-shplutz is that they were leveraged beyond belief: I heard Lehman had a 35-1 ratio of debt to assets (which is, IMO, flatly insane).
Also, all these lenders have to find ways to get rid of the "toxic (non-performing) debt in their portfolios. Since much of this is mortgages of the subprime and other varieties, and since much of this is "hidden" (i.e., capable of GOING bad but not yet HAVING GONE bad), it's going to be a witch-with-a-Capital-B of a job to identify said debt and contain it. This is going to take a hellaciously long time and keep a great many accountants gainfully employed for years and years. (Recently admitted college freshmen, take note.)
This money-heaving "bailout" package is going to mean a great many more dollars out there than there ever have been. Those Many More Dollars are going to be chasing about the same level of goods and services. That means I-N-F-L-A-T-I-O-N, particularly internationally. I'd advise against making those plans for that three weeks in Europe next year if I were you; not unless you would rather stay at a youth hostel than at the Savoy.
"Congress is going to spend, spend, spend. Look for lots of public works to "rebuild our infrastructure". Foreign creditors are not going to be recycling as many dollars back into government securities as in the past, so look for monetization there, too. (Don't panic. It won't end in hyperinflation. Japan did this sort of thing for years.)"
The one partially good thing about this "rebuilding our infrastructure" is that some of it---a fair bit of it, actually---is actually necessary. Our power distribution grid is in pathetic shape; that's why New York City had those blackouts last summer. Lots of bridges and roads are going to be in need of some rebuilding. The difficulty here is going to be the usual one of Congresscritters doing Porky Pig instead of Practical Pig and allocating the cash to their favorite campaign contributors instead of where it's actually necessary. (sigh) Here we go again.
Bottom line: we're looking at 8-10 years of repaying a heck of a lot of debt at a time when foreigners are going to be less than willing to lend us more. It's going to look a lot like Japan in the '90s, and they're STILL not over it, quite. It's going to hurt, but it has to get dealt with. And soon.
Reason being: we've still got the (Financial) Big Ones to get ready for. Medicare and SocSec are going to absolutely explode in a dozen years or so, and they're going to make this little bit of fun and games look like, well, fun and games. It's time to break out those old savings-account passbooks and get reacquainted with them. Time to "Feed The Pig", 'cause party time is over. The hangover is, in the words of the immortal Captain James Hook, "really going to HURT".
You Have Been Warned.
Your servant,
Lord Karth
zzz
I agree with jim r:
We have made our bed. If you vote, you have voted for representatives who allowed and enabled the things we are now dealing with. If you didn't you allowed others to do so. It is our collective fault as a nation, and collectively we are going to suffer the consequences. I pray that they are not too severe. I fear that they will be.
Rod, Aside from the suffering of my friends and neighbors -- none of whom, as far as I know, took wild chances with their personal finances
Well, I think it all depends on what you call "wild chances". From your explanation of each case, both sounded risky to me...that is, most small businesses fail, and also one should certainly be prepared for getting layed off at any time. It's called saving money and cutting spending until you feel safe. We don't think we have to do this anymore.
Americans have simply become spoiled and expect life to be just peachy, and are shocked and angry when something "goes wrong". We weren't always like this...we used to be more conservative in our families, our spending, and and our lifestyle. We had deeper family and community roots that could help us in times of stress and this made us less likely to take risk without a nest egg and more senstive to being a burden on others. The past was a more conservative time for a reason: one didn't get divorced without consideration of money, and one would raise good, responsible kids if only to make sure someone would change your bedpan when you were old. Not today: the government will take care of you by taking OPM.
For example of how far gone we are, the very idea that single motherhood is a reasonable option at all speaks to our great wealth and ease of living we've come to expect. In most other times and places, not having two parents often made it hard for junior to even eat. Being a single parent today is a joke, a standard event. So we are spoiled and thus live free and liberal and do what we want.
Point: color me unimpressed with American financial angst. We expect - no, demand! - things to work out for us even when we make bad choices. Unfortunately, we will not grow out of this way of thinking except through pain. And we have a lot more pain to embrace.
Pyrrho
DavidTC: "[S]tock prices, as far as I know, have absolutely no bearing on the ability of a company to actually operate. So what, exactly, is supposed to be about to happen here?"
You're right. People are looking in the wrong place. Credit spreads, LIBOR, etc. is what they should be looking at. It isn't pretty ...
But, wait, if I'm right, and all that's going to happen on Monday is a stock crash...why do we have to push through a deal so fast?
Can't we wait for the financial market to actually freeze and start to self-correct and then put money in where it will be actually needed to loosen things up?
If there is no actually financial problem that's doing to slam into us on Monday, just the continual slowdown and lockup as the wheels of credit grind to a halt, couldn't actually wait and intelligently fix this when they do, instead of having wild spending whereever? Yes, the US needs credit, but does it really need it Monday morning at 9 sharp?
Is my assumption that this 'deadline' is entirely due to stock prices on Monday morning correct?
stevereno: Credit is the mother's milk of our economy.
Well, it's poison, then. You don't keep drinking poison even when it's painfully apparent it's going to kill you.
There is reasonable debt, and grossly unreasonable. We've been playing games with the latter way too long.
Cranky: "[Y]ou seem resigned to long term economic contraction... why is that?"
You can live well beyond your means on credit until you can no longer service your debt on your current income. Then, you have to live well below your means in order to work your way out of debt.
Until a credit bubble peaks, no one pays and everyone benefits. After the peak, everyone pays and no one benefits.
DavidTC: "[I]f I'm right, and all that's going to happen on Monday is a stock crash...why do we have to push through a deal so fast?"
The credit markets have been seized up for more than a year, and the term auction facilities that the Fed set up have proved inadequate to unfreeze these markets. Banks and other financial institutions have been borrowing from the Fed TAF but not lending the money out. They won't lend to each other because they are worried about getting paid back.
The word from the Treasury is that we're perilously close to a total seize up of credit market and panic is spreading. This panic would be reflected in a stock market crash; it wouldn't cause it. Of course, a stock market crash would freak out folks on Main Street and make matters worse.
Here's the PDF version of the actual bill:
http://www.speaker.gov/pdf/AYO08C04_xml515pm.pdf
From p. 11:9-13
AUTHORITY TO BASE PREMIUMS ON PRODUCT RISK.—In establishing any premium under paragraph (1), the Secretary may provide for variations in such rates according to the credit risk associated with the particular troubled asset that is being guaranteed.
Just how does he determine "credit risk associated with particular troubled asset?"
LK -
As usual, I agree with everything you wrote except for the I-N-F-L-A-T-I-O-N bit.
Monetization is not going to result in inflation for the following reasons:
[1] When it monetizes, the Fed does not actually "print" money. It extends credit. Since financial institutions will not be lending except to the most credit-worthy borrowers, only the Federal Government will be borrowing and spending this "money".
[2] The amount of "money" that the Federal Governement borrows into existence will never catch up with the amount of credit destruction going on (loans that never get paid back, losses financial institutions assume, capital that has to be raised and held in reserve, etc.). In other words, the money supply will still be contracting. This is what happened in Japan, BTW.
[3] Most companies and "consumers" will have less access to credit, causing real demand for most goods and services to decline.
[4] The downturn means more people will be out of work, causing real demand for most goods and services to decline.
[5] Sentiment will shift away from living for today towards saving for an uncertain tomorrow (the 'time preference shift' economists are always babbling about). This will cause real demand for most goods and services to decline.
In other words, CASH IS KING.
(I actually LOVE engaging in inflation vs. deflation debates, but I'm now going to get some sleep.)
Well, the Asian markets didn't tank upon opening:
money.cnn.com/data/world_markets/
Maybe Congress can take this nice and slowly and come up with a real plan, and not a Saturday & Sunday Night Special.
I know this is morbid-but what do all of you think one should do with retirement funds in 401(k) and IRA accounts? Are there opportunties to make money in this market? Are index funds still a good option, or should a person be in cash? Thanks in advance for any input.
I know this is morbid-but what do all of you think one should do with retirement funds in 401(k) and IRA accounts? Are there opportunties to make money in this market? Are index funds still a good option, or should a person be in cash? Thanks in advance for any input.
Banks and other financial institutions have been borrowing from the Fed TAF but not lending the money out. They won't lend to each other because they are worried about getting paid back.
And I'm assuming this bill includes some requirement that banks accepting this money actually lend it out? I'm not sure how that would even work.
Otherwise I'm failing to see how this helps at all. The banks will just take the money we're giving them and hold it, too.
We can't actually make the banks operate as banks if they don't want to.
Nor should we care about their stupid stock prices if they don't actually wish to operate as a business. Companies that choose not to provide goods or services to people are rather worthless entities, and the stock price should reflect that. We're sorry you've screwed up your own market so badly you're too scared to actually operate in it, but that's not actually our problem.
Perhaps what we should be doing is admitting present banks are holding tons of worthless and impossible-to-value assets, and thus they can't do business and it sucks to be them...so we'll just have to set up a few new banks funded with this 700 billion that are willing to give out loans, although they will be a good deal more careful about it. With the intent of eventually selling 700 billion dollars worth of stock to recover our costs and turn them into public companies.
Meanwhile, existing banks would just stop making loans while they sort out their existing crap piles of paper and put the good ones in useful bundles.
Seriously, existing banks decided to trade crap paper as a medium of exchange for loans between each other, and now they're unwilling to do that. I fail to see how handing them money will make them now accept crap paper. (Or why that would even be a good thing.)
According to EricW's link, the Asian markets are down 1 % or so; the Nikkei is actually up a bit. IF that holds for London and NY, then the Dow is going to be down somewhere in the 100-200 point range. All fans of the Apocalypse, take note.
That does NOT, repeat NOT, affect my guess as to long-term prospects: long-term, we're going to get seriously reamed. Even if we get a President John McCain, the demographics of our national situation are not promising. Boomers retiring as fast (or faster) than new Millennials coming into the workforce means a shift in the ratio of productive members of the population to unproductive. Combine that with increased demand for central-government-provided medical care and unearned income on the part of those same unproductive Boomers means a larger State apparatus, with a correspondingly reduced productive base. More people fighting over a smaller pie seldom makes for a Pleasant Dining Experience.
Pyrrho: I'd be inclined to consider your sunnier-than-mine view on potential inflation, save for one thing: an Obama Presidency will mean the central government shifting spending into fourth gear while staring longingly at the "overdrive" slot. (You don't really think Freddie and Fannie are going anywhere under a President Obama, do you ?) The man has campaign promises to keep, after all---and a nice, relatively friendly Democratic-controlled Congress to help him keep all those promises. This is on top of already-promised entitlement spending and continued (albeit mildly reduced) spending on the Iraq occupation. Do you really think we can count on that kind of Congress exercising any sort of spending restraint ? This Wonderful Gang of Happy Monkeys is Keynesian, if not outright Marxist, in their economic orientation. They're going to do their very, very best to maintain demand, particularly among those non-productive elements. And who will there be to say them nay ?
Recall my Motto: "In any given situation, don't just assume the presence and effects of Human ignorance, idiocy and depravity. Rely on them."
Your servant,
Lord Karth
Jim R @ 11:37 PM writes:
"I know this is morbid-but what do all of you think one should do with retirement funds in 401(k) and IRA accounts? Are there opportunties to make money in this market? Are index funds still a good option, or should a person be in cash?"
First things first: pay attention to the long term.
Having said that: if I were a financial planner (which I must hasten to add, I am NOT), I would tell anyone who asks to get their assets the heck out of the USA, especially for the long term. If Obama gets in, you're going to see the following:
1) the repeal of the Bush tax cuts;
2) removal of the upper income limit in the SocSec tax for sure; I would not discount the possibility of applying SocSec taxes to unearned income;
3) increases in the highest corporate tax rate;
4) massive new spending on infrastructure, welfare and health care.
Obama has already promised an expanded central-government role in health care;
5) increased provincial-level taxation to "top off" retiree pension and healthcare funds to bring them up to full funding;
6) Unions will be massively strengthened; this will lead to upward pressure on wages;
1 and 2 combined mean probable combined marginal tax rates of 60-70 % at the highest levels, with similarly high levels of capital-gains taxation. We already have relatively high levels of corporate taxation, along with a tax structure that deliberately encourages foreign investment over domestic, particularly in manufacturing. Investing in health-care or health-care insurers for the long term will be suicidal; I think there is a distinct possibility (30-50 %) that there will be a nationalization of the health care industry, starting with "Medicare for all" after 2010. If Obama gets a second term, doctors will become salaried civil servants and private health insurance may well be rendered illegal. This will produce a collapse of medical innovation, particularly in pharmaceuticals.
These people want a European-style, if not an outright socialist economy, a la the USSR of Brezhnev. If Obama gets in and Congress stays Democratic, they may get it before 2016. Even if McCain somehow pulls a victory out, that will only delay it by a few years; a Presidential election cannot affect demographic trends all that much.
As you can tell, I am rather bearish on the long-term prospects of the US economy. If anyone can tell me why I'm wrong, I'd love to hear it.
Your servant,
Lord Karth
As you can tell, I am rather bearish on the long-term prospects of the US economy. If anyone can tell me why I'm wrong, I'd love to hear it.
I'm not going to argue with you, but I do wonder about your almost certainty about the nation veering far left.
You know, and I know, that "liberal economics" is sort of an oxymoron. They don't work. Do you believe that public is insufficiently capable of grasping that, and giving rise to a resurgent preference for capitalism and individual empowerment, rather than collectivism?
To believe that we're going to head down the road wildly to the left, unchecked, is to believe that somehow these narrow margins in voting between left and right cannot be overcome, and that no intelligent and persuasive leader cannot arise and sell the notion.
After all, you and I are sold on the notion because it makes sense, how could it not sell the rest of the public, once it starts taking things economic seriously?
Cranky @ 12:57 AM writes:
"You know, and I know, that "liberal economics" is sort of an oxymoron. They don't work. Do you believe that public is insufficiently capable of grasping that, and giving rise to a resurgent preference for capitalism and individual empowerment, rather than collectivism? "
Re-read what I wrote @ 12:14. It's not a matter of whether the American people are capable of grasping the concepts of economics. It's a matter of the fact that most people will vote their own self-interest rather than the national interest. The retiree population will be expanding very rapidly over the course of the next 20-30 years, and they will (for the most part) vote to keep those Solid Gold (Freebie) Goodies coming.
I hate to say it, but it's also a matter of culture. Simply put, the current dominant American culture militates against capitalism and individual achievement. Consider this: the average American child is exposed to thousands of hours of television programming from birth to 18. That's more time than he or she spends in school. It is not that much of an exaggeration, IMO, to state that while the schools provide the actual FORMAL education (reading, math, etc.) in this country, it is the mass media that provide the informal education---the emotional engineering, if you will---that shapes the worldview of the average person. That emotional shaping is geared towards producing individuals with a predisposition towards immediate gratification and materialism, a belief in the equality of all cultures and viewpoints, and a kind of fluffy sentimentality towards others. This is hardly conducive to any kind of excellence or desire towards achievement, save possibly on the athletic field.
Also, remember that most Americans are employees. The typical American expects to work for a company, rather than for him-/herself, and expects to be a subordinate to a boss. The formal education system is expressly geared towards conformity and regimentation, even where it makes little sense ("zero tolerance" policies, for example) and it was designed to be so. In addition, modern pedagogy emphasizes self-esteem (which is based on emotions) over self-respect (which is based on fact and accomplishment). The current mania for "diversity" and "multiculturalism" also hinders assertiveness (which is necessary for entrepreneurial success) in favor of conformity and non-discrimination--the traits of the ideal employee.
"To believe that we're going to head down the road wildly to the left, unchecked, is to believe that somehow these narrow margins in voting between left and right cannot be overcome, and that no intelligent and persuasive leader cannot arise and sell the notion."
As long as television is the dominant medium of political discourse in this country, the rise of such a leader is unlikely at best. As a medium, television is set up to emphasize the simple, visual and emotional over the complex, mental and rational. Long, complex chains of reasoning, particularly about already-abstract subjects like economics, do not transmit well over television. This is why TV news has been displaced by TV entertainment programming; "Survivor" over "The McLaughlin Group".
In addition, television, by its very nature, encourages passivity in the Human brain, rather than activity. The simple act of watching television tends to elicit alpha brainwaves, which are symptomatic of a brain at rest. (See J. Healy, "Endangered Minds: Why Our Children Can't Think And What We Can Do About It") A political message of dependency is more easily transmitted by such a medium than a message of independence, which requires encouraging action on the part of the viewer.
"After all, you and I are sold on the notion because it makes sense, how could it not sell the rest of the public, once it starts taking things economic seriously?"
Because the natural Human tendency to accept something for nothing is vastly more appealing than a message of having to work for a reward. And because the American populace is encouraged, if not downright conditioned, to expect maximal rewards for minimum (if any) effort.
The third, and most telling, reason is that the American political system, as currently constituted, is set up to encourage the non-productive to plunder the productive. All "citizens" above a certain age are considered capable of exercising the right to vote (and exert political AUTHORITY), without necessarily having demonstrated the corresponding RESPONSIBILITY of paying taxes, military service or otherwise visibly contributing to the survival of the society. Combine this with the pre-existing mental conditions I describe above, and any proponent of a message that goes against the grain of liberal economics has got, at best, a very uphill battle to secure political success.
This, unfortunately, is why I believe that the "American Experiment" has failed, and the "Human experiment" (in its Western manifestation, at least) is in danger of failing as well.
Your servant,
Lord Karth
This week:
Palin replaced by Rudy G
Stock Market falls to 2000
Bush invokes Marshall Law to protect himself
Bin Laden gives speech with 'Mission Accomplished' banner behind him.
Lord Karth: I see.
I am nowhere near that cynical - though I at times am a bit cynical, more than I wish to be.
I don't agree with your conclusions, nor the fatalistic "i'm giving up on doing anything", either. Heck no, I'll fight till I'm the last man standing and they'll have to drag me off kicking and screaming or a bullet in my head.
Churchill said it well:
"This is the lesson: never give in, never give in, never, never, never, never—in nothing, great or small, large or petty—never give in except to convictions of honour and good sense. Never yield to force; never yield to the apparently overwhelming might of the enemy."
He said it of war. It's worthy advice for saving this country as well.
"Of course the game is rigged ! But step up to the table anyway. If you don't bet, you can't win."
---R. A. Heinlein
Your servant,
Lord Karth
Lord Karth,
Who watches television? I only go in for the occasional TV series, and then I watch DVDs of only that series. House is my current favorite. I don't intend to own a TV. Just a nice computer monitor I can watch movies and the occasional Cubs game on.
Phyrro,
Limmer boots has off the shelf ones available. I'm tracing my feet as soon as I can find a printer around here. Unit's packing up everything to be shipped home. By sea. Which is awesome, don't get me wrong, but I need a printer...
It looks like the bailout tanked (but not by much). The Dow is down 500-and-change.
"Now that the imagined terror has become real, dendrites, adjustment is possible."
-----James Blish, "The Duplicated Man"
Your servant,
Lord Karth
The Dow is down 500-and-change.
Time to buy!
Pray for stability? Mammon is indeed the God of the Amercan Christophiles. Thanks for making it painfully obvious, Rod.
>t would be good to pray for stability. Not kidding.
So... how does that work? If your god gets enough prayers begging for stability then he'll let it / make it happen? If he doesn't he won't? If it's the right thing to do why won't he do it without people asking? Is he lazy? And instead of stability why doesn't your god just magic up a self-sustaining and regulating economy for the whole planet? Why just a patch when he can release a whole new version?
Theism is so weird.
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