Miscellaneous news and thoughts about the financial crisis
Here are bits and pieces you may find of interest, too small for individual posts. Somewhat self-congratulatory, which I usually avoid. But every rule has exceptions.
Debt Deflation, predicted and arrived
The Paulson Plan is dead; long live the Paulson Plan!
I recommend these articles about the geopolitics of the crisis
Why so many posts about the financial crisis?
The master narrative of this down cycle
Also: by now the importance of this election should be evident to everyone. The new Administration will make decisions that will re-shape important aspects of America, and echo in history for many decades. Please get involved — donate time, money if you can. Do you best to help us collectively make the best decision possible. The candidates might not be what you would hope for, but the difference between bad and worse is more significant than between good and better.
(1) Debt Deflation, predicted and arrived
I warned in June that if the Fed did not expand the money supply, rising material and energy prices might spark debt deflation. Others also saw this (see here for an example). The Fed didn’t, and now we have debt deflation. There were other factors in play, but this is is a near-exact parallel with the 1930’s.
- For several years after the 1929 the Fed worried about inflation, while debt deflation grew.
- Since the crisis started in December 2006 (with the collapse of the mortgage brokers), the Fed spent 10 months worrying about inflation — while debt deflation grew.
(2) The Paulson Plan is dead; long live the Paulson Plan!
I warned on 29 Septemberthat the Paulson Plan was irrelevant. Since then it has mutated into something unintended by either the Treasury Department staffers who wrote it or the Congresscritters who approved it.
Instead of buying “toxic assets” at $50b per month, the government is pumping massive sums ($250b in the first round) directly into financial institutions (loans, by purchases of preferred shares). On lousy terms compared to what Warren Buffett recently negotiated. Given to some institutions who do not even want the money. Probably the result of panic at high levels leading to hasty development and thoughtless execution of programs that are nonsense on stilts.
However inefficient, this might work — helping to restart the nation’s flow of credit. It’s better than the initial plan, and far better than doing nothing. But a vast waste of scarce resources; and we do not have unlimited resources with which to fight this crisis.
(3) I recommend these articles about the geopolitics of the crisis
- “Liquidating the Empire“, Patrick J. Buchanan, posted at Antiwar.com, 14 October 2008
- “Is this the end of the American era?“, Paul Kennedy, The Times, 12 October 2008
(4) Why so many posts about the financial crisis?
Because it is reshaping the world. Right now, on a scale and at a speed seen only in great wars, revolutions, and major recessions. Like most world-changing events, the daily news covers it in an inchoherent fashion — often misreporting major events in correctly.
(5) The master narrative of this down cycle
The master narrative of this down cycle has been the unexpected breaking of links in the financial system. The mortgage brokers. Defaults on “prime” mortgages. The long, deep decline in home prices (“home prices have never declined over a full calendar year since the Great Depression”). The failure of major banks and brokerage firms.
At each step the expectation of the wise was that the past events were unexpected, and the current event was unexpected, but future events would unfold in a predictable fashion. That was wrong, and I believe it will continue to be wrong. What will be the next unexpected link int the system to fail? I have two guesses:
- A rise in rates, very unwelcome during a recession. Every government is borrowing big; there might not be sufficient global savings to meet demand.
- A big decline in GDP. Perhaps zero growth in global real GDP (a big drop from almost 5% during the past 5 years, perhaps worst since WWII). Perhaps down 4% in US GDP over a 12 month period sometime between now and the end of 2010 (which would be the 5th worst decline on record, tied with 1933 — nothing like a depression, but the worst downturn since WWII).
If you are new to this site, please glance at the archives below. You may find answers to your questions in these, such as the causes of the present crisis. I have been writing about these events for several years; since November 2007 on this site. As you will see explained in these posts, the magnitude of the events now happening is beyond what most Americans have — or can — imagine.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- about the Financial crisis – what’s happening? how will this end?.
- about The End of the Post-WWII Geopolitical Regime.
- A solution to our financial crisis
Key posts about the financial crisis
A solution to our financial crisis, 25 September 2008
A picture of the post-WWII debt supercycle, 26 September 2008
- America has changed. Why do so many foreigners see this, but so few Americans?, 1 October 2008
- A sitrep on the financial crisis: why has the treatment been so slow, so small?, 8 October 2008
- Forecasting the results of this financial crisis – part I, about politics, 13 October 2008