The seriousness of our situation becomes clearer by reading the analysis that fills the airwaves, print media, and the Internet. Most of it is wrong, as the full extent of it is too vast to see. This post attempts to show put events in a larger context, and consider how to fight our way thorough this crisis.
Key elements of out situation
(1) It is not a sub-prime mortgage crisis – the deceptive narrative for so many critical months. Not a mortgage crisis, a real estate crisis, or a crisis of the finance industry. This is the culmination — the inflection point of the post-WWII debt supercycle. See the links at the end for more information.
(2) We have not hit the climax point. We are still in the early innings, as the full effects of the coming recession have not yet hit. That will likely be as severe as the 1973-75 and 1980-82 recessions; it might be the worst since WWII. The stresses of that recession will break additional links in our economic system, creating the climatic events that will mark the trough — the inflection point leading to eventual recovery.
(3) Our response has been most seriously hindered by the optimism of our leaders, both public and private. Let’s consider them separately.
Nodes of influence in the network of America
Our private sector leaders have been optimistic, more so than the man-in-the-street (as shown by sentiment and confidence polls). We have heard happy-talk not just from most corporate leaders, but also from influential voices on the Internet. Despite the long and steady darkening of economic numbers, they promulgated delusional optimism.
Google “Dude, where’s my recession” to see specific examples. They are the equivalent of radio stations urging people to ignore the evacuation warnings — the hurricane will not hit us! The volcano will not erupt. Disregard the sirens, stay on the beaches — the tsunami warnings are fake, or just a short-circuit of the alarms.
As I said on June 3:
Economic statistics work for us like the whiskers on a cat. As we move into the unknown future, they hint at what lies ahead. Almost all US economic numbers have decelerated over the past 2 or 3 quarters. This is a clear warning signal, but useful only if people act on it. Build savings. Be careful when starting new projects or switching jobs. Carefully watch the risk in their households’ balance sheets.
Nobody can say what comes next — economic science is immature, the data too poor — but ignoring the data is imprudent, even foolish. Those who write commentary that casually dismiss this data do a disservice to their readers. The ‘where is my recession, dude’ meme is not funny, and imo actively harmful. The web gurus who propagate this reenact the story of the grasshopper and the ant, acting as cheerleaders for the grasshopper. Most Americans are not adequately prepared for a downturn, so this cheerleading could have unpleasant consequences for some of their readers.
We no longer have time for such nonsense. Everyone must prepare as best they can, and consider how to help those without sufficient resources to face what is coming. Each of us knows what to do, at least with respect to our own business and family.
The paradox of government warnings
Should the government have sounded the alarm, warning of the onset of a potentially severe recession — risking panic which might make the recession certain, immediate, and severe? Or was happy-talk the correct choice, hoping to maintain our spirits — our spending and investment patterns — while the economy’s natural resilience carried us to safety?
This goes to the essence of our problem. Warnings would have helped a well-founded nation, with a budget government surplus after a long boom, a neutral trade balance, whose households had adequate savings. We would have trimmed our sails slightly, but no drastic changes would have been necessary. These moderate preparations would have weakened the economy further, but insured that it would be mild.
But in our collective madness we choose different policies. Massive government deficits after a long boom, national consumption 5%+ above our income, massive foreign debts after a 20 year-long binge … the government could not risk a sudden return to sanity. The crash of sudden withdrawal from our debt addiction was to painful to contemplate. As at every point along the road to this crisis the solution was to muddle through, as corrective action could wait until tomorrow. Until a better time, a new year, a new administration.
Promises of certain success have marked each of the many (who can keep count) plans announced by Bernanke and Paulson since the down cycle began in December 2006. Even now it may be that their newest plan is failing, rejected by our creditors (watch the US dollar and treasury yields). if so they will need a new plan, or an expanded version of the current measures. Let’s dampen the criticism, as they are doing the best they can under impossible conditions. In return let’s get some honesty about our situation. They rightly fear our reaction to something so unprecedented in the modern era.
We have to be able to accept the truth from our leaders. We have to demand the truth, accepting nothing less.
Our Responsibility
While we grapple with rapidly changing events, struggling to understand the full magnitude of our problems, the calls goes out to find the culprits. This is a democracy, and certain the guilty cannot be us. No matter how pressing the crisis, we have time to debate who has the greatest responsibility. We furiously recite the mantra of 21st century America: It’s not my fault.
We can get through the difficult times ahead. The essentials steps are…
- Keep our cool and avoid panic.
- Remember our history and our values, neither of which should be abandoned in the search of temporary security or prosperity.
- Make you voice counted in the November elections. Our new leaders will be amongst the most important we have ever elected.
Key Treasury Department documents
We cannot plead the “we didn’t know the details in the fine print” excuse. The important details about this massive nationalization have been clearly spelled out for us. See this page for a current list of Treasury Department documents.
Afterword
Per the FM site’s Comment Policy, 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 information about this site see the About page, at the top of the right-side menu bar.
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?.
- Good news about America, a collection of articles!
Some posts discussing solutions to the financial crisis:
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- Slow steps to nationalizing the US financial sector, 7 April 2008 — How this will change our society.
- Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
- How should we respond to the crisis?, 24 September 2008
- A solution to our financial crisis, 25 September 2008
- The last opportunity for effective action before disaster strikes, 3 October 2008
- Prof Roubini prescribes first aid for America’s economy, 4 October 2008
- Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
- Dr. Bush, stabilize the economy – stat!, 7 October 2008
- The new President will need new solutions for the economic crisis, 9 October 2008
- A brief note about our financial system: Intermediation, disintermediation, and soon re-intermediation, 16 October 2008
- New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
- A look ahead to the end of this financial crisis, 30 October 2008
The place to start is with the return of the Glass-Steagal Act. Commercial banks cannot be allowed to own volatile, opaque securities. Otherwise, the banks’ managers have too great an incentive to inflate the value of those securities, to produce the paper profits upon which their real dollar bonuses are calculated.
Didn’t we learn that lesson already?
There’s been a bank heist. Why is it nobody can see that the heist was an inside job? Bank managers purchased securities with the bank owners’ capital, then claimed those securities had a certain value. Bonuses were then calculated for that quarter.
Well, this quarter, those exact same securities are not worth much. Yet, the bonuses still got paid and nobody is asking for the bonuses back. If you’re wondering what happened to your capital, that’s where it went.
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Fabius Maximus replies: (1) Regulatory changes are both premature (we have not sufficiently analyzed what happened), and (2) probably irrelevant to the current crisis.
As for G-S, the issue is moot. Probably every large broker will either be bought by a bank holding company or follow Goldman and Morgan Stanley to become bank holding companies.
It’s never as good as you think it’s going to be, and it’s never as bad as you think it’s going to be. Fruits of my 30 years in business, which I’ll admit, doesn’t prepare one for a hundred year storm.
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Fabius Maximus replies: I hate to burst your bubble, but events are often far worse than “you think it’s going to be.” Read some first person accounts of history, such as “Befoer the Deluge” by Otto Friedrich or “The World of Yesterday” by Stefan Zweig.
“This is the culmination — the inflection point of the post-WWII debt supercycle.”
The idea that the Federal Government should be involved with individual mortgages seems to fly in the face of the 10th Amendment. Is this high level of Fed involvement the ultimate fruit of the New Deal? Am I mad for even raising the question?
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Fabius Maximus replies: No, you are not mad. I discuss this in my post of 4 July 2006m, “Forecast: Death of the American Constitution“.
I agree with FM re the gravity of this crisis. Which means that the current choice of “leaders” is such a tragedy. Neither Obama or McCain as far as I can see has the slightest understanding of economics. But then, neither does most of the intelligentsia in the US. Their belief in the economics taught in most universities, whether Marxist, Keynesian or neo-classical, is one of the reasons we are in this mess. The only school of economics and social theory that could form the basis of sound policy is the one that is taught almost nowhere: Austrian economics.
I have no idea where the current crisis is going to end up. But many, many people who thought they were safe and secure will find themselves overwhelmed. That is particularly true of anyone who believes in the efficacy of the state. Anyone who depends on the political state at any level for their financial or other wherewithal is going to be shocked. The American political state at every level, Federal, state, local is broke, bankrupt, kaput.
However, like a cornered animal that makes it even more dangerous. Unless Paulson et all are the modern incarnations of Cincinnatus, who at the height of his power resigned to return to his farm, we are getting deeper into some form of fascism/socialism. And who in Washington these days shows any sign of that kind of intelligence and humility.
Political democracy has never worked. It is the one form of government that devolves most rapidly into tyranny. Read Mencken’s “Notes on Democracy” or Hoppe’s “Democracy, the God that Failed” for the reasons.
The tried and true way for states in crisis to rally the people is war. God knows there’s plenty of scope for that at the present time. The most certain pathway to war is protectionism. Free trade actually does work non-theological miracles. It has saved us for 20 some years from the financial debacle we can no longer avoid. If we do not over-regulate and do not engage in protectionism we may come through this dark time without catastrophic destruction. But, of course, that is the path Washington is least likely to take.
“The most important kind of freedom is to be what you really are. You trade in your reality for a role. You trade in your sense for an act. You give up your ability to feel, and in exchange, put on a mask. There can’t be any large-scale revolution until there’s a personal revolution, on and individual level. It’s got to happen inside first. You can take away a man’s political freedom and you won’t hurt him- unless you take away his freedom to feel. That can destroy him. That kind of freedom can’t be granted. Nobody can win it for you.”
The strangest life I’ve known…
btw – No one here gets out alive.
People end up in debt for all sorts of reasons. Anecdotally, the most common one I see amongst my family, friends and self are romantic disasters. (A good film on this is Maxxed Out, naive college students seem to be particular succulent prey for the credit card industry. After all, even if they can’t pay, their parents can.)
Once a person is in debt, if they manage to break the pattern that led there and seek some kind of redemption, the fact that they have debt and must deal with the magic of compound interest will hobble them for years. It’s not enough to wake up from the somnambulism that brought them to the brink of ruin. The still have to deal with the toxic fallout and will for years to come. This is in the relatively good times we’ve had up until now.
And now comes the storm, and these people will be destroyed. What will happen to them? More importantly, these destroyed people will no longer be productive members of society. They’ll be broke, homeless, possibly unemployable. They’ll be destroyed, but they won’t be dead. What will they do? How will the lenders contrive to get their money? I read one guy in a forum recently, bragging about his credit card stock and thanking the fools who were allowing him to make money on these stocks. If I were that guy, I’d hurry up and divest.
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Fabius Maximus replies: The Levy Institute has done many studies which paint a similar picture, looking at the high levels of debt and low savings of blue collar families. It is too early to say for sure, but I suspect that the government attempts to avoid such a masssive deflation by moving these loans from private creditors onto the Federal balance sheet, where they can be handled gently.
How this is resolved will play a large role in the shape of American society in the 21st century.
Any reason we shall not end it as Zweig did?
If the recession is just as bad as the 1980-82, we should thank our lucky stars.
However for a lot of working class folks things are already that bad. Stagnant wages for the last 20 years, job loss, ever increasing health care costs, inflation sending food prices ever higher, etc.
The middle-class is steadily shrinking thanks to our nation’s off-shoring of manufacturing and technology sectors, then there’s importing of skilled foreign workers(H1-b,L-1 guest worker visa) to replace Americans for lower pay.
The only thing that kept a otherwise decaying economy stripped of everything that made this country a economic powerhouse afloat was cheap credit. That among other things allowed people who were otherwise strapped to be good consumers, buying houses, cars and other things they couldn’t normally afford.
And as usual the ordinary American is going to be stuck with the bill while the Ivy League educated bozos that created the scam escape with just the littlest bit of criticism.
“It’s not my fault”? Then whose fault is it? BRIc’s? The skilled foreign workers’?
Now that we know at least several of the problems afflictin’ the US (at least the US is pretty TRANSPARENT still), how are we gonna come up with SOLUTIONS?
why not just let it all happen, whatever it is, recession or depression, and let the strong survive.
I agree with FM completely on this post but it brings up a question I’ve asked for years. How are we going to change this engrained spend all or more than you make behavior?
One way is to have credit so tight it clamps down opportunity for those who may deserve a little leeway. One is to socialize the control( give it to the Go’vt). One is to educate. One is to wait for the next enlightened generation who learn this the hard way, by having no choice.
I fear the last is the only solution we can stick to so this problem will continue through various forms of credit crisis’ until we’re tapped out(or at least the credit junkies are) In the mean time the economy won’t fully recover. There has yet to be a credit card financing correction, but surely people are shifting their debt load from their tapped out homes to their consumer debt. My advice would be for the next 2 years don’t get too comfortable when the economy starts to swing up ’cause that’s how the next hammer blow starts.
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Fabius Maximus replies: This is the easy part of the process. The cost of credit will rise; the availability of credit will decrease. Consider the sub-prime mortgage market: almost gone, except for government-guaranteed programs. In 1980 a blue-collar household had limited access to credit, and then only with large downpayments. I suspect we will return to that world.
The challenge will be how we adapt to this new environment.
Mr. K : oohh, SCARY. You’re soundin’ like ’em eugenicists. I seriously doubt there are that many STRONG individuals out there…
“Let’s dampen the criticism, as they are doing the best they can under impossible conditions.”
Why do you assume this?
At the very least, the Paulson plan is being widely criticized for its lack of oversight and the risible notion that the best way to value these dud securities is to let the holders determine the lowest price they will sell them to the Fed. Add to that the typical secrecy clause (“we’re gonna do it our way and no darned Congress or court can tell us we can’t”) and the overall ooh-bad-scarey-must-do-this-now way this is being sold, oh, yes, and the fact that their original notion of what constituted “oversight” went long ways to help cause this train wreck and I’d say that Paulson and Bernanke are doing average- to poorly- under impossible circumstances.
Not that I think it matters: both sides of the political aisle are up to their hip pockets in collusion with this mess. They will act to save their cronies, and it will be the political and economic stability of the U.S. that suffers.
If someone in DC has decided to reinvent our country as 17th Century Spain they’re doing a heckuva job Brownie.
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Fabius Maximus replies: I meant that we should focus criticism on the actual proposals. For good or ill, we are stuck with the current set of leaders until the election. This is like a disaster on a ship, where survival requires working with the existing leaders.
“Where’s my recession”? is a valid issue. Ever since the Bush Tax Cuts, the Krugman-led anti-Bush media have been calling the Bush recovery ‘a recession’, or nearly so, 2003, 20004, 2005, 2006 etc …
When screaming about the economy before the 2006 election: how terrible the unemployment is, what a crisis in health care, etc., such doomsayers have been crying ‘Wolf! Wolf! Bush! Bush! bad bad baaaa baaa”. The fact is, the US economy was macro-economic fine, except for the asset price bubble. But virtually none of the anti-Bush ‘no increase in wages for the middle class’ critics was criticizing the asset bubble (Greenspan did; even McCain warned about Fannie Mae).
Constantly, and loudly, criticizing Bush for the WRONG reasons (unemployment too low; wages not growing fast enough), and constantly claiming the current situation is worse than it is, sets the stage for apathy against complaints when the situation gets dire.
The truth is this: the American consumer (voter) will have to change their behavior and spend less. Few voters are willing to vote for that truth; and the Dems, in particular, have been promising the opposite. (See the reluctance to vote in favor of higher gas taxes — one of the sure ways to get Americans to use less gas.)
It is certainly true, and not that sad, that $25/hr jobs in a low-skill manufacturing plant are not being created in America anymore — nor anywhere else. Easy to learn, repititious, ‘human robot’jobs that are cheaper than the capital needed to buy a real robot. Similar work is being done for $5/hr in China, or India (tho labor costs there ARE rising, thank God and Free Trade for a huge reduction in real poverty in the world). (Auto welders have already been replaced by real robots; also painters) Thus, high school drop-out (/grad? Fred Flintstone?) comfy middle class life of being a home owner, plus new car, new boat, new Big Screen TV, new cell phones — that’s going, going, gone. No politician nor program can bring it back.
Such folk can still become comfortably paid plumbers, auto mechanics, hair stylists; not so much construction workers last year nor for the next few years. Everybody who has taken out a new or refinanced (for a higher amount) their mortgage w/o investing it, has been partly to blame.
We have met the over-spender, and he is us. And not happy to hear the bad news, nor willing to vote for such a messenger.
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Fabius Maximus replies: I had two posts on this subject. Here and here.
“the Krugman-led anti-Bush media have been calling the Bush recovery ‘a recession’, or nearly so, 2003, 20004, 2005, 2006 etc”
In the 53 comments nobody was able to give the smallest evidence for this theory. It is, so far as I can tell, an urban legend. Like most, mindlessly repeated.
BTW — You throw you net a bit too widely.
** In 2003 we were coming out of a recession. It was not clear at that time why, although we now know the government’s excessive stimulus and incompetent regulation had sparked the housing bubble.
** In 2006 warnings of the crash were appropriate, as it was clearly visibile in the future but could have been mitigated (the crisis started in December 2006 with the collapse of the mortgage brokers).
Sorry “unemployment too low” is my critique of the Bush critics, like Brad DeLong — who claimed unemployment was too high, employment was too low. A big US problem has been Overemployment, now being corrected. Painfully.
In my opinion, the macro behind the crisis is the culture – nay, the civilization – of Washington D.C. that has long overflowed its petri dish and now infects the entire nation.
The proposed bailout proposes stripping the Treasury of non-existent wealth to buy worthless securities to protect – who? That would be the regulators who brought us here; not the regulators, but their sinecure existence.
There is no bottom in sight. I remember the seventies; the scale of pressures then and now are not remotely near parity. We have concentrated on electing politicians that concentrated mainly on getting reelected. It turns out that their best strategy was to nationalize education standards to ensure that the electorate would be ignorant of history, functionally illiterate in an age ruled by geometrically expanding tech, and devoid of morals or ethics, as befitted the proles of a post modern utopia.
The absolute only logical, second response is to remove every exposed incumbent Washington based hack on November 4.
The first response: stop the bailout. Stop it now before we become a banana republic. Stop nationalization.
It’s our fault. Let us start fixing the problem at the source. Let us stop the political keepers from doing any more damage than they already have.
Huh? Shenandoah remains stuck in an ideological take on this crisis. Read the real (post-) Keynesians at the Levy School at Bard. Wray, Galbraith and the rest tracked and warned of the imbalances that fell in the category of things that couldn’t go on forever, and didn’t. (Who else was talking about Minsky, way before the “moment”?)
Look at Michael Hudson at U of M, KC., another post-Keynesian who got this right.
There are no Marxists doing economics in any meaningful sense. Please, point me to one Austrian who provided any original insight or policy prescriptions during the decade-long run-up to this debacle.
Our elites chose to feed on existing rents and income streams without creating anything new locii of production and innovation, indeed neglected the the country until its state could best be captured in the metaphor of a bridge collapsing into the Mississippi. In the end, the summit of hypertrophied finance fed on the subprime, expanding into the niches formerly filled by loan sharks, and so became a new mafia clad in Prada. And a casino using OPM. The Anglo-American model has failed. Serfdom comes, not as predicted by Hayek, but through the very ‘hands-off’ prescriptions that provided ideological cover for the predation that unwinds at our expense today.
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Fabius Maximus replies: I strongly agree about the Levy Institute. Much of what little we know about our situation — how the US economy can weather a recession — comes from their work. I have links to several of their best reports in “We have been warned. Death of the post-WWII geopolitical regime.”
There are two defects in this whole line of thought:
The US in not an empire; it is a hegemon. This is not a pedantic distinction. The structure of an empire is radically different than that of a hegemon.
• The existence of China in its present form, controlled by the current regime depends on a strong US market.
• Russia’s economy depends on strong energy demand at high prices.
• EU economic growth as currently structured grows modestly at best.
• All of these nations depend on a strong US economy. They are not conquered satrapies of Imperial America, but independent nations that depend on American hegemony.
1980 – 1982 is not 2008.
• There are two factors to the length and breadth of a recession. One, finance, you have covered admirably, but the other, growth, I haven’t seen much of anything about.
• The US economy in the late 70’s/early 80’s, which I had the misfortune to begin my career in, had two industries with strong growth potential: pharmaceuticals and, for lack of a better term, high tech. High tech was a much smaller piece of the economy then, and required lots of capital and existing structure. (Those players that would grow to dominate now: Apple, MS, etc, were relatively tiny.)
• The current US economy has so many major and growing industries, I can’t even list them. For many, the cost of entry is miniscule and a small business can grow with extreme rapidity.
• The internet has exponentially increased productivity, and its potential has hardly been exploited. To take but one example: the ability for people to interact in real time over the web is economically revolutionary.
I’m trying to keep to my limit here, plus I know I’m too wordy as it is. The point is this: I agree (how could I not?) that the near-term is going to be unpleasant, but there isn’t going to be any long-term deep recession.
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Fabius Maximus replies: This is quite a grab bag of things. Some are true, some questionable. Most of these are commonplaces, true of most points in American history, and irrelevant to the nature of recessions.
Recessions are part of the normal economic cycle. The economy must breath both in and out. Rapid growth can produce severe downturns (as seen in late-19th century US history) or frequent recessions (as in the 1950’s – 1960’s post-WWII boom).
I think most of us are aware that the US is not an Empire in the traditional sense (i.e., no Emperior). Hegemon is the correct term, but boringly technical. Hence the use now and then of empire.
Strong recommendation to read this brief analysis of the Paulson Plan, asking is $700 bilion enough?
“Some ballpark math on the US financial sector“, Brad Setser, Council on Foreign Relations, 23 September 2008 — Setser is one of America’s top experts in global capital flows. Opening:
The Federal Reserve’s flow of funds data indicates that US households have $11.2 trillion in outstanding mortgage debt on non-farm homes, another $2.4 trillion in outstanding “other mortgage debt” (a category that includes corporate farms, who knew … ) and $2.5 trillion outstanding consumer credit.
Figuring out how much households owe is the easy bit. Figuring out who owns the debt of US households is a bit harder.
For now, I am going to focus on the $13.6 trillion in mortgage debt. Of that $7.8 trillion is held by the Agencies (Freddie, Fannie and the like). Like the Agencies or not, no financial institution is going to go bust holding Agency debt. That leaves $5.8b of outstanding mortgage exposure in the hands of the financial system, give or take. …
Good article, but where are the steps? I was expecting to see:
Step 1: Do this.
Step 2: Do this.
Step 3: Do this.
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Fabius Maximus replies: I discuss this in the next post. This site is written for Americans. Regular folks, part of the process by which we understand changes in the world around us. On the right side are the FM reference pages. Note that there are no “letters giving advice to the President” or “letters to God.” Neither are listening.
Step 1: Buy canned food.
This is an excellent article basically explaining how we got into this mess with some
suggestions on what to do.
Computing At Chaos Manor, Jerry Pournelle, September 23, 2008
“In the past month, investment banks managed to lose more money than all the banks in history cumulatively have made as profit on risky investments. Lehman Brothers, which survived the Civil War, the turbulence of the late 19th Century, World War I, the Crash of ’29 and the Great Depression, has vanished. Major stockbroker houses, which used to know that the first rule was never to gamble with house money, collapsed. Note that the crisis was easily predicted by anyone except the smartest guys in the room who controlled America’s financial centers. They, apparently, couldn’t see it coming.”
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Fabius Maximus replies: How nice! He reads the newspapers.
I suggest that we look for solutions to the experts who accurately predicted the crisis, not to the amateurs who have become instant experts on matters they do not understand.
I fully agree about the appropriateness of a warning in 2006, early 2007: a bigger credit crunch is coming. But that is different than saying, then, that the current economy is already in recession.
Like Gary Becker, I, too, certainly underestimated how bad the credit crunch is.
The Levy front page of their 2007 warning is good. Plus they have an important issue that hasn’t quite come up here — jobs.
An effective job-creation method could be some form of employer-of-last-resort programme that offers government jobs to all workers who ask for them”.
I think there should be a voluntary ‘national service’ corps that offers a job to everybody. Perhaps at about 70-80% of the prior year’s average wage (~$45k so maybe ~$36k), and then find work for them, including paying them to learn new skills like solar panel or wind farm installation.
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Fabius Maximus replies: Almost every economic indicator is at levels associated in the past with recessions, and has been for months. The “borrow from foreigners and send money to everyone” plan gave a boost to the Q2 economy, but has since faded. That so many refuse to recognize this, at such a late date, is one of the many remarkable aspects of this downturn.
Employment is a lagging indicator, but already fading. Hours are cut first, and have been in a steady decline for several quarters. The household survey — more accurate than the estabilishment survey — has shown substantial and accellerating job losses (reflected in the rising unemployment rate).
I think your fine #19 comment about Setser makes the point, as he says in trying to create a balance sheet for the USA.
just how much of that balance sheet is tied up in the real estate market.
Which weakens your point #1 of the post. This IS a sub-prime mortgage mess, spilling over to all real estate, about to spill over into the production economy. (or not so much?)
Also a WSJ article (from an AEI guy) points out that Fannie Mae practices really DID create this crisis.
http://online.wsj.com/article/SB122212948811465427.html
Subprime going from 8% to 20%, while high house prices kept climbing, is the root of the gov’t supported problem. Or the crisis trigger problem.
The over-indebtedness crisis needs a ‘trigger’ to be manifest, and the trigger is not the whole problem.
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Fabius Maximus replies: Subprime mortgages were at most 10% of the mortgage market, which in turn is aprox (from memory) 80% of the consumer lending market, which is a big part — but only a part — of the total US debt load. The defaults just started with subprime, as the most vulnerable debtors. Then to Alt-A, now spreading to credit card and auto loans.
As I have shown, and cited many studies forecasting this problem (unlike the folks now claiming 100% hindsight), this is a long-standing climax to the post-WWII increase in US debt levels. They grew to the maximum level we can carry, and beyond. Folks point to all sorts of small things as causes of the larger phenomenon, which most as yet still do not see. The next few innings will make these points more clear to all.
The 700 Mia bonds should be bought **compulsory** inland, **not by the poor**, voila.
In response to Tom Grey’s posts:
The “overemployment” figures are a fallacy. So are unemployment figures. The figures are still based on assumptions going back to an old model of employment. They ignore the impact of the baby boomers who work even when they don’t have to until old age (or ’cause they have to but still consider it just living) and have a very fluid definition of “work” and “employment” I plan to work until I’m dead. When will I be “employed”? I don’t care. I work when I want to now. Many people would consider 1/2 what I do work. I consider it a challenge. I might be “working” as a fishing guide when I’m 60. If you ask me then if I’m employed I don’t think I’d care. I’d tell you to f-off.
You seem to have a “big brother look down on the little guy view” of the current problem. I take offense.
I have a top 25 college degree, but I wear a tool belt to make my living at times. I also deal with world class art, but get my hands dirty doing it. I’m nearly a millionaire(barring a national financial meltdown) but have never pulled down more than 75K a year. I know nearly illiterate chicken farmers who are wealthier than me. And UPS truck drivers who are wealthier than 1/2 or more of Americans.
It’s not about the guy not making $25/ hour. It’s not about 45k v. 35k. It’s about taking control of one’s life. It’s about being serious about the contracts one commits to.
There are Wallstreet CEO’s who’ve done nothing but backpedaled on their contracts(I use this in the handshake sense not the lawyer sense) and made millions. There are laborers who’ve done the same on their mortgage.
Their are also potters who’ve kept their contracts and Wallstreet CEO’s who have exceeded theirs.
You seem to favor the elite and dismiss the working. Hence your bias toward G.W. Bush who’s never held to a contract in his life, except when it’s made him richer. I remember his promise of less regulation and less government on his watch. Where is the execution? Here we are on his watch about to have the most regulated, governed, economy in 63 years. And it’s going to cost me at least $500/ year more in taxes for years. I judge people by the job they promise v. the results they deliver. If I was G.W. Bush I’d fire myself and give a credit back to my client.
The big problem has been a culture of fiscal immoderation in good part from top to bottom.
{SNIP} Personal attacks will be deleted. Second offenders will have future comments moderated.
{SNIP} Personal attacks will be deleted. Second offenders will have future comments moderated.
YT – you can have the last word on the name calling.
I am not convinced we would not be better off letting the system “collapse”. I have no desire to see my taxes increased to pay for stupidity and greed, ranging from wall street down to the borrower. I am also not convinced that it will be all doom if the government does not bail out the investment banks…and from the looks of it, we may get to find out if I am right.
and, if it does all go to hell, I like my chances in a free for all.
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Fabius Maximus replies: On this tiny island in the great cyberspace ocean I have the last word. There will be no “name calling” on this site.
From Arnold Toynbee’s A Study of History:
The “Peter Principle” of nation states?
Mr. K : I’m just worried that the US may not be able to “evoke a successful response” & that this comin’ financial tsunami may be wickedly detrimental not just to the US but other developin’ countries in asia, South America or Eastern Europe as well. But I do agree with you that it is irresponsible to have the average American suffer for the idiocy & gluttony of those protoganists in wall st. Perhaps we should revive the use of Le Guillotine… “Free for all” : a good reason for another civil war, I guess. Or maybe just pure anarchy.
FM : forgive my insult towards Mr. K. But it’s sorta funny how you “snipped” our profanities. You should have left ’em as it is. Really made my day! :)
Really FM, I think your censorship is a bit much. Forgive my passion on this but it all stems from my own experience. I started my own business 5 years ago and have done well so far. As with many others, we have had a slowdown and I see some layoffs for us, I am afraid. I have carried people as long as I can. Where I am, we are absorbing one body blow after another – drought, gas price spike, now no gas, plus this financial crisis.
The SOB’s that created this crisis now presume to have the solution? Are you kidding me? 700 billion? I know who will get to pay for that. For the first time in my life, I am one of those high income people who will get to be “patriotic” and pay for this mess. I got where I am with zero starting capital. I got what I have from luck, brains, and balls. I routinely risk my own health and safety to do what I do. Bullshit on this bailout. I pay my mortgage, and my taxes…and have paid my dues.
I am prepared to take care of my own. I have zero interest in seeing greed and stupidity rewarded at my expense. And I am about damn near ready to start an armed insurrection.
Personal attacks? I enjoy getting a good insult as much as giving one. Sorry if I offended your sensibilities.
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Fabius Maximus replies: It’s a functional policy — a matter of sense, not sensibility.
On most sites comment are largely exchanges of soudbites, with large quantities of invective mixed in. People obviously enjoy these, as they attract hundreds of comments and high traffic.
On this site we have carved out something different, almost unique so far as I have seen on the Internet. Often 25 – 50 comments (some over 100), often totaling tens of thousands of words, most quite substantive. The strict comment policy probably contributes to this result.
BTW, your is the first comment I have seen in favor of allowing insults. I have received dozens applauding the ban. The Internet is vast beyond imagining, so some diversity in these things seems OK to me.
FM – I will try to honor your rules but won’t be surprised if I get booted. For the record, in web comments or out here in real life, I never shoot first or swing at anyone smaller than me. YT drew first!
What were the essential steps? I missed any clear advice.
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Fabius Maximus replies: You’re right, it was not clear. Thanks for pointing this out! I edited it slightly. Note the red sections and the numbered items at the end.