poli not sci
i can has financial crisis?
so… how’s everyone feeling about the financial crisis?
i keep feeling like i *should* be worried, but i’m not. well, not really. not yet.
maybe cos i’m younger and don’t have a lot of savings to lose? or a mortgage? or loans?
or maybe it’s cos i’m one of those annoying young americans who likes to watch the debates and the daily show but doesn’t *really* understand economics. i mean, i’m sorry, but my instructor for college econ was a german grad student who learned to speak english in scotland. there’s only so much you can do when the illustration for supply and demand is an unintelligible sound that you later find out was supposed to be “pizza and beer.” i mean, seriously.
anyway, i feel a little more informed after reading this article in the NYT, which aims “to teach a little lesson on the economics of a credit crisis — how A can lead to B, B to C and C to Depression.”
i recommend reading the whole thing (it’s only a page), but here’s the basic idea via some snippets, starting with the great depression:
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In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.
Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren’t nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn’t know which borrowers were less reliable than they looked. Credit dried up.
“If a guy has a good investment opportunity and he can’t get the funding, he won’t do it,” Mr. Mishkin, who’s now an economics professor at Columbia, notes. “And that’s when the economy collapses.” Or, as Adam Posen, another economist, puts it, “That’s when the Depression became the Great Depression.” By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak.
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The crucial point is that a modern economy can’t function when people can’t easily get credit. It takes a while for this to become obvious, since most companies and households don’t take out big new loans every day. But it will eventually become obvious, and painfully so. Already, a lack of car loans has caused vehicle sales to fall further.
* * *
so, this makes sense to me, even though it’s just a first step, and i still don’t really understand the specifics of bailout plans being debated and discussed in congress (i.e. i haven’t taken the time to read up on them).
however, i know at least several of you have v. strong opinions about the bailout (ahem, john and david), so i hope you’ll take a minute and share them in the comments.
and even if you don’t have an opinion on the bailout, i’m curious about how pants world feels, if you’re really freaked out or could care less or haven’t really taken the time to investigate cos, you know, it’s not like tina fey is impersonating this issue on SNL or something.
LINKS
i thought about just writing an entry in reaction to this post on jezebel about how dating michael cera’s characters in real life would really suck, and just how many fully developed, realistic male characters are really dateable? i guess mr. darcy doesn’t count…
erin posted one of my all time sesame street favorites: the orange crayon factory video!! watching it makes me so so so happy… and now i just wanna tear open a big pack of crayons and take a big whiff!!
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This is totally not on the topic of your post, but important nonetheless. One of the at risk students I meet with each morning came in today and announced that she got a new back pack. I looked up to see that her new pink and white back pack was decorated with images of cupcakes! I almost took a picture of it for you-and probably still will!
I’m genuinely terrified. I really am. I grew up in the 1980s, when things in Ireland were rough, and though our family was extremely fortunate, our good fortune (literally) and that of other members of our extended family went into keeping things ticking over for other family members. It was rough. When you want to start a business, or expand an existing one, or buy a house, the first thing you do is arrange credit. I grew up in a climate of bank manager’s saying ‘no’ by default.
Now, I was very young, so how can I talk about it with any authority? My teens are littered with MASSIVE rows and hurtful comments thrown around my rather large extended family. People I love barely talk to each other over arguments rooted in events that occurred when things were rough. It’s not cool.
Ok, I need to keep this short. Economics has never been my strongest suit. However, the bail-out is completely necessary and needs to happen. Yes, it sucks that Wall Street allowed so much credit to build up, but I didn’t hear anybody complaining when they were buying their HDTVs over 72 months and having no money didn’t mean you had to stop buying things. We’re all culpable in this. But leave that aside, let’s be realistic: it doesn’t matter whose fault it is. If AIG collapses completely then the economy can’t handle the insurance burden that company was underwriting. Everything will go to hell. There are banks disappearing in Europe and others being bought out. The Irish economy, a flagship system for the ‘good’ aspects of the globalised capitalist world (and one that McCain referenced in the first debate) is entering its first official recession since 1983. Now, there are multiple reasons for that but the fact of the matter is that stock markets worldwide are freaking out.
So, barstool economics is for idiots. Leave it in the bar. You wake up with a hangover and you start making real decisions. This isn’t about Main St and Wall St, this isn’t about socialism, this needs to happen, and anyone in this country that believes that the government should not spend money in this situation no matter what is just plain wrong. Just WRONG. Things aren’t going to magically get better if/when the government agrees on the bail out, but if it doesn’t happen everything will go sour.
If there’s no credit in the economy, you can’t get a loan to buy a car, you can’t get a mortgage to buy a house, you’re paying (even) higher rates of interest on your student loans…..
It just drives me crazy when people say “I think a bail out is wrong” like it’s a bloody moral issue.
And, finally. Obama has disappointed me. I know he’s tiptoeing on a very fine line and there’s a section of support he needs to court big time, but I can’t believe he has been speaking the way he has. Not very encouraging from the person I hope is the next President of the US.
Phew. Sorry. That was uber-long.
Hey, what’s so bad about learning to speak in English in Scotland? FREEDOM! I’m surprised his go-to economic example was “pizza and beer”. Surely “fish & chips and beer” would have been more appropriate given his linguistic roots.
I’m really not sure what to think. I read an interesting article the other day that compared and contrasted some datapoints between the 1930s and now. I’m trying to find the link but one of the datapoints looked at government spending and a top tax rate that moved from 20 to 63%. There’s a school of thought that it was meddling that took the Depression and made it the Great Depression. There are other places in the world that climbed out of the 1933 recession faster than we did. But honestly, I don’t know. If you haven’t had a chance to read it, grab a copy of Amity Shlae’s The Forgotten Man. It’s a fascinating look at the great depression that goes into some analysis and looks into the reasoning and some of the power players.
I loved my economics classes but I wouldn’t call myself an economist. I can’t comprehend all of the moving parts and I think that’s part of the problem with discussing it. It’s like that story of the blind men and the elephant in a way. Nobody has a complete picture especially the layman public.
Maybe we do need to spend the money but I’m a little leery that our legislators, who in many cases know about as much about economics as I do (or less) are rushing headfirst into something without a lot of dialogue and analysis. There were two moves today that give me a bit of hope. First, the SEC made adjustments to the mark-to-market rule, allowing companies to not have to artificially mark down bonds/mortgages below their value. Second, the new bill raises FDIC insurance from 100,000 to 250,000.
Dave Ramsey, the guy whose financial plan Angela and I are following came out with his own proposal today. I like it quite a bit more. Both because I think it addresses some of the fundamental issues and keeps us from giving a drunk a drink.
“Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three steps:
Common Sense Plan.
I. INSURANCE
A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.
B. In order for a company to accept the government-backed insurance, they must do two things:
1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.
a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while
working with the borrower—again limiting foreclosures and ruined lives.
2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.
C. This backstop will cost less than $50 billion—a small fraction of the current proposal.
II. MARK TO MARKET
A. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.
B. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.
III. CAPITAL GAINS TAX
A. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.
B. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down. This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to
stand up, speak out, and fix this mess.
“
this is worth listening to.
http://a1611.g.akamai.net/f/1611/23575/9h/dramsey.download.akamai.com/23575/audio/mp3/mydrs_blog/092308_mark_to_market.mp3
I love, love, LOVE the smell of new crayons! Reason #295 why I was destined to be an art teacher.
I am very interested in the economy right now. I listen to all debates and I read as much as I can. I am no economist but this is my take.
This problem has been in the making for quite a while and I think it goes back to the Clinton administration. Clinton wanted the “American Dream” to be available for everyone and pushed banks to reduce lending standards to make it easier for minorities and lower income families to own a home (and I am not blaming Clinton for all this, banks should have been smarter. And I do like some things Clinton did…he had a great budget and got rid of inheritance tax). Anyway, an article in the NYT from 1999 predicted this fall, specifically for Fanny Mae. Bad loans were given to eager Americans who wanted to own their own homes. Fast forward a few years and the banks that were lending to people who didn’t have adequate credit were caught holding the bag. Banks are only required to keep a certain % of money in reserves, but when they are responsible for bad loans, that % keeps increasing. It got to the point where they could not maintain that % and it made the bubble pop. People got in over their heads and banks had a m-e-s-s.
The bailout needs to happen, although I don’t agree with the entire plan. The fact is that our economy ONLY works when people spend money and the bailout will allow money to flow again. If people are not spending, then we enter a huge depression. It takes a lot longer to feel a depression/recession in 2008 because the credit we do have allows money to still flow. Think about it: in the early 80s, it hit faster because credit was not a prevalent, and in the 30s it hit super fast because credit was non-existent. My prediction is that the credit card companies are going to be the next to fall, merge and go under. Just wait. Then we’ll have even a bigger mess. Bottom line, when money stops flowing, our economy tanks and it trickles down to virtually every job. (I do think education is fairly sheltered).
These are the times where the rich get richer and the average Joe loses everything. The rich continue to invest in a weak stock market because they know that the market will rebound eventually and they were able to buy more at a lower value. Meanwhile, your average American is buying groceries on credit to feed their children.
If you’re worried about your money, move to a smaller bank. These banks don’t fund mortgages (or they approve you and sell the mortgage to someone else) and are actually doing OK.
I started getting nervous when Tommy and I applied for our mortgage loan. We both have great credit and no debt so we didn’t think we would have a problem. Banks were making it difficult to get loans (we had to jump through hoops) and our interest is not as good as it should be. If that is happening to us imagine what that means for people that are less fortunate. I think its a stupid move to base the decision on the bail out on revenge. Are some Wall Street companies greedy and dumb…yes…but we have to do whats best for us and the economy. The bail out amount sounds like alot (and it is) but its nothing compared to the damage that can happen to our economy.
i’m thinking it would only take about $20,000 to bail me out and i’ll even pay it back if you’ll give me a reasonable interest rate and lock it in, not send me an email two days later and tell me my 4% rate on my credit card is now 19% cause, well cause, you just want it to be and besides, it’s our money you are borrowing, so we can tell you to pay it back any way we want to and if you’re even 1 hr. late when you are supposed to make the payment, we’ll charge you $50 and raise your rate to 31% and you can call us and plead with us and you can even cry some and we’ll just tell you you’re screwed and this is how our ceo gets to buy his new jet and fly off to his private island and you’re not invited to join him. oh, what was the question?
guys, you have not seen anything yet.
everyone (here, in the media, our legislators) talks about the crisis without mentioning the most extreme aspect of all of this.
WAKE UP. do not buy into the silly argument about low income housing for poor people- or predatory lending blah blah blah
thats the argument that lets people fall into the useless republican/democrat conservative/liberal bullshit
i know i know thats probably mostly true- people got loans they couldnt pay back and lenders pushed loans on them, yes clinton pushed that agenda back in 99, blah blah
its all true.
but its CHUMP CHANGE.
derivatives. start here: http://en.wikipedia.org/wiki/Derivative_(finance)
now, this “tool” is basically a way to move risk around and around, using leverage to make lots of money from very little changes in value of real assets.
so what these huge firms have done (think: ENRON) is built up huge amounts of wealth by betting on the values of existing and future assets, but they only do this by pushing the risk further and further into the future-
now if its unintuitive or seems really complicated, you’re smart- it is. (intentionally) now the real scary part is how huge and pervasive this has become
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U.S. annual gross domestic product is about $15 trillion
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U.S. money supply is also about $15 trillion
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Current proposed U.S. federal budget is $3 trillion
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U.S. government’s maximum legal debt is $9 trillion
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U.S. mutual fund companies manage about $12 trillion
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World’s GDPs for all nations is approximately $50 trillion
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Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
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Total value of the world’s real estate is estimated at about $75 trillion
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Total value of world’s stock and bond markets is more than $100 trillion
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BIS valuation of world’s derivatives back in 2002 was about $100 trillion
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BIS 2007 valuation of the world’s derivatives is now $516 trillion
$516 trillion
$516 trillion
$516 trillion
$516 trillion
IN SIX YEARS!!!!! since 2002 derivative trading has gone from ~$100 trillion to $516 trillion!!!
http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid={B9E54A5D-4796-4D0D-AC9E-D9124B59D436}
http://www.ft.com/cms/s/0/73a3d4d8-8eff-11dd-946c-0000779fd18c.html?nclick_check=1
This article is about derivatives from JUST credit markets:
http://money.cnn.com/2008/09/30/magazines/fortune/varchaver_derivatives_short.fortune/?postversion=2008093012
now, i really have to just say that unless the national debate can include discussions on this, the bubble is going to burst and people are not going to know what hit them
the reason i hate the bailout is because it just gives the impression that its going to fix or change things– it wont, it’ll just let the companies keep doing this stuff for some period of time before it comes crashing down again.
oh and by the way– lets not pretend like another bailout didnt already happen…
the fed has been extending itself
sorry i guess for that second article you have to paste the whole thing yourself– not sure why it didnt work correctly
also, I will look for the article on how the Fed already injected some hundreds of billions once they saw that the house had voted down the original bailout plan— but for now i need to go tutor.
I’m with you, Sarah. Economics – past the basic idea of a free market – was never my strong suit, and it’s hard to trace the fall of Fannie Mae to me, someone who has no mortgage, has (almost! praise Jesus!) paid off her school loans, has one credit card and whose only major purchase ever made with credit was a car. And it was a Honda Fit.
But, of course, everything links to everything, and someone else’s inability to get or maintain proper credit will end up touching my life as well. I do wish I knew more about it – luckily pantsworld’s full of such smarties!
I think Jezebel might have missed the point slightly. They forgot an all-important category of male romantic lead (and the one epitomized by one Mr. Dobbler) – that of “charmingly unhinged stalker.” Seriously, if someone showed up to my house after I’d asked them repeatedly not to speak to me? In the middle of the damn morning? Actually, this HAS happened, several times, and at no point was it sweet or charming or romantic. More like creepy, stalkerish and affection-killing. Yuck.
no one cares.
Wow, these comments made my head hurt and my blood pressure rise because, although I think Chris and I will be okay, it does scare me a bit as well as confuse the hell outta me. But then again, money has always done that to me. My dream is to live sustainably on some land somewhere and maybe bring back the barter system.
Anybody? Barter? Yes? Will trade wine for your olive oil.
OH wait, on my dream land, I have olive trees.
Silly me.
With my limited knowledge, the Ramsey Plan seems like a good idea to me, also. If nothing else, it seems like an excellent first step.
I agree that the government must do something, but does it have to be something so big and so quickly? This mess took years to get into and will take a long time to get out of. I don’t think we’re fixing much of anything in one week. I dread looking back a year from now and wondering what we were thinking, but I get this sneaking suspicion that this is exactly what will happen. I hope not.
Lastly, I don’t think this should be politicized. This isn’t the result of “failed Bush policies” – this started long ago and suspending a campaign won’t really do too much. Let’s just get this fix started and go back to arguing the war, taxes, immigration, etc.