I'll do my own post soon....but to put this in perspective (and I don't thing this is a good idea) - you could give 97 smart entrepreneurs a billion dollars a piece to start new businesses. And we'd get our money back! We won't with the car companies. We are giving money away. Loans, gifts, bailouts - whatever. There is nearly a 0% this money will come back.
http://www.thetruthaboutcars.com/freep-does-the-math-974b-and-counting/
Tuesday, February 24, 2009
Tuesday, February 17, 2009
The Second Great Depression – Part 1 – The Problems
I don’t know what people will call this current financial crisis. It may be something like “the great real estate bubble” or “the great derivatives meltdown”. I think this will be either the “Second Great Depression” or “The Great Stagflation”. (Although some argue we had this one in the seventies already.) The bad news, regardless of names or titles, is that this is going to difficult. The good news is we’re the richest society in the history of the world and there’s no reason we can’t get through this with some collective dignity and health.
The major economic problems as I see them are:
1. Real Estate is overvalued. Consumers are heavily in debt against over valued real estate, which means financial institutes are heavily leveraged against overvalued real estate. Sub-prime mortgages were only the first round of defaults. The second wave (Alt-As and Option ARMs) won’t hit until the end of 2009. It’s impossible to predict how much values will drop, or which regional markets will drop/level off, but based on long-term trends and the recent national 25% drop, it wouldn’t be unreasonable to expect another 20-40% drop over the next few years.
2. Derivatives. I won’t lie. I don’t really understand these things very well. The first time I heard of them was back in the spring of 2003 while reading the Berkshire Hathaway 2002 annual report where Warren Buffet said of them, “I view derivatives as time bombs, both for the parties that deal in them and the economic system…… The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
I don’t have much more to add to that. Huge sums of money with no “true value” (many filled with toxic debt) combined with so much uncertainty in the markets.....this can't be good.
3. Debt. We borrowed and consumed. Then borrowed to consume. The numbers are staggering now, and in any imaginable future. Please watch this. http://www.iousathemovie.com
4. Banking Crisis. A free market cannot run properly without strong financial institutions. Either let the weak banks fail or we temporarily nationalize them. My free market inclination is to let them fail, but I don’t think we know how bad things can/will get. I don’t believe there’s even a consensus on if the original $350B helped or hurt the situation. The point is, we need to move much quicker. (I realize Obama hasn’t been in office very long.) Mr. Geithner’s plan to stress test the banks sounds reasonable if it can be accelerated. If we learned anything from the Japanese crisis in the late eighties, it’s that time is not on our side and mistakes will drag this out for years or decades.
I think future economists will prove that Bear Stearns should have been allowed to fail. The Fed could have brought in subsequent measures to prevent the cascade of failures. But by interfering as they did, they opened the doors to an “all in or all out” proposition. As soon as they started to interfere with a problem that big, they bought the problem. Which quickly leads to the other choice: Nationalize the banks.
Next on Clusterfuckery: Why the Stimulus Packages Won't Work
The major economic problems as I see them are:
1. Real Estate is overvalued. Consumers are heavily in debt against over valued real estate, which means financial institutes are heavily leveraged against overvalued real estate. Sub-prime mortgages were only the first round of defaults. The second wave (Alt-As and Option ARMs) won’t hit until the end of 2009. It’s impossible to predict how much values will drop, or which regional markets will drop/level off, but based on long-term trends and the recent national 25% drop, it wouldn’t be unreasonable to expect another 20-40% drop over the next few years.
2. Derivatives. I won’t lie. I don’t really understand these things very well. The first time I heard of them was back in the spring of 2003 while reading the Berkshire Hathaway 2002 annual report where Warren Buffet said of them, “I view derivatives as time bombs, both for the parties that deal in them and the economic system…… The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
I don’t have much more to add to that. Huge sums of money with no “true value” (many filled with toxic debt) combined with so much uncertainty in the markets.....this can't be good.
3. Debt. We borrowed and consumed. Then borrowed to consume. The numbers are staggering now, and in any imaginable future. Please watch this. http://www.iousathemovie.com
4. Banking Crisis. A free market cannot run properly without strong financial institutions. Either let the weak banks fail or we temporarily nationalize them. My free market inclination is to let them fail, but I don’t think we know how bad things can/will get. I don’t believe there’s even a consensus on if the original $350B helped or hurt the situation. The point is, we need to move much quicker. (I realize Obama hasn’t been in office very long.) Mr. Geithner’s plan to stress test the banks sounds reasonable if it can be accelerated. If we learned anything from the Japanese crisis in the late eighties, it’s that time is not on our side and mistakes will drag this out for years or decades.
I think future economists will prove that Bear Stearns should have been allowed to fail. The Fed could have brought in subsequent measures to prevent the cascade of failures. But by interfering as they did, they opened the doors to an “all in or all out” proposition. As soon as they started to interfere with a problem that big, they bought the problem. Which quickly leads to the other choice: Nationalize the banks.
Next on Clusterfuckery: Why the Stimulus Packages Won't Work
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