Thank You President Obama

[Anna Perenna]

So the carbon emissions tax that isn't here yet caused the disaster? Wow, you people are incredible. The fear and paranoia goes on....

.

 

We both know Obama had nothing to do with it. For everyone else, the following couple of articles explain things in simple terms:

 

Economic Crisis Explained

 

The Subprime Mortgage Fiasco Explained

 

The Dot com bubble burst in 2001. Shares in internet companies collapsed and with events of 9/11, the US faced recession. The Federal Reserve responded by cutting interest rates to 1% - there lowest level for a long time.

Low Interest rates encouraged people to buy a house. As house prices began to rise, mortgage companies relaxed their lending criteria and tried to capitalise on the booming property market.

Mortgage companies actively sold mortgages to people with bad credit, low incomes - often first generation immigrants. This 'subprime market' expanded very quickly.

Mortgage salesmen were paid on commission. Therefore, they often hid the true cost of adjustable rate mortgages and did little to check whether the homeowners could actually afford repayments in the long term. Even the feeble lending checks were ignored

Many took out adjustable rate mortgages which were affordable for the first two years, but, then the interest rate increased making mortgage payments much more expensive.

In 2006, inflationary pressures in the US caused interest rates to rise to 4%. Normally 4% interest rates are not particularly high. But, because many had taken out large mortgage payments, this increase made the mortgage payments unaffordable.

Also many homeowners were not coming to the end of their 'introductory offers' and faced much higher interest rates. This led to an increase in mortgage defaults and companies lost money.

As mortgage defaults increased the boom in house prices came to an end and house prices started falling.

The falls in house prices were exacerbated by the boom in building of new homes which occurred right up until 2007. It meant that demand fell as supply was increasing causing prices to collapse, especially in suburban areas.

The Fall in house prices made the mortgage defaults more costly. If house prices are rising and someone defaults, the mortgage company can get most of the loan back by selling the house. But, now with falling house prices, they may end up with only a fraction of the house value.

 

The Role of Credit Default Swaps

 

You might imagine that this irresponsible lending by US mortgage companies would mean they would go out of business - end of story. However, the problem of the US mortgage defaults was spread across the financial system.

 

Mortgage companies in the US borrowed from other financial institutions to lend mortgages. They sold collateralised mortgage debt in the form of CDOs to other banks and financial institutions. This was a kind of insurance for the mortgage companies. It means that other banks shared the risk of these subprime mortgages.

Because these subprime mortgage debts were bought by 'responsible' banks like Morgan Stanley, Lehman Brothers e.t.c. risk agencies gave these highly dubious and risky debt bundles triple A safety ratings. Thus banks either ignored or were unaware of how risky their financial position was.

Therefore, when mortgage defaults in the US occured, many banks and financial institutions around the world had to write off bad assets. E.g. AIG had been insuring many of these mortgage debts so was faced with huge losses

The extent of this bad debt is estimated by the IMF to be close to ?1.3trillion.

 

Freezing of Money Markets.

 

In addition to bad debts, the other problem was one of confidence. Because many banks had lost money and had a deterioration in their balance sheets. They couldn't afford to lend to other banks. This caused a shortage of liquidity in money markets.

Banks usually rely on lending to each other to conduct every day business. But, after the first wave of credit losses, banks could no longer raise sufficient finance.

For example, in the UK, the Northern Rock was particularly exposed to money markets. It had relied on borrowing money on the money markets to fund its daily business. In 2007, it simply couldn't raise enough money on the financial markets and eventually had to be nationalised by the UK government.

Because banks were short of liquidity, they have been selling assets such as their mortgage bundles. This caused further falls in asset prices, further liquidity shortages and further deterioration in bank balance sheets. (The Paulson plan is to try to reverse this cycle by the government buying these financial assets no one else wants to buy.)

 

The Vicious Cycle of the Financial Crisis

 

1. Share Prices

 

Because banks have lost money, people have been selling shares in banks. This fall in their share prices was speeded up by aggressive 'shorting' of banking stocks. The fall in share prices have compounded the problem of banks because

 

• 
  [ ] investors / consumers lose confidence
  [ ] more difficult to raise finance on the stock market.
  

 

Part of the UK plan is to buy bank share capital to give greater confidence to the banks and enable them to raise sufficient finance.

 

2. Housing Markets

 

The shortage of finance means that banks have had to reduce lending, especially mortgages. The shortage of mortgages has caused further falls in house prices, especially in the UK. Falling house prices are magnifying the loss of banks as more default on their mortgage and loan payments.

 

3. Economy

 

Falling house prices, shortage of finance and collapsing confidence have caused the 'real economy' to decline. Investment and consumer spending has fallen therefore major economies face recession and rising unemployment. The rising unemployment increases the chance of more mortgage defaults and further bank losses.

[Anna Perenna]

Economist Hermany Daly on The Crisis

 

The turmoil affecting the world economy unleashed by the US sub-prime debt crisis isn?t really a crisis of ?liquidity? as it is often called. A liquidity crisis would imply that the economy was in trouble because businesses could no longer obtain credit and loans to finance their investments. In fact, the crisis is the result of the overgrowth of financial assets relative to growth of real wealth? basically the opposite of too little liquidity. We need to take a step back and explore some of the fundamentals that growth-obsessed economists and commentators tend to neglect.

 

After winning the Nobel Prize for chemistry, Frederick Soddy decided he could do greater good for humanity by turning his talents to economics, a field he felt lacked a connection to biophysical reality. In his 1926 book Wealth, Virtual Wealth and Debt: The Solution of the Economic Paradox, (a book that presaged the market crash of 1929), Soddy pointed out the fundamental difference between real wealth ? buildings, machinery, oil, pigs ? and virtual wealth, in the form of money and debt.

 

Soddy wrote that real wealth was subject to the inescapable entropy law of thermodynamics and would rot, rust, or wear out with age, while money and debt ? as accounting devices invented by humans ? were subject only to the laws of mathematics.

 

Rather than decaying, virtual wealth, in the form of debt, compounding at the rate of interest, actually grows without bounds.

 

Soddy used concrete examples to demonstrate the flaw in economic thinking. A farmer who raises pigs faces biophysical limits on how many pigs he can take to market. But if that pig farmer took on debt ? a promise to repay at a future date ? he would in effect be issuing a claim or lien on his future production of pigs. If he borrowed the equivalent value of 100 pigs, he could represent the loan on his balance sheet as ?-100 pigs.?

 

While debt as the farmer?s accounting entry is negative, negative pigs do not really exist. If the farmer should suffer a series of lean years and be unable to pay the interest, he might soon owe more pigs than could be raised on his farm. After a year, with interest looming, he?d show ?-110 pigs?; in 5 years, ?-161?; in 40 (assuming a patient bank), ?-4526.? When the bank finally came to call on the pig farmer to collect repayment of its loan, it could well find that most of the virtual wealth that had grown so appealingly on its books had to be written off as a loss.

 

Soddy?s insights show us that the institutions of a growth economy lead to the type of crisis that hit the US economy in 2008. Real wealth is concrete. Financial assets are abstractions. Existing real wealth serves as a lien on future debt. For example, the 100 dollars of virtual wealth that I carry in my wallet are a lien on real wealth in that those dollars enable me to buy pork at the store.

 

The problem that we?re seeing in the US has arisen because the amount of real wealth is not a sufficient lien to guarantee the staggering outstanding debt which has exploded as a result of banks? ability to create money, loans given out on shaky assets and the US government?s deficit, which has been stoked by financing the war and recent tax cuts. All of these factors are exacerbated by the compounding mechanism on debt. The debt is growing, and consequently, it is being devalued in terms of real wealth.

 

The conventional wisdom is that when faced with the threat of recession and business failure, the solution is to grow the economy so we can grow our way out of the crisis. But because the wrong diagnosis is made, namely that businesses are in trouble because access to credit has tightened, the wrong solution is proposed. Even if we could grow our way out of the crisis and delay the inevitable and painful reconciliation of virtual and real wealth, there is the question of whether this would be a wise thing to do. Marginal costs of additional growth in rich countries, such as global warming, biodiversity loss and roadways choked with cars, now likely exceed marginal benefits of a little extra consumption. The end result is that promoting further economic growth makes us poorer, not richer. The cost of feeding and caring for the extra pigs is greater than the benefit of eating extra pork.

 

To keep up the illusion that growth is making us richer, we deferred costs by issuing financial assets almost without limit, conveniently forgetting that these so-called assets are, for society as a whole, debts to be paid back out of future growth of real wealth. That future growth is very doubtful, given the deferred real costs, while the debt continues to compound to absurd levels.

 

What allowed symbolic financial assets to become so disconnected from underlying real assets?

 

First, our economy is based on fiat money (paper money issued by governments) that has value by convention but isn?t backed by any physical wealth. Second, our fractional reserve banking system allows pyramiding of bank money (demand deposits) on top of the fiat government-issued currency. Third, buying stocks and ?derivatives? on margin allows a further pyramiding of financial assets on top of the already multiplied money supply. In addition, the financial sector was very inventive in coming up with new financial instruments that were designed to circumvent government regulation of commercial banks to protect the public interest.

 

The agglomerating of mortgages of differing quality into opaque and shuffled bundles that led to the sub-prime mortgage crisis should be outlawed. The US balance of trade deficit has allowed us to consume as if our economy was growing real wealth instead of accumulating debt. So far, US trading partners have been willing to lend the dollars they earned from running a trade surplus back to us by buying treasury bills but these treasury bills are liens on yet-to-exist wealth. Of course, they also buy real assets and their future earning capacity. Our brilliant economic gurus meanwhile continue to preach deregulation of both the financial sector and of international commerce (i.e. ?free trade?).

 

How then do we clean up this mess?

 

A massive bailout ? and having the US taxpayer take on billions in bad debt ? is merely a way to keep the growth economy from failing a little longer while allowing it to continue degrading the planet. Propping up such a destructive system makes no sense. Instead, we need to redesign our laws and institutions to foster an economy that remains within biophysical limits.

 

I would not advocate a return to commodity money (such as gold), but would certainly advocate gradually increasing reserve requirements for banks. Commercial banks should act as financial intermediaries that lend other peoples? money, not as engines for creating money out of nothing and lending it at interest. If every dollar invested represented a dollar previously saved, we could restore the classical economists? balance between investment and abstinence. Far fewer stupid or crooked investments would be tolerated if abstinence had to precede investment.

 

Of course the growth economists will howl that such measures would slow the growth of GDP. I say so be it ? growth has become uneconomic, and we have limited time to bring the economy into line with the biosphere?s carrying capacity.

 

Were Soddy still around, I doubt he would be surprised by the havoc wreaked by all these two-legged Wall Street pigs, given that they were left free to raid whatever troughs they could poke their snouts into while drawing on conventional economic thinking to disguise their mess as innovations in finance. But I also think he would be disappointed that 80 years after the publication of his book, we still haven?t figured out a way tether the economy to reality ? to ensure that the number of negative pigs can?t grow without limit.

[hugo]

The root of the problem is low savings rates by Americans. We need a recession spurred byAmericans increasing the rate at which they save. Consumption taxes in place of income taxes would help longterm. Sadly, not one politician cares about anything past the next election. For the money spent on these stimulus bills they could have given every American family 10K. Now that would have spurred the economy.

 

Soddy was a dumbass.

[RoyalOrleans]

Ohh... let's blame the predatory lendors and Wall Street pigs! They held a gun to these folk's head and made them sign on the dotted line, initial here, initial here, initial here, signature, initial here, etc, etc.

 

In the simplest of country-ass terms, "You don't need to go buying things you can't afford.". And then my personal favorite, "You gotcherself into this sh!t, dig yerself out!".

 

Fukken entitlement-whoring sh!theels.

[ImWithStupid]

We both know Obama had nothing to do with it. For everyone else, the following couple of articles explain things in simple terms:

 

 

Nobody said the coming carbon tax caused the crisis except Bender, that's why nobody responded to his assertion. The comments on the carbon tax that Obama is implimenting was related to harming the recovery.

[hugo]

In the simplest of country-ass terms, "You don't need to go buying things you can't afford.". And then my personal favorite, "You gotcherself into this sh!t, dig yerself out!".

 

 

Bought a house for 49k in '83. It dropped to 33k by '86. Eventually sold it for 60k in '98. The drop in home value actually lowered my monthly payment by reducing property taxes. The only people harmed are investors, not home buyers.

 

I hope my current home's value declines (along with the property taxes). I'll probably die in it.

 

At some point a world economy that depended on Americans spending more than they earned was going to take a hit. Our government's solution is to accelerate spending more than they receive in revenues. Both parties favor deficit spending to end this recession. They are both Keynesian parties.

[RoyalOrleans]

Our government's solution is to accelerate spending more than they receive in revenues. Both parties favor deficit spending to end this recession.

 

And they rely, and I've heard Obama the Messiah use this term, "deficit reduction". Which is a ill-defined, sugar coated elusion to tax increases rather than savings.

[ToriAllen]

We both know Obama had nothing to do with it. For everyone else, the following couple of articles explain things in simple terms:

 

"Everyone else" agrees with economists the world over. Obama may not have caused the problems, but his policies will not solve them, either. He is turning a bad situation into a worse situation... a recession into a depression. I just hope the dems don't screw things up too bad before the Reps are voted back into congress.

 

I'm curious as to what Australian political party you are affiliated with, considering your liberals are the equivalent of our republicans.

[snafu]

"Everyone else" agrees with economists the world over. Obama may not have caused the problems, but his policies will not solve them, either. He is turning a bad situation into a worse situation... a recession into a depression. I just hope the dems don't screw things up too bad before the Reps are voted back into congress.

 

I'm curious as to what Australian political party you are affiliated with, considering your liberals are the equivalent of our republicans.

 

Obama was a senator at the time Fanny and Freddie were going hog wild and he either voted for it or voted just present knowing he would be running for president later. He also was the second biggest recipient of campaign monies from them not being beaten out by Chris Dodd. And we all know about his ass now too! So yes Obama was part of the cause as well!

[RoyalOrleans]

Barack Obama on the Issues

 

See for yourself!

[Anna Perenna]

Soddy was a dumbass.

 

At least you read the article

 

Whatever you think of Soddy, you can't really argue with Herman on this point:

 

"A massive bailout ? and having the US taxpayer take on billions in bad debt ? is merely a way to keep the growth economy from failing a little longer while allowing it to continue degrading the planet. Propping up such a destructive system makes no sense. Instead, we need to redesign our laws and institutions to foster an economy that remains within biophysical limits."

 

Propping up this economic model is like applying a bandaid to a bullet wound - it's not going to heal.

 

The economy is just going to collapse again.

 

"Everyone else" agrees with economists the world over. Obama may not have caused the problems, but his policies will not solve them, either. He is turning a bad situation into a worse situation... a recession into a depression. I just hope the dems don't screw things up too bad before the Reps are voted back into congress.

 

I'm curious as to what Australian political party you are affiliated with, considering your liberals are the equivalent of our republicans.

 

Actually, other world economies are applying stimulus packages (Australia included) and the IMF is encouraging all able economies to implement their respective stimulus packages asap to avoid zero or negative growth.

 

What I find interesting is that nobody can propose a better interim solution to the crisis - this situation requires some form of immediate action, and governments can only act on the best advice & information they are given.

 

(Unless of course they are republicans, in which case they shun all logical advice in favour of being ......... utterly corrupt and destructive )

 

I don't align myself with any party in particular, but I do love Senator Bob Brown, who is the leader of the Greens.