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The State of the Economy
March 4, 2009 10:38 AM   Subscribe

So how's the economy doing? Everyone, even google's CEO, seems to acknowledge it's bleak. Of course, panic would not be good, but a glance at the headlines reveals that one in five mortgages are underwater--prompting yet more federal relief--while the FDIC's insurance fund is threatened by further bank insolvency, and the U.S. private sector hemorrhaged nearly 700,000 jobs in February. New revelations about the banking crisis show that as Merrill Lynch foundered, its top 10 earners made $209 million last year, and that some of the companies that caused the mortgage crisis are now benefitting from it. At a time when 87 million Americans can't afford health insurance, and prison spending outpaces all but Medicaid; when we still don't know where exactly $2.2 trillion in bank loans have gone, some analysts are nevertheless cautiously optimistic. One sign of progress is that Obama is taking on the kinds of costly and wasteful U.S. defense contracts that the previous administration let run amok. If he can take on that racket, and make a dent, there may be hope after all.
posted by ornate insect (132 comments total) 23 users marked this as a favorite

 
You know, this is a really good post.

But all the same, I'm beginning to wish there was a Firefox plugin that would strip out any news or blog stories containing the word "economy." It's just so incredibly depressing. The early slow-down-and-see-the-car-wreck appeal has long faded. It's like the middle east. There's never any good news and I'm just tired of hearing about it. I'd rather just read about other things that have educational/informational merit.
posted by Afroblanco at 10:53 AM on March 4, 2009 [3 favorites]


Yeah - every time I open the newspaper they seem to be trying to one-up yesterday's already apocalyptic news. 25% unemployment in the central valley. Oh, wait, there's actually a PLAGUE OF LOCUSTS DESCENDING ON SALINAS RIGHT NOW.

Outrage fatigue has given way to panic fatigue.
posted by GuyZero at 10:56 AM on March 4, 2009 [1 favorite]


Obama said wasteful spending was a problem across the whole government but he zeroed in on the defense industry after earlier citing a project to build a new presidential helicopter fleet as an example of the procurement process "gone amok."

"The days of giving defense contractors a blank check are over," Obama told reporters.
Whoa. Here's to the DoD's first bake sale!
posted by DU at 10:59 AM on March 4, 2009 [3 favorites]


Now would be a good time to take on the defense budget. It's always had an extremely powerful lobby, but with so much going on right now some reforms might slip by.
posted by delmoi at 11:01 AM on March 4, 2009


MANY of the diehard optimists on Wall Street have been beaten to a pulp by now, but those still standing have fallen back on a nifty bit of calculus. The second derivative, they say, is turning positive. That means that although the economy is spiralling down, it is doing so more slowly.
posted by KokuRyu at 11:02 AM on March 4, 2009 [1 favorite]


I somehow doubt that a few wasteful defense contracts are going to make a dent in the trillions we've promised over the last 4 months. I don't think the DoD is nearly THAT large.
posted by sbutler at 11:04 AM on March 4, 2009 [1 favorite]


The other day in a train station, I actually bought the paper version of The Wall Street Journal. It was thin, real thin - with not a lot of ads. It was amazing to see an entire paper with nothing but panic centered articles. I was tempted to put it away for distant future ... well, not laughs, exactly.
posted by R. Mutt at 11:05 AM on March 4, 2009


I know that MeFi typically substitutes as Obama's cheerleading squad, so this will go over like a lead balloon, but there isn't much he's done that warrants hopefulness. His administration comes across as being deficient in understanding even basic economics at a time when knowledge of complex economics is needed.
posted by wabashbdw at 11:05 AM on March 4, 2009 [10 favorites]


Hey, it's all going to work out. Here's sports.
posted by Dr-Baa at 11:07 AM on March 4, 2009 [4 favorites]


I remember days of stagflation, of credit card interest rates on home loans (15% !), of double-digit unemployment. Those days passed, as shall these. I'm not suggesting that there won't be lasting effects from the current economic crisis, but some of these effects will be of net benefit in the long run. In the US, for example, people are saving money! Saving it! Just keeping it, just in case! That's good news, even though it's driven by fear right now–it will become habit at some point. People I've known personally who lived through the depression always kept cash on hand and in savings accounts. As one of the links points out, when the cash is in savings accounts, banks can lend it out to "good" risks. Another net positive is that we'll see an end to the trend of aggressive deregulation that led to the development of the toxic mortgage-backed securities and other exotic financial instruments that helped put us into this mess.

Personally, I think that the greatest benefits to come from this crisis will be the investments made in the US infrastructure, educational systems, public/alternative transportation, and energy production and distribution. These are areas that have been neglected since the 1970s, and I hope that we can hang on collectively to see the dividends these investments will pay in coming years.
posted by Mister_A at 11:08 AM on March 4, 2009 [8 favorites]


One sign of progress is that Obama is taking on the kinds of costly and wasteful U.S. defense contracts...

This is barely even tangentially related to the issues of the economy though? I mean, both deal with large amounts of money, sure... But in one case we're spending money to try and to get people to spend more money, and in the other we're cutting spending.

Yes, it's true. I hate optimism.
posted by pokermonk at 11:09 AM on March 4, 2009


I thought for a while that the market in the 6000s was an over reaction and then I read stuff like this and think maybe not...

My mortgage is underwater, but I can still make the payments as long as I keep my job. I could even take a 15% cut and deal with it. Not much beyond that though. The value is down 40% from where I bought it, so the 20% down payment is long gone...
posted by SirOmega at 11:10 AM on March 4, 2009


His administration comes across as being deficient in understanding even basic economics at a time when knowledge of complex economics is needed.

I know. Seriously. What the fuck is up with a recovery plan made by consulting the country's top economists? A guy on the Internet says they don't really get it!
posted by Astro Zombie at 11:10 AM on March 4, 2009 [48 favorites]


But just to clarify, I'm all for eliminating waste at the DoD, along with legislative pork, etc. So "Yea, President Obama!"

I just don't think it means that much compared to the financial crisis. It's like watching your house burn down, but cheering that you saved the microwave and blender.
posted by sbutler at 11:11 AM on March 4, 2009


[Obama] ordered a reform of the way the government did business, a move he said would save taxpayers $40 billion a year and help cut the budget deficit, which he has forecast will hit $1.75 trillion for the 2009 fiscal year.

There's 2.2% of the problem licked right there.

I feel so optimistic now that I'm going to refinance my house to get that new plasma TV.
posted by Joe Beese at 11:11 AM on March 4, 2009



My mortgage is underwater, but I can still make the payments as long as I keep my job. I could even take a 15% cut and deal with it. Not much beyond that though. The value is down 40% from where I bought it, so the 20% down payment is long gone...

So what's stopping you from just walking away?
posted by KokuRyu at 11:12 AM on March 4, 2009 [1 favorite]


His administration comes across as being deficient in understanding even basic economics

I agree with you that now is a good time to have a knowledge of complex economics, but what in particular is it about his policies that makes you claim a deficiency of the basics?
posted by JohnFredra at 11:12 AM on March 4, 2009 [1 favorite]


I'm beginning to wish there was a Firefox plugin that would strip out any news or blog stories containing the word "economy." It's just so incredibly depressing. The early slow-down-and-see-the-car-wreck appeal has long faded. It's like the middle east. There's never any good news and I'm just tired of hearing about it.

^^^
with that in mind i think i'll slip this in here :P
"A Gripping Saga of Cod, Elves, and Bankers"
Your latest entry in depression tourism, Michael Lewis touches down in Iceland. (via)
cheers!
posted by kliuless at 11:14 AM on March 4, 2009


$30 billion more given to AIG, bringing the total to somewhere around 180 billion dollars.

AIG lost $60 billion in the fourth quarter alone: as Reuters puts it, $460,000 per minute.

They've actually lost a lot more than that, they just don't know it yet. From this article, Peter Morici, a professor at the University of Maryland, says, "There's no amount of money that you can give (AIG), there are $2 trillion in losses out there."

We've been in not one, but three generational bubbles, and the fallout from bubbles is always catastrophic. And this all traces back to Alan Greenspan at the Fed; he could have stopped all of this in its tracks, but instead he cheerled and funnelled super-cheap money to all these players.

The bailouts are just more of the same 'medicine' that made us sick in the first place, easy money and ridiculous deficit spending. They're giving more meth to the meth addict. It may feel good for the moment, but the ultimate damage will far outweigh the temporary relief of symptoms.

Your way of life is ending. Your standard of living in the future is going to be much impaired -- and if you allow the politicians to continue the bailouts, every dime that leaves their hands is a dime they're taking from you and giving to entities that are already rich, to try to convince them to do more of the same stuff that made us sick.

If it works, you lose, and if it doesn't work, you lose.

You may notice a common outcome in those two scenarios.
posted by Malor at 11:14 AM on March 4, 2009 [14 favorites]


Oh, wait, there's actually a PLAGUE OF LOCUSTS DESCENDING ON SALINAS RIGHT NOW.

Salinas has never not had a plague of locusts descending upon it.
posted by blucevalo at 11:14 AM on March 4, 2009 [3 favorites]


I know. Seriously. What the fuck is up with a recovery plan made by consulting the country's top economists? A guy on the Internet says they don't really get it!

Please. The recovery bill, or stimulus plan -- or whatever you want to call it -- was written by the lobbyist and special interest groups in Congress. It's largely the result of America's greediest, not America's brightest.

My understanding is the majority of economists support the IDEA of a stimulus bill, but there are plenty who oppose or have doubts about the particular one that passed.
posted by sbutler at 11:18 AM on March 4, 2009 [2 favorites]


but what in particular is it about his policies that makes you claim a deficiency of the basics?

I'm sure it's the fact that he's been relying so heavily on consulting with economic hacks like Paul Volcker.
posted by saulgoodman at 11:18 AM on March 4, 2009


2.2% is pretty good! The trick is to get another 1.9% here, 0.4% there, 1.1% from this, 0.8% from that, and you're talking real money. A bunch of small incremental gains (savings) taken together can make a huge difference in the budget deficit.
posted by Mister_A at 11:18 AM on March 4, 2009


His administration comes across as being deficient in understanding even basic economics at a time when knowledge of complex economics is needed.

Whereas the previous administration was so chock-full of economic brilliance that it would have made Milton Friedman blush with envy.
posted by blucevalo at 11:18 AM on March 4, 2009 [3 favorites]


@ Astro Zombie-- You are so right! What a lazy SOB! I mean, these last 59 days have been for shit. I expected him to just keep shoveling money into the furnaces at Citibank but nooooooo, he has to have "A PLAN". What a complete douche!

On another note to wabashbdw-- Here you go.

Buttermilk biscuits (serves 10)

Ingredients

* 2 cups unbleached all-purpose flour, plus more for dusting the board (if you can get White Lily flour, your biscuits will be even better)
* 1/4 teaspoon baking soda
* 1 tablespoon baking powder (use one without aluminum)
* 1 teaspoon kosher salt or salt
* 6 tablespoons unsalted butter, very cold
* 3/4 cup buttermilk (approx)

Directions
Preheat your oven to 450°F.

Combine the dry ingredients in a bowl, or in the bowl of a food processor.

Cut the butter into chunks and cut into the flour until it resembles course meal.

If using a food processor, just pulse a few times until this consistency is achieved.

Add the buttermilk and mix JUST until combined.

If it appears on the dry side, add a bit more buttermilk.

Turn the dough out onto a floured board.

Gently, gently PAT (do NOT roll with a rolling pin) the dough out until it's about 1/2" thick.

Use a round cutter to cut into rounds.

You can gently knead the scraps together and make a few more, but they will not be anywhere near as good as the first ones.

Place the biscuits on a cookie sheet- if you like soft sides, put them touching each other.

If you like"crusty" sides, put them about 1 inch apart- these will not rise as high as the biscuits put close together.

Bake for about 10-12 minutes- the biscuits will be a beautiful light golden brown on top and bottom.

Do not overbake.

Note: The key to real biscuits is not in the ingredients, but in the handling of the dough.

The dough must be handled as little as possible or you will have tough biscuits.

I have found that a food processor produces superior biscuits, because the ingredients stay colder and there's less chance of overmixing.

You also must pat the dough out with your hands, lightly.

Rolling with a rolling pin is a guaranteed way to overstimulate the gluten, resulting in a tougher biscuit.

Note 2: You can make these biscuits, cut them, put them on cookie sheets and freeze them for up to a month.

When you want fresh biscuits, simply place them frozen on the cookie sheet and bake at 450°F for about 20 minutes.
posted by zerobyproxy at 11:20 AM on March 4, 2009 [9 favorites]


This is all due to a cross-culture mistake. Obama didn't say he was going to buy bad assets. He said he was going to be bad ass, etc.
posted by dances_with_sneetches at 11:20 AM on March 4, 2009 [5 favorites]


My understanding is the majority of economists support the IDEA of a stimulus bill, but there are plenty who oppose or have doubts about the particular one that passed.

Actually, when polled, I think something like 60% of economists have said they support the stimulus as passed, except that they doubt that it's big enough.
posted by saulgoodman at 11:20 AM on March 4, 2009


So what's stopping you from just walking away?

Credit score. Living with my parents again. I have entertained the idea of buying a new house, homesteading it, and walking away from my current one. If I could manage to come up with the 20% down payment for a new house ($50-75k) it would make the numbers work. Then I'd have to talk to a lawyer who knows about this stuff and could tell me about all the other issues that'll come up.

Also, NV is a state where they can come after any other assets I have if I get foreclosed on (or a short sale) - my car, maybe my investment accounts? Who knows. But then if I cashed out right now they would have anything to come after. Though cashing out now seems like a bad idea....
posted by SirOmega at 11:22 AM on March 4, 2009


I agree with Malor's comments regarding the whole AIG mess; that's just good money chasing after bad, and I seriously doubt if the hole that company dug itself into can ever be filled:

The government stake in American International Assurance [an Asian subsidiary of AIG] will probably be controversial. The unit had been put up for sale recently, without success. That suggests that the government is giving A.I.G. better terms than private investors were willing to give, exposing the government to further accusations that it is providing a handout to A.I.G.
posted by ornate insect at 11:23 AM on March 4, 2009 [1 favorite]


Given that global financial system has been outed in the 12 months as one gigantic Ponzi scheme where only a few profit for a while, but it dies when enough people stop believing in it, why don't we just put this whole stimulus crap to rest, call it the fraud that it is and start over with something new?

Beads and shells anyone?
posted by psmealey at 11:27 AM on March 4, 2009 [2 favorites]


this will go over like a lead balloon, but...his administration comes across as being deficient in understanding even basic economics at a time when knowledge of complex economics is needed.

I always imagine fatuous statements as balloons full of hot air, not lead.
posted by zoomorphic at 11:32 AM on March 4, 2009 [1 favorite]


His administration comes across as being deficient in understanding even basic economics at a time when knowledge of complex economics is needed.

For instance: spending taxpayer dollars on educating children is socialism, but spending taxpayer dollars on bombing children is an investment in our future.
posted by Optimus Chyme at 11:44 AM on March 4, 2009 [4 favorites]


Federal Report: Economy Deteriorated in January and February:

...most economists believe the recession will drag on for most of this year even after the enactment of President Barack Obama's $787 billion stimulus package of boosted federal spending and tax cuts designed to revive limp consumer spending and boost factory production. Bernanke told Congress Tuesday that the impact of the stimulus package is subject to "considerable uncertainty, reflecting both the state of economic knowledge and the unusual economic circumstances that we face."
posted by ornate insect at 11:47 AM on March 4, 2009


His administration comes across as being deficient in understanding even basic economics at a time when knowledge of complex economics is needed.

Let me let you in on a little secret. Economies are so complex no one really understands them. They cant be guided or controlled. Most economists are closer to being voodoo priests than they are scientists. All you can do in a recession is spend your way out of it hoping to keep people employed and not repeating the mistakes of the past. There's no silver bullet or marginalized phd that can help you. The people who believe there's an easy to understand solution out there and congress is too blind to see it are really part of the problem.
posted by damn dirty ape at 11:48 AM on March 4, 2009 [8 favorites]


His administration comes across as being deficient in understanding even basic economics at a time when knowledge of complex economics is needed.

I agree. As anyone with even a middling knowledge of economics knows, there are only two surefire ways to solve the current economic crisis:

1. Tax cuts.
2. Americans can do anything they put their minds to.
posted by psmealey at 11:49 AM on March 4, 2009 [3 favorites]


psmealey, shouldn't you be governing Louisiana?

*Hops on maglev train to Uranus*
posted by Mister_A at 11:52 AM on March 4, 2009 [1 favorite]


The people who believe there's an easy to understand solution out there and congress is too blind to see it are really part of the problem.

He says there are no easy answers. I say: He's not looking hard enough!
posted by Joe Beese at 11:56 AM on March 4, 2009 [2 favorites]


Most economists are closer to being voodoo priests than they are scientists

Hah! Funny story.

Back in '04 or so, I met a woman on J-Date who worked as a currency analyst. In one of her emails, she said something to the effect of, "I'm one of the people they like to quote on Bloomberg and Reuters [....] go ahead and google me and see what happens." Lo and behold, she spoke the truth. Apparently, her opinion was much sought-after.

Anyway, during our date proper, she let me in on her industry's dirty little secret - namely that nobody actually knew why the market did what it did. "So what about all the quotes?" I asked. "Well, " she said, "we just kinda make that stuff up because you have to say something. Indexes rise due to .... earnings forecasts? Stocks drop due to .... profit-taking? Nobody really knows."

And they wonder why I refuse to play the stock market.
posted by Afroblanco at 12:00 PM on March 4, 2009 [16 favorites]


there are only twothree surefire ways to solve the current economic crisis:

1. Tax cuts.
2. Americans can do anything they put their minds to.

3. Google Ron Paul
posted by uncleozzy at 12:00 PM on March 4, 2009 [3 favorites]


All you can do in a recession is spend your way out of it
Is that just circular reasoning? The gov borrows money to "spend" and then of course tax...
What about producing your way out? The 90's gave us a tech boom that created jobs in turn creating tax revenues.
Seems to me we need a new sector to come on the scene and do something similar. Green energy has promise but I don't think it can do it alone.
Asking the government to "fix" things is like asking your mother in law to move in. So far we have seen Bush and Obama throw money at this crisis with limited effect. Maybe it needs more time to sink in?
Every time I see Obama speak I want to believe that he believes what he is saying. And I think he does believe it, but that speech to Congress really made it clear. Biden over one shoulder and Pelosi smirking over the other...
He means well and is trying, but the status quo that is DC will never give up the reigns.
posted by a3matrix at 12:03 PM on March 4, 2009


My understanding is the majority of economists support the IDEA of a stimulus bill, but there are plenty who oppose or have doubts about the particular one that passed.

Well here in the real world, where a single bill cannot completely satisfy more than one person, we shall settle for pissing off as few as possible while incorporating as many good ideas as we can and still get something passed.

Perfect being the enemy of good and all.
posted by butterstick at 12:07 PM on March 4, 2009 [3 favorites]


nobody actually knew why the market did what it did

The Mandarins in the financial sector have long benefitted from the innumeracy of the general populace. Even though America should--after the S&L debacle, after Enron, WorldCom, Tyco and the dot com bust--have know better, the giant speculative and Wall Street-driven bubble we are now watching implode seems to have taken many by surprise.
posted by ornate insect at 12:08 PM on March 4, 2009


It sounds like what we need is some robots. Robots will solve this crisis!
posted by TwelveTwo at 12:11 PM on March 4, 2009


All you can do in a recession is spend your way out of it
Is that just circular reasoning? The gov borrows money to "spend" and then of course tax...
What about producing your way out? The 90's gave us a tech boom that created jobs in turn creating tax revenues.
Seems to me we need a new sector to come on the scene and do something similar. Green energy has promise but I don't think it can do it alone.
Asking the government to "fix" things is like asking your mother in law to move in. So far we have seen Bush and Obama throw money at this crisis with limited effect. Maybe it needs more time to sink in?


What do you think "production" is???
PRODUCTION = SPENDING

God I'm tired of the pop economists on Metafilter. Opinions and assholes...
posted by jckll at 12:18 PM on March 4, 2009 [1 favorite]


I somehow doubt that a few wasteful defense contracts are going to make a dent in the trillions we've promised over the last 4 months. I don't think the DoD is nearly THAT large.

In 2001 Rumsfeld testified that the DoD wasn't sure what happened to $2.3 trillion.
posted by ryoshu at 12:21 PM on March 4, 2009 [3 favorites]


I don't see how anyone, economist or not, can have a reasonable expectation that this course can be righted in the next 18 months, let alone the next 18 years. This crisis has been coming since we first became a debtor nation in 1974 or therabouts. We dismantled our manufacturing base, emasculated our trade unions, created an underglass of migrant labor (whom we no gleefully demonize), and migrated to a service based economy where no real net increase in production of real goods occurs, and spend the vast majority of time buying (and convincing others to buy) things that we don't need. In the meantime, we've privatized many of the core functions of government, including national defense which was at one time sacrosanct, and done nothing to improve our transportation infrastructure, power transmission, and water delivery infrastructures.

So, 30+ years of borrowing in order to maintain our standard of living, we are now insisting that our new president solve a what has blown up into a global crisis in his first term in office.

The question that no one is asking (for fear of being branded a socialist, I guess), is not whether the economy can be restored to its previous state, but whether it even should.

At any rate, I don't know what goes on behind closed doors in the White House, but the stimulus package itself seems suspicious in its lack of imagination. It looks like a token effort to come up with a conventional solution, to keep the wolves at bay for a while. As Krugman says, it's not a bad bill, it's just not enough. So, I wonder what they really have in mind.
posted by psmealey at 12:22 PM on March 4, 2009 [20 favorites]


Google Ron Paul

Wait, who? That guy who said in 2007 that lax monetary policy was inflating a housing bubble that would eventually pop, demand bailouts of Fannie and Freddie, and lead to a corresponding bust?

Why would you want to know any more about that nutjob? He got trounced in the debates when Senator McCain reassured us that we're not heading into a recession, because the fundamentals of our economy are strong.
posted by roystgnr at 12:29 PM on March 4, 2009 [6 favorites]


Hidden Pension Fiasco May Foment Another $1 Trillion Bailout
posted by homunculus at 12:36 PM on March 4, 2009 [1 favorite]


Why would you want to know any more about that nutjob? He got trounced in the debates when Senator McCain reassured us that we're not heading into a recession, because the fundamentals of our economy are strong.
posted by roystgnr at 12:29 PM on March 4


I think he would have had a lot more credibility if he didn't think interstate highways are the devil's veins.
posted by Optimus Chyme at 12:37 PM on March 4, 2009 [2 favorites]


"Anyway, during our date proper, she let me in on her industry's dirty little secret - namely that nobody actually knew why the market did what it did. 'So what about all the quotes?' I asked. 'Well, ' she said, 'we just kinda make that stuff up because you have to say something. Indexes rise due to .... earnings forecasts? Stocks drop due to .... profit-taking? Nobody really knows.'"

Those post hoc rationalizations are strikingly similar to now people "explain" their acts of "free will" when queries by psychologists. Or the confabulations employed by, e.g. victims of left brain strokes to "explain" why they just don't wat to move their (paralyze) right sides.

I suspect that if we dug a little deeper, we'd find that most Wall Street wonders know less about economics/picking stocks than they have intuited about psychology and con games.
posted by orthogonality at 12:39 PM on March 4, 2009


PRODUCTION = SPENDING

Production and spending are not the same thing jckll. Especially when we are talking about GOVERNMENT spending.


God I'm tired
Take a nap.
posted by a3matrix at 12:41 PM on March 4, 2009


Uh, you left the last part of that out. It was the pertinent piece:
"God I'm tired of the pop economists on Metafilter."
Like you, apparently.

Production and spending are not the same thing jckll. Especially when we are talking about GOVERNMENT spending.

GDP = C+I+G+NX
Look it up.
I'm not wasting any more words explaining Econ 101 to you. Sorry.
posted by jckll at 12:51 PM on March 4, 2009 [3 favorites]


His administration comes across as being deficient in understanding even basic economics at a time when knowledge of complex economics is needed.

I know. Seriously. What the fuck is up with a recovery plan made by consulting the country's top economists? A guy on the Internet says they don't really get it!


I don't have time to read the whole thread right now, but I want to comment on this exchange. I'm an Obama fan, but there is some evidence that Geithner and Summers either don't get it or don't want to get it. And I say that not based on the rantings of right-wing cranks, but on the reporting at NPR's Planet Money. It seems pretty clear that the banks are insolvent and not just facing a liquidity crisis. Yet the plan so far is based on the assumption that it's a liquidity crisis. The only way that's true is if housing prices (and the assets based on them) are about to rebound. That seems unlikely.
posted by diogenes at 12:59 PM on March 4, 2009 [3 favorites]


A.F.L.-C.I.O. to Support Nationalizing Banks
posted by ornate insect at 1:02 PM on March 4, 2009


Bah. My personal favorite blogpost on the economy recently?

It's not the economy by Havi Brooks.

Among the nuggets o' wisdom:
Yes, the economy is crappy. You know what’s really crappy though?

That otherwise smart, goodhearted, well-meaning people start a business out of a labor of love, and no one tells them about the part where you have to learn how to run a business.
I think that's as applicable to, say, a giant corporation as it is to a mom and pop store. orthogonality says:

I suspect that if we dug a little deeper, we'd find that most Wall Street wonders know less about economics/picking stocks than they have intuited about psychology and con games.

Uh huh. Been there. Worked for Salomon Smith Barney. As a baby broker, our guys who Supposedly Knew Better and were there to help our proto-Greed Is Good selves were pushing us to sell Enron right up until POW!

So yeah. A lot of businesses are failing. A lot of shitty businesses are failing. Because -- wow -- they neglected to, oh, run their business well. Wanna hear something funny? I co-own a studio/store that teaches sewing/knitting/fiber arts lessons and sells specialized products relating to the same. I'm selling $650+ spinning wheels like there's no tomorrow, bub. No downturn here. And no one can tell me in 2009 that a spendy spinning wheel is a necessary purchase like, say, heart medication. Or boner pills, if you're a Republican congressperson.

Mister_A says:

In the US, for example, people are saving money! Saving it! Just keeping it, just in case! That's good news, even though it's driven by fear right now–it will become habit at some point.

Hey guess what? Guess how we started our business? With cash. Cash we'd saved. No bank in their right mind would've lent us money anyway. We've been in business nearly two years and profitable from day one. The POW! I was waiting for now that the economy is sucky? Hasn't happened. It's time to put away this whole 'the economy sucks! everything's asploding!' thought process and realize that the people who weren't running their businesses well are gonna fail, and everything will end up righting itself...if we let it.

Meanwhile Obama and co. can help out with investments in infrastructure, and in that I include healthcare, because hot damn, more auto manufacturers are moving operations to Canada from Michigan for reasons that do not include better beer, and if we want to rebuild our economy the right way, we need to look at all the inputs/costs/etc involved. We've got a chance to do it right this time if those obstructionist bastards (I'm looking at you, Boehner, and all your ilk) will shut up, admit they fucked up and get out of the way while someone else has a go.
posted by bitter-girl.com at 1:04 PM on March 4, 2009 [15 favorites]


Government spending is (among other things) a reserve fuel tank for the economy. When the economy starts lagging, government spending can firm up soft spots in the economy, and provide jobs such as construction when consumer confidence is low.

The problem in America is that we haven't put anything back into that reserve fuel tank in 30 years. Every time things go bad, we borrow our way out of a recession, but when things are going well, we cut taxes and cruise along rather than prudently paying back our debt (refilling the tank).
posted by explosion at 1:06 PM on March 4, 2009


All this talk of bubbles, bailouts, green economy, health care reform, and infrastructure spending reminds me of this, which had an interesting thread on MeFi.
posted by effwerd at 1:09 PM on March 4, 2009


A lot of businesses are failing

The problem is not just that business are failing, it's that a certain kind of business upon which our entire system depends for investment, the free flow of credit, and financial peace of mind--i.e. banks--are failing. If Sbarro or the Gap go out of business the ripple effect is bad but somewhat contained, but if Bank of America goes out of business, it's a catastrophic tsunami. It's great you started your business with cash, but it's unrealistic to expect all business models to be financed that way. Try manufacturing windmills or software instead of spinning wheels, and I suspect you're start up money would be insufficient.
posted by ornate insect at 1:15 PM on March 4, 2009


you're your start up money
posted by ornate insect at 1:16 PM on March 4, 2009


DoD cuts always seem to work the same way. The White House tells the DoD to identify places in their budget where they can make cuts. After tons of intradepartmental politics, some program is finally identified as non-critical.

Whatever program it is, it is spread out over several states (they all are). The company that has the contract for the program calls the Representative for each of the districts where the program is being conducted. The newspapers run stories on how the government is shutting down private sector jobs. The Representatives in the affected district work together, partisanship isn't so important when it's JOBS (and campaign contributions). Congress makes sure that the cuts are cancelled.

So the DoD has its hands tied, and Congress just points fingers, not owning up to their part in the problem. It's a repeating cycle, with the same programs being cut and resurrected over and over. The government pays to stop a program. The government pays to restart the program. They pay to stop it. They pay to restart it.

I hope Obama has a way out of it. I don't see it, though.
posted by Quonab at 1:18 PM on March 4, 2009 [1 favorite]


Banks are going bust because they pulled stupid shit in an attempt to make big bucks. A giant one locally is on the verge of a big ol' scandal after they got turned down for TARP money, then another bank misused TARP money to force a shotgun wedding merger -- why'd the local one go to hell and get itself in that situation in the first place? hello, subprime mortgages! So my "don't do stupid things and your business won't fail" concept is, broadly applied, workable there.

Banks pulling stupid shit is every bit equivalent to smaller businesses pulling stupid shit. The difference is, people seemed to think that banks' stupid shit didn't stink a bit when it was actually smelling up the room for a lot longer than they'll admit to...that's why the other big local bank is doing considerably better -- they got OUT OF the stupid shit that screwed over their competitor because some wise person said "hey, you know what? maybe lending money to people who can't pay it back might not be such a hot idea!"

Why wouldn't a bank have lent me money for my business? Because despite quite a bit of evidence to the contrary, they would never have thought a leisure-based-business like ours would hold its own. (In fact, craft-related spending tends to hold or go up during times of economic crisis -- a $10 ball of yarn lasts hella longer than a $10 movie ticket and you've got something useful on the other side). Ok, so WHY would that same bank happily give a mortgage to someone who's barely holding down a job?

And when that kind of stupidity ends up messing with the rest of their core business, that's when it all breaks down.
posted by bitter-girl.com at 1:30 PM on March 4, 2009


You're missing the point, bitter-girl.com. Yes, "banks pulling stupid shit is every bit equivalent to smaller businesses pulling stupid shit." But smaller businesses' failures don't have a catastrophic effect on the economy as a whole. Banks' failures do. And thus, like it or not, the government will come riding to the rescue of the banks. And rightfully so.
posted by jckll at 1:35 PM on March 4, 2009


Banks pulling stupid shit is every bit equivalent to smaller businesses pulling stupid shit.

It's equivalent in terms of the stupidity that you describe, but not in terms of the effect it may cause if an/or when the two businesses fail.

A large bank, like Citibank, failing, might be so bad for the economy it would put you out of business. The reverse would not be true. If you stop selling spinning wheels, Citibank will not go under. If Citibank goes under, I can almost guarantee you'll stop selling spinning wheels (at least the fancy kind, although there might well be a market for cheaper ones since people will start making their own clothes).
posted by ornate insect at 1:36 PM on March 4, 2009


"hey, you know what? maybe lending money to people who can't pay it back might not be such a hot idea!"

You'd think they'd have learned that from the Latin American debt defaults in early 90s. Didn't stop them from booking huge loan origination fees and profits on these instruments in the 80s. Same idea. I think at the core of the problem is the fact that accounting standards for financial institutions reward this behavior, rather than prevent it. You have mortgage brokers, bankers and the rest of it getting their points on the full value of the loan, but the owner of the actual note gets flipped and flopped every which way, so when default happens, Fannie Mae (and by extension US), end up paying for it.
posted by psmealey at 1:37 PM on March 4, 2009 [1 favorite]


damn dirty ape: Your comment about economic complexity is dead on, but this part:

All you can do in a recession is spend your way out of it hoping to keep people employed and not repeating the mistakes of the past.

won't be true in this case.

That only works if the problem isn't structural; the problem we're facing is that we're maladjusted from easy money from the Fed, vast government deficit spending, and enormous personal and corporate debt. That's what made us sick, so 'spending our way out of it' will just make the problem WORSE, not better. We need to PRODUCE our way out of it.

You can't solve a debt problem with more debt, any more than you can solve a drug addiction with more drugs. You can restructure debt, but we're not doing that -- we're taking on massive new debt in the hope that the old debt will somehow magically become good.

jckll says: PRODUCTION = SPENDING

God I'm tired of the pop economists on Metafilter. Opinions and assholes...


I'd back off on the aspersions until you demonstrate you have a clue. Not all spending is good. Not all spending is equal. Buying plasma TVs and building factories is not at all the same thing. And going into further debt when the fundamental PROBLEM is too much debt is a feel-good measure that delays the pain somewhat, but worsens it.

Obama's infrastructure stuff is nice, but while much of it is necessary work that we've postponed to buy bigger guns and invade countries, we're still going massively into debt to do it, and given the debt load we have already, there's a good chance it won't actually pay for itself. We're fortunate that the world is still willing to finance us, but that party probably won't last very much longer, and then we're going to be in dire condition.

So, no, production does not necessarily equal spending, at least not OUR spending. We need to produce stuff that the REST of the world buys, to reduce our debt. If we spend it ourselves, it's just more debt, and debt is what's causing the problem.

We actually have to *gasp* pay for what we consume, which is going to be a horrific adjustment.

You know, I see a lot of very scornful supposed 'economic experts' in these threads, and there's one thing that's been true of essentially all of them: they've been wrong. Badly wrong. Many of the 'pop economists' on MeFi have consistently been better at predictions than people who claim expertise in the field.
posted by Malor at 1:43 PM on March 4, 2009 [2 favorites]


I work with many different types of business. I'm getting very discouraged lately by how almost nobody in larger organizations is on the level. Conflicts of interest and double-dealing seem likely to be the way things get done if you're not fortune 500.

A friend recently got a promotion that allowed him to bring me a contract through his employers. He insisted on drafting up the agreement rather than giving me all the information I need so that I could do it myself. He then asked for a 10% kickback on the contract fee at the eleventh hour. He doesn't even seem to think it's embezzlement, and his "I would only do this for a friend" logic was so backwards I was more than a bit taken aback.

I wonder how much of the stimulus will be embezzled.

Anyhow, maybe a bit too personal for this thread but it's weighing on me and I think relates to the idea that many failed businesses will blame the economy when in fact they are riddled with cancers from the inside, such as embezzlers, double-dealers, spiteful shitwits and incompetent boobs who have attained their position through attrition, by keeping their head down. These cancers leave them too weak to adapt to a changing environment. So maybe little economic depression where such companies die is a shot of chemo that will save the patient in the long run.
posted by autodidact at 1:47 PM on March 4, 2009 [4 favorites]


It's also worth pointing out that we've completely abandoned the concept of moral hazard, instead bailing out the most reckless and punishing the most prudent.

If there's one thing you can be absolutely certain about: if you reward stupidity and punish prudence, the economy will move en masse toward stupidity.
posted by Malor at 1:48 PM on March 4, 2009 [3 favorites]


I wonder how much of the stimulus will be embezzled.

Given recent history, I would say 112% of it.
posted by ryoshu at 2:00 PM on March 4, 2009 [2 favorites]


You can argue the merits of various types of spending all you want. There's definitely a point to be made that certain spending is better for the economy, both in the long-term and in the short-term. However, the point I was making is that spending (plus other things, obviously) DOES equal production. Period. And I'm not going to argue that fundamental truth with anyone, just the same way that I'm not going to argue acceleration due to gravity is 9.8 m/s/s. If you, or the other guy, don't accept that premise, then get your kicks arguing with somebody else.
posted by jckll at 2:01 PM on March 4, 2009


Sure the effect is bigger when Citibank or BOA or whoever fails, ornate insect...

A large bank, like Citibank, failing, might be so bad for the economy it would put you out of business. The reverse would not be true. If you stop selling spinning wheels, Citibank will not go under. If Citibank goes under, I can almost guarantee you'll stop selling spinning wheels (at least the fancy kind, although there might well be a market for cheaper ones since people will start making their own clothes).

But you know what? If Citibank goes under, it's not because *I've* made stupid decisions. And yes, it will affect the overall economy, and yes, if I lived somewhere where, say, Citibank employed a lot of people (and they all lost their jobs), sure... that'll screw with my business when they can't afford to buy fancy stuff and take classes any more. But Malor has it right:

It's also worth pointing out that we've completely abandoned the concept of moral hazard, instead bailing out the most reckless and punishing the most prudent..

And autodidact hits the nail on the head with

I work with many different types of business. I'm getting very discouraged lately by how almost nobody in larger organizations is on the level. Conflicts of interest and double-dealing seem likely to be the way things get done if you're not fortune 500.

We are not only allowing financial institutions to do stupid stuff, we are helping to enable them to continue to do stupid stuff, and do it crookedly. Which, in the long run, is going to be a hundred times worse when the zombie outbreak comes. (I'm envisioning loan officers in suits roaming the streets moaning: SUBPRIME LOOOOOOOANS)

We live in a country where not only do we no longer have a decent manufacturing base (although, it must be said, that's not a 100% solution, since the service based economy and stuff like Hollywood probably produce more revenue than your typical widget plant, at least judging from the number of Watchmen trailers clogging my internet), we actively create pitfalls for our economic interest. Saving Ford or GM in the interest of not having 100,000 new people on the unemployment line is all well and good.........but

(here comes my Stop Doing Stupid Shit philosophy again -- FIX IT!...go to 4:26 on that link)

...maybe those asshat execs shouldn't, you know, go begging for money from Washington in their corporate jets. Or maybe AIG shouldn't spend a gazillion dollars on a corporate retreat in the middle of their Failboat Trip to Failytown.

This link in the original post above should have people calling for Countrywide's HEAD on a PLATE.

There are industries that should be helped. There are things that can be done. (Fixing health care would take a hell of a lot of heat off of small businesses, who employ most of the people in this country if I'm not mistaken). But bailout after bailout is putting a band-aid on a cut to the jugular.
posted by bitter-girl.com at 2:14 PM on March 4, 2009


It is quite evident that their efforts are, in fact, helping many distressed homeowners.

“Literally, their assistance saved my family’s home,” said Robert Robinson, of Felton, Pa., whose interest rate was cut by more than half, making his mortgage affordable again.


from bitter-girl.com's link above. The end of the TAL story on The Bad Bank covered this. I really don't think it's all that offensive, considering bankruptcy judges cannot re-negotiate the terms of mortgages (yet, obama and company are working on that).

I have great credit and a great job, but I can't re-fi right now... and I'm not even underwater yet. I'm not sure the Countrywide goons are doing the same thing that was mentioned in the TAL piece, but at least in this case the assets are getting a concrete price. That seems to be the first step to admitting you're insolvent.
posted by butterstick at 2:25 PM on March 4, 2009


So, no, production does not necessarily equal spending, at least not OUR spending. We need to produce stuff that the REST of the world buys, to reduce our debt. If we spend it ourselves, it's just more debt, and debt is what's causing the problem.

Do you even understand the difference between government debt, consumer debt and, trade deficits? Because that paragraph doesn’t seem to make a distinction.

You know, I see a lot of very scornful supposed 'economic experts' in these threads, and there's one thing that's been true of essentially all of them: they've been wrong. Badly wrong. Many of the 'pop economists' on MeFi have consistently been better at predictions than people who claim expertise in the field.

As opposed to you, who never makes any actual predictions, just a hearty stew of adjectives and DOOM. A couple months ago you said we were "heading for Zimbabwe" -- meaning hyperinflation. Instead we've got the opposite. So it looks like you're just as wrong as the people who you whine about.

If there's one thing you can be absolutely certain about: if you reward stupidity and punish prudence, the economy will move en masse toward stupidity.

What's good for the economy is not necessarily the same thing as what's good for the individual. If everyone saved their money and invested only in treasury bills (or GOLD!!!) then that money couldn't be used to get more people to work. On the other hand, if people spent the money on useless crap, or invested it in risky projects, then you produce a lot more economic activity. So it actually makes sense for the government to 'punish prudence' if that prudence just amounts to hoarding liquidity.

If I were in charge, I'd impose a 2% annual tax on holding securitized gold (or holding stock on companies with gold reserves, I guess). Just to fuck with all the nutbar gold bugs out there. Not that I think the companies who caused the financial crisis should be rewarded.
posted by delmoi at 2:25 PM on March 4, 2009 [1 favorite]


Buying plasma TVs and building factories is not at all the same thing.

Doesn't buying plasma TVs pay for factories -- the factories that built them? The purchase of any kind of good seems to imply an investment or return on investment in the infrastructure that made it and got it to you...

(I do take the point that not all production capacity and infrastructure is equal -- some infrastructure probably has a lot greater return, some products add capacity to the economy while some don't apparently add much, I just don't see how you can disconnect any good from the economics of its production...)
posted by weston at 2:27 PM on March 4, 2009


Doesn't buying plasma TVs pay for factories...

As it stands now, buying plasma TVs in America helps factories in China, but I'm guessing the poster's original statement--buying plasma TVs and building factories is not at all the same thing--was meant as:

buying (plasma TVs in America) and building (plasma TV factories in America) is (are) not...the same thing, i.e. consuming and manufacturing are not the same thing
posted by ornate insect at 2:38 PM on March 4, 2009 [1 favorite]


But you know what? If Citibank goes under, it's not because *I've* made stupid decisions. And yes, it will affect the overall economy, and yes, if I lived somewhere where, say, Citibank employed a lot of people (and they all lost their jobs), sure... that'll screw with my business when they can't afford to buy fancy stuff and take classes any more.

Well I hope your smug satisfaction can keep you warm and safe in the rubble that the American Economy would be if we followed your policy prescriptions.

Seriously. You're missing the point. Of course we should punish the banks and the bankers. I don't think you'll find many people who dispute that. But if we--right now--say "screw banks, they got us into this mess, let them all go under, we don't need them"--we won't have an economy. If the major banks (C,BAC,JPM,WFC make up 60%+ of the banking sector) fail NO ONE will be able to produce or purchase anything after a few weeks or months.

You seem to think that if C goes down a few cities might feel some pain because C employs a lot of people there. You don't get it. Without banks, money does not move around the economy. If money does not move around the economy, people cannot produce and people cannot spend. There's no two ways about that.

So what we have to do is prop up the banks (how we do that is what's up for debate in the "not-tinfoil-hat-wearing-real-world") THEN once they are stabilized we can talk about punishing those who are responsible and attempting to make sure there are safeguards in place going forward.

Not the other way around.
posted by jckll at 2:40 PM on March 4, 2009 [2 favorites]


C,BAC,JPM,WFC make up 60%+ of the banking sector

According to an article I linked to upthread, that figure is closer to 43%, but your point still stands.
posted by ornate insect at 2:43 PM on March 4, 2009


the FDIC's insurance fund is threatened by further bank insolvency

So, one interesting fact seems to be that the FDIC is on the hook for about under 5 trillion in deposits as of 2008.

If that's the case, it's less than several of the estimates regarding the ultimate costs of a public cleanup of the banking system.

Why not simply let the banks fail, then? I understand that credit markets are essential, but you could simply have the federal government step in and perform lending directly at a small premium above market rates until private banking can get back on its feet.

And there'd be no need to seize anybody's business, wipe out anybody's equity (the market will do that job well enough), or put the public on the hook for the rampant irresponsibility of the financial sector. Just filling a gap in the credit market in a profitable manner while private parties can't do it better. And if what I hear is correct, most of this lending is short-term anyway, which means that the state would be doing this without serious long-term liabilities on its balance sheet.

(I realize there may be problems with this idea, and am posting it in no small part because I'm interested in understanding them better...)
posted by weston at 2:51 PM on March 4, 2009 [3 favorites]


According to...
I was going with assets. That's 64%. See here about halfway down (direct link)
But either way, the song remains the same.
posted by jckll at 2:51 PM on March 4, 2009


"t seems pretty clear that the banks are insolvent and not just facing a liquidity crisis. Yet the plan so far is based on the assumption that it's a liquidity crisis. The only way that's true is if housing prices (and the assets based on them) are about to rebound. That seems unlikely."

Isn't that what the stress test is for, to determine if the bank needs to be nationalized? There is a liquidity crisis on top of everything else, so the most urgent need is to get the velocity of money back to close to normal.

From my understanding many banks are reluctant to go through their books, because many would be proven to be insolvent. So, like B of A, they just keep going back and asking for more, but not the whole amount all at once, or it would signal a failed bank, not one in need of assistance.
posted by krinklyfig at 2:55 PM on March 4, 2009


More economic indicators:
Local and national outbreak of grave robbing
Thousands pick up free vegetables on Colo. farm
Pawnshops doing brisk business
In hard times, tent cities rise across the country (Previously on MeFi)
posted by PHINC at 2:58 PM on March 4, 2009


Incidental mention of my pet topic by bittergirl dotcom inspires the following derail:

auto manufacturers are moving operations to Canada from Michigan for reasons that do not include better beer

Hehe, better beer in Canada than Michigan - what a laugh!

OK, return to your econ talk.
posted by thedaniel at 3:02 PM on March 4, 2009 [5 favorites]


"I agree with Malor's comments regarding the whole AIG mess; that's just good money chasing after bad, and I seriously doubt if the hole that company dug itself into can ever be filled"

That's likely true, but if AIG fails it could set off a cascading effect that would cause serious problems, like much worse than what we've so far experienced. It's a gigantic, global company, and it holds assets from many various parties. It's very much a case of too big to fail. Not a good situation to get into, but we're here and we need to make sure it doesn't collapse.
posted by krinklyfig at 3:07 PM on March 4, 2009


krinklyfig--I mostly understand and am sympathetic with that argument when it comes to the big banks, but as AIG is mostly an insurance company that burned itself with speculation in Credit Default Swaps, I'm not entirely swayed. Either way, however, we are not yet getting the full facts on the ongoing AIG bailout.
posted by ornate insect at 3:16 PM on March 4, 2009


The argument is that it sold so much protection (i.e. CDS) to big banks & financial institutions that if it were allowed to go bankrupt and default on its CDS positions, a cascade of banks would be forced to write down billions, thus also becoming insolvent. Essentially the government is using AIG as a conduit through which it can keep banks upright. Most, if not all, of the dollars that the taxpayer is pouring into AIG's front door is going right out it's back door to its counterparties.

I think it's a crime that AIG peddled insurance that it knew full well it could never cover, but it is what it is. And to "punish" AIG by letting it go bankrupt would be cutting off our collective nose to spite our collective face.
posted by jckll at 3:24 PM on March 4, 2009 [1 favorite]


jckll--fair enough, but the banks are already writing down billions, and if they were to be temporarily nationalized (something even James Baker now endorses), the bleeding might be stopped. Keeping the banks healthy makes sense, and re-regulating the banks such that runaway speculation and investment practices are put to a halt, is also necessary. But when the economy finally does recover, what service does AIG provide at that point that makes it so essential? It seems like other insurers can fill that gap. Bailing out the big banks with temporary nationalization and other regulatory measures would seem to be a way of saving the economy. Bailing out AIG just seems to be delaying the inevitable.
posted by ornate insect at 3:35 PM on March 4, 2009


So what we have to do is prop up the banks

Do you include nationalization among the options for propping them up? If so, then I don't disagree with you. If nationalization isn't an option, then propping them up might not work. If the assets really are bad (and not just due to liquidity issues), then no amount of propping up is going to work. Time won't fix the problem.

Isn't that what the stress test is for, to determine if the bank needs to be nationalized? There is a liquidity crisis on top of everything else, so the most urgent need is to get the velocity of money back to close to normal.

They won't say the word nationalization, so it's hard to know what they will do if the banks fail the stress test. I agree that there is a liquidity crisis, but the problem is that if there is also an insolvency crisis, than fixing the liquidity crises isn't going to solve the problem. Focusing on liquidity is just delaying the inevitable, and making it worse in the process.
posted by diogenes at 3:45 PM on March 4, 2009


jckll, who are AIG's counterparties the money will go to?
posted by dydecker at 3:45 PM on March 4, 2009


All I have to say on this topic; and it's all I ever have to say; is I'm glad that people are saving again.

I will say this for a "service economy". I live in China, which is, as you probably know, a manufacturing economy. I just bought a house in Beijing, and for fuck's sake, the way these idiots did the interior just makes me furious. We have no heat because they installed a furnace rated for half the size of this place. Nobody noticed. The phone jacks weren't hooked up. Faucet heads were non-standard, half were used. In a service economy you just don't do that shit. This is after we hired our own team of people to come in and redo the hack job the developer's interior people did. Every day, for 2.5 weeks, we've been calling these people back to fix something basic, which is a huge waste of their time, not to mention ours.

They make their money not through competence or time or labor; they bring in migrant workers fresh off the farm and pay them just enough to keep them from selling the tools for scrap; they make their money by overcharging for cheap, useless shit. The guys we brought in were way better, as professional as they get in this city, but there was so much that had to be redone that they just skimped in places. Before you knock the fundamentals of the American economy, remember that the underlying principle of a service economy is competence before manufacture, manufacturing the right thing and then knowing what to do with it. That's a lot better than an economy based on piles of useless hunks of plastic and metal that don't do what they're supposed to half the time, isn't it? I mean, sure, the American economy has that component, but it's not the underlying engine. And behaviors can be changed a lot faster than plastic and metal can be sorted and recycled, and they have a lot higher resale value.

I'm just sayin'.
posted by saysthis at 3:46 PM on March 4, 2009 [3 favorites]


The argument is that it sold so much protection (i.e. CDS) to big banks & financial institutions that if it were allowed to go bankrupt and default on its CDS positions, a cascade of banks would be forced to write down billions, thus also becoming insolvent

Could you explain how this works exactly? If Goldman Sachs buys $1 billion in CDS insurance against the failure of GE, why would they need to write down anything if the position is wound down?

on preview dydecker: Goldman Sachs and Deutsche Bank are two that I know of. The AIG bailout is a back door for funneling more money to banks.
posted by ryoshu at 3:51 PM on March 4, 2009


btw, interesting news about CDSs:

The Federal Reserve Board approved Intercontinental Exchange Inc. proposal to clear trades in the $27 trillion credit-default swap market.

This should help the market out a bit.
posted by ryoshu at 3:55 PM on March 4, 2009


The argument is that it sold so much protection (i.e. CDS) to big banks & financial institutions that if it were allowed to go bankrupt and default on its CDS positions

How about if it were allowed to go bankrupt and not default on its CDS positions? Creating a retroactive FDIC-type liability for some crooks' unregulated pseudo-insurance doesn't sound like a good idea... but isn't it at least a better idea than paying for both their pseudo-insurance plus whatever they continue to skim off the top?
posted by roystgnr at 4:10 PM on March 4, 2009


Without banks, money does not move around the economy. If money does not move around the economy, people cannot produce and people cannot spend. There's no two ways about that.

We need banking, yes, most definitely. But we do not need these particular horrid banks. There is a difference. Why shouldn't there be OldTimeyValuesCommunityBank or NiceLittleCreditUnion left standing after the crooks are gone? Or even BrandNewBank, which was chartered to take advantage of the hole in the marketplace after the bad banks went boom?

(If your answer is something like, well, OldTimeyValuesCommunityBank won't make a big enough loan or on "good" enough terms the way IndyMac Wachovia Washington Mutual used to, so they won't help wannabe-homeowners or businesses enough, then you have just proved Malor's point: the cure for our debt problem is not and never will be more debt, no matter how much we want it to be.)

So what we have to do is prop up the banks...

This is impossible to do much longer. A number of them are INSOLVENT. Not just "in trouble". Not just "need some help from Uncle Sam and we'll punish the bad guys later". Not just "they have some bad loans, but maybe we'll go in halfsies with private enterprise and magically make money off those assets somehow someday". INSOLVENT. We are throwing money at companies (not just banks) that will never ever give it back to us. This is not like the S&L crisis where you can squeeze some gold out of the crap. But far worse, the money will not help the problem -- just delay it a little. That's the part that people here just don't seem to get, the part that's really obscene: the money will not help! We are talking black holes here.

What's more, we -- er, the government -- are going to need that money very badly in the next five to ten years, to finance everything from make-work jobs to local soup kitchens. We're going to need that money in the next year or so to prop up the FDIC, which is about to run out of money. We're going to need that money to hoard so that when there is a bond market dislocation and we can no longer fund our annual budget deficit, we have something other than bottle caps to use for payment.

Malor is insanely right, as usual. He's the Rorschach of Metafilter, and you're looking for a happy stalwart red and blue Superman to make you feel better. So you don't like that some of us cry doooooom and get dramatic, oh poor you. He's still right. You guys have no fucking idea how bad this could get.

Aw, fuck it, why do I feel like a broken record? I knew there was a reason I mostly quit posting in financial threads here.
posted by Asparagirl at 4:13 PM on March 4, 2009 [4 favorites]


But when the economy finally does recover, what service does AIG provide at that point that makes it so essential? It seems like other insurers can fill that gap.
Absolutely. No argument there. And that's why it's likely that the endgame for AIG will be a breakup and sell-off. It's already being discussed. But the point is right now, AIG, not some other insurer, is in the muck.

Do you include nationalization among the options for propping them up?
I do. The next sentence in my post I believe was that how we should go about propping up the banks is what's up for serious debate. (Nationalization versus capital injection versus government asset relief versus public/private partnership asset relief versus...). Not, as is often the case on Metafilter, whether the banks should be supported at all.

jckll, who are AIG's counterparties the money will go to?
Well it's not really clear (someone correct me if I'm wrong). That's the beauty(!) of OTC derivatives. But there is speculation that GS is a major counterparty, which was why they (Blankfein) appeared to be front and center advocating for the first bailout of AIG. But no one outside of AIG and its counterparties (and Geithner, Bernanke, Summers, Obama, etc) really can tell you who AIG's counterparties are. But it's a near certainty that many, if not most, major financial institutions have/had ties to AIG's financial products division.

Could you explain how this works exactly? If Goldman Sachs buys $1 billion in CDS insurance against the failure of GE, why would they need to write down anything if the position is wound down?
It's complicated, and I'm no expert, but my understanding is that AIG wrote CDS against securities ("toxic assets", natch, among others) issued and owned by major players like GS. And the fact that AIG waved its magic (AAA) wand over those securities made them highly rated and considered low-risk or even risk free. A bank (i.e. GS) is forced to hold little collateral (capital requirements) if its assets are low-risk.

If AIG were to default, its insurance would no longer cover those securities. And they would be downgraded, which would force banks to raise their capital requirements. Guess what? Most banks don't have excess capital sitting around right now. If they did, we wouldn't be in this mess. So if they were forced to put up extra capital in the form of collateral for securities, they would be insolvent. Perhaps "writedown" was the wrong term. Apologies.

Again, someone with some more nuts and bolts finance experience than me please feel free to jump in and add to or correct this. I'm no financial engineer.

posted by jckll at 4:16 PM on March 4, 2009 [1 favorite]


So just how much of this whole mess can be laid down to the failure to draw - or even acknowledge - a distinction between "investment" and "speculation"?
posted by dilettante at 4:19 PM on March 4, 2009


The other day I was reading a center-right forum (I forget exactly which) and someone there was complaining about "marxists giving the banks money". Marxists. Giving banks money. Marxists. Giving banks money.
posted by telstar at 4:19 PM on March 4, 2009 [5 favorites]


That was supposed to be "forced to hold little collateral (in the form of capital requirements)"

Also, some AIG reading:

Goldman had $20B in AIG CDS exposure: Willumstad
Pressure Grows To Reveal AIG's Major CDS Counterparties
Propping Up a House of Cards

The last piece is a nice little summary from Joe Nocera. A good overview.
posted by jckll at 4:21 PM on March 4, 2009 [1 favorite]


Credit Default Swaps, counterparties, and specifically AIG's big mess of Credit Default Swaps, explained in 10 minutes.
posted by dydecker at 4:22 PM on March 4, 2009


Solvent Insurer / Insolvent Insurer
posted by ryoshu at 4:45 PM on March 4, 2009


Malor is insanely right, as usual.

Sometimes you're insane, and sometimes you're insane and right. Sometimes you're just right, but sometimes you're just insane.
posted by oaf at 4:47 PM on March 4, 2009


asparagirl--I agree that the major banks are most probably, if the financial news is any indication, insolvent or nearing it (although it's difficult to know for sure, given how muddled the whole thing is), but they remain, for the time being, psychologically solvent. What that means is that there has not been a panic (yet). There is still a lot of capital in circulation, even if it's not what it was even a year ago.

Although intra-bank lending and things like the commercial paper market does have the potential to dry up due to lack of confidence and transparency, as of yet there has not been a run on the banks (the FDIC's problems notwithstanding).

The irony of course is that credit is not being unfrozen because banks are too scared to loan. Take credit cards as well: Amex, which remains profitable, has nevertheless been offering money to people who close their accounts.

I think a lot of what the Fed is doing is perception management: attempting to look like they are in control of the situation. In other words, trying to prevent panic. It seems to me the next step in this process may well be temporary nationalization of the major banks, as many economists and pundits are now arguing for. We shall see.
posted by ornate insect at 4:56 PM on March 4, 2009


delmoi: As opposed to you, who never makes any actual predictions, just a hearty stew of adjectives and DOOM.

I was unwilling to make very many because I wasn't sure what the Fed would do. The economy is a hyper-complex thing to begin with, and when you have intelligent entities at the center, manipulating it to try to control outcomes, macro predictions in times of crisis become extremely difficult. Until the Fed chose its path, I couldn't tell what was going on -- there was no way to see, ahead of time, all the bullshit new 'rules' they'd pull out of their asses. The game changed almost completely over the last year, and you didn't benefit from those changes.

But, at this point, we're set on an inflationary path, and I'm quite confident you're going to see wicked amounts of the stuff. Other governments are also trying to inflate with their currencies, so you may not see it in exchange rates, but you'll start seeing it in commodity prices soon, probably by the end of the year. As soon we start to bottom out, things will probably take off like a shot, and we'll careen right back into new forms of wealth destruction. You're definitely going to be seeing more bubbles -- all that cash sloshing around is looking for returns.

A couple months ago you said we were "heading for Zimbabwe" -- meaning hyperinflation.

We are, because at every step, the cost of failing to bail out will look too high; we'll ignore the long-term consequences of printing money. That's what we've been doing -- trillions of it so far. This will not stop until the destruction is near-absolute. It's not going to happen overnight. It could take a decade yet. But it's going to happen, unless we well and truly crash before it does.

Instead we've got the opposite.

It's a temporary blip. Remember how I was talking about the tug-of-war between inflation and deflation? What you're seeing is a disinflationary debt collapse. It's not true deflation, just a very, very low inflation rate. But with the Fed juicing the system from the bottom, and the big stimulus from the Congress, I fully expect to start to see the 'results' by the end of this year.

Note that official government stats on inflation are completely bogus; shadowstats.net has much better numbers.

So it looks like you're just as wrong as the people who you whine about.

I've been absolutely consistent in saying that we're headed for economic disaster, that the Fed has been wildly irresponsible, and that we can't keep borrowing and inflating the way we have without profound and severe consequences. I've been saying this for years.... all but shouting it from the rooftops.

This has been pretty fucking disastrous so far, and it hasn't really even gotten started yet. I imagine you'll see a respite for awhile when the inflation starts to take hold, but then we'll wildly overshoot the other direction, and we'll lurch from crisis to crisis to crisis.

Read what Asparagirl is saying: she gets it, one of those who did her homework and really understands. She was one of the people I was specifically thinking about when I said that the armchair economists have been a lot closer than the pros.
posted by Malor at 5:01 PM on March 4, 2009 [3 favorites]


saysthis: that's not a symptom of a service economy, that's just bad manufacturing. We were a manufacturing powerhouse at one time, and you'd never see that shit in an American product. When we built houses, they were right -- and they were right long before we transitioned to the service economy model. Actually, from the size of punch lists these days, I suspect we did a better job BEFORE going to service.

China, by the way, is a great example of an unrestrained capitalism, and while I'm a big fan of letting bad players fail, don't ever mistake that for thinking we shouldn't regulate. If you don't, you get shit exactly like what you're experiencing - substandard products with no useful remedy.
posted by Malor at 5:07 PM on March 4, 2009


Oh, and delmoi, some analysts I read think we might end up in an inflationary depression, where not only does the economy go nowhere, we also destroy the dollar. Likely prognosis for your standard of living: poor.
posted by Malor at 5:09 PM on March 4, 2009


Well, I just checked the mint and they are no longer selling the two-coin 24k gold (half ounce each coin) 8-8-08 Prosperity Set. I just realized last night that that set is 24k irony because 5 weeks after it was released we had the most massive global anti-prosperity event since, like, ever. I guess it's really very appropriate that they sold out of that set already: the Mint's all out of Prosperity!
posted by jamstigator at 5:36 PM on March 4, 2009


financialstability.gov: this site is coming soon
posted by ornate insect at 6:04 PM on March 4, 2009


Stimulus Logo: Branding the U.S. Recovery
posted by kliuless at 6:09 PM on March 4, 2009


It sounds like what we need is some robots. Robots will solve this crisis!

they sure will (at the movies ;)
posted by kliuless at 6:14 PM on March 4, 2009


It's not that the armchair economists have been a lot closer than the pros—there are quite a few pros who have been able to tell us all along what we can do. The problem is that those pros aren't in charge.
posted by oaf at 7:14 PM on March 4, 2009 [2 favorites]


Why shouldn't there be OldTimeyValuesCommunityBank or NiceLittleCreditUnion left standing after the crooks are gone? Or even BrandNewBank, which was chartered to take advantage of the hole in the marketplace after the bad banks went boom?

i was actually just thinking that iBank (or walbank for that matter) wasn't such a bad idea, viz. taking advantage of consumer deleveraging along a 'smarter, better, cheaper'* theme, which could, say, end up "disintermediating the entire mortgage broker business" [or, essentially, probably just putting an user-friendly (inter)face on fannie & freddie...]

---
*which is the only way, i think, this is ever going to end well; oh and btw: "He cannot abandon the faith, even in the face of a market failure of these historical proportions."

re: 'none of the above'
I do want to come back to one idea. Early on, I described a Winterspeak/Moldbug synthesis in which the government comes off as incredibly powerful. Government money is what everybody wants because everybody wants it. The government destroys money through taxation and borrowing, and creates it by spending and lending, and can do so at will. A very large fraction of "private" lending is in the influence of government, by how it organizes the pseudoprivate banking system as well as via direct market interventions. With so much power, what are the government's constraints? Why can't it get an outcome that it wants, presumably a good economy with a bit of corruption on the side? Let's put aside the institutional stuff. (For example, governments usually have to pretend private banks are private; their ability to direct the loans they guarantee is limited; in fact, a bankers-control-government-expenditure story is historically more compelling than government-controls-bank-expenditure). Right now, the government can pretty much do what it wants with the banking system, can expand the quantity of risk-free claims to meet demand at will, can lend to whomever it pleases. Why can't it fix the country?

Cassandra had a brilliant post not long ago called "an idea crunch". Read it if you haven't. Ultimately, a financial system has to find productive projects for the private parties to invest in. The government can invest directly, can delegate investment to the best and the brightest, can saturate the public's demand for money until private parties try to find other means of storing wealth. But it's what real human beings do with real resources that ultimately matters. Our financial system didn't fail because it was overlevered. It failed because it was uncreative: It could not conjure up worthwhile things to do with the capital it was asked to invest, and instead of owning up to that, it pretended that poor projects were good. Financial markets are ultimately information systems. The only way out of this is to discover worthwhile things to do, or more importantly, to develop better means of generating a diverse menu of worthwhile things to do going forward. Right now, the government is being asked to do what the semi-private financial system could not: generate a positive real return on trillions of dollars of undifferentiated future claims. The stakes are very high — that Moldbugian monetary Nash equilibrium can be a bitch. Money is the bubble that need not pop, but that's no guarantee that it won't. Anything that's desirable only because everybody desires it is just a single major failure away from being yesterday's darling. If unthinkable banking system failures can occur, so can unthinkable failures of the monetary system.
like i was thinking this was a great comment on the 'meaning' of fiat currency: "I cannot get my head around why the Fed can, or would 'accumulate' surpluses. It’s like an airline 'accumulating' it's own frequent flier miles."

fiat currencies are like _tickets_ for a (hopefully enjoyable and not too risky :) ride! if the goal is to fill the planes and keep them flying, the airlines can always achieve that goal by being more generous with their FFM reward vouchers, as long as they have empty planes and idle crew; similarly, as long as there's 'capacity' (or an output gap) in our gov't run theme park, they can and will just keep on handing out tickets...

which would follow from the 'logic of central banking'
For more than 170 years, it has been accepted doctrine that markets are not to be trusted when there is a liquidity squeeze. When the prices of even safe assets fall and interest rates climb to sky-high levels because traders and financiers collectively want more liquid assets than currently exist, it is simply not safe to let the market sort things out.

At such a time, central banks must step in and set the price of liquidity at a reasonable level – make it a centrally-planned and administered price – rather than let it swing free in response to private-sector supply and demand. This is the doctrine of “lender-of-last-resort.”

For more than half that time – say, 85 years – it has been accepted doctrine that markets are also not to be trusted even in normal times, lest doing so lead to a liquidity squeeze or to an inflationary bubble. So, central banks must set the price of liquidity in the market day in and day out...

But now it appears that, despite all this, we still have not had enough central planning in finance. For, even as the central banking authority administered the price of liquidity, the price of risk was left to the tender mercies of the market. And it is the price of risk that is the source of our current distress...

The US Federal Reserve, the US Treasury, the European Central Bank, the Bank of England, and other public financial regulatory entities are being pushed toward a further expansion of their roles. The Treasury and Federal Reserve are adding preferred stock to the balance sheets of the US mortgage giants Fannie Mae and FHLBC and the insurance giant AIG in the hope of shoring up their capital cushions and lowering their borrowing costs so that they can buy more mortgages.

The Treasury has asked for authority to purchase $700 billion of mortgages to get them off of the private sector's books. Expanding the demand and reducing the supply of these risky assets is a way of manipulating their price. The Fed and the Treasury are walking down a road that ends with making the price of risk in financial markets, along with the price of liquidity, an administered price.

This was how central banking got started in the first place: letting the market and the market alone determine the price of liquidity was judged too costly for the businessmen who voted and the workers who could overthrow governments. Now it looks as though letting the market alone determine the price of risk is similarly being judged too costly for today’s voters and campaign contributors to bear.
viz. Anti-Trust America
Why, then, did the country’s GDP drop by 6.2 percent in the fourth quarter of 2008? While it’s true, as the president says, that America’s stock of physical and human capital remains undiminished, something important was indeed destroyed last year: trust...

For financial markets to play their vital role once again, we must restore people’s faith in them. The most effective way to do so is to eradicate the perception that the government is run in Wall Street’s interest. The ethics rules issued by President Obama are a good but insufficient first step. More important is to redesign the bank rescue plan so that it clearly acts in the interest of the country (having well-capitalized banks), not the interest of Wall Street (having taxpayers bail out current investors). Not only is this feasible, it is also fair. And fair rules of the game are what investors need to regain their trust.
cf. When Does Faith in Financial Engineering Wane? & The Biggest Story of the Week
posted by kliuless at 7:25 PM on March 4, 2009 [2 favorites]


This is impossible to do much longer. A number of them are INSOLVENT. Not just "in trouble". Not just "need some help from Uncle Sam and we'll punish the bad guys later". Not just "they have some bad loans, but maybe we'll go in halfsies with private enterprise and magically make money off those assets somehow someday"....

What's more, we -- er, the government -- are going to need that money very badly in the next five to ten years, to finance everything from make-work jobs to local soup kitchens.


Wait a second, a few things are getting muddled here. It doesn't actually matter if the banks are insolvent if nationalization is an option. The government can take over the banks, wipe out the shareholders (oh well) and clean them up directly. The problems with doing this are more political than economic. Many of the shareholders of these banks are middle eastern oil government and Chinese govt funds that made investments in the banks in 2007 when things looked bad. If you wipe out shareholders, you wipe them out. And we need them to buy govt bonds, so we have to keep them happy.

The second point is different. Remember, the Fed has a nearly infinite capacity to create money. The reason the Fed is reluctant to take advantage of this is because it is easy to add liquidity, but it is impossible to extract it. Hence the inflation spectre.

But deflation is a very real thing right now - all those store closings are deflationary. Commodity prices have collapsed. That's deflation. The Fed and Treasury's struggle is balance inflationary moves against deflationary reality, and the balancing has to be done in real time. People who always talk about inflation have to consider the massive contraction that is largely invisible to everyone but the Fed (and Treasury I guess now that they own pieces of banks).

What's good for the economy is not necessarily the same thing as what's good for the individual. If everyone saved their money and invested only in treasury bills (or GOLD!!!) then that money couldn't be used to get more people to work. On the other hand, if people spent the money on useless crap, or invested it in risky projects, then you produce a lot more economic activity. So it actually makes sense for the government to 'punish prudence' if that prudence just amounts to hoarding liquidity.

delmoi's point here needs to be emphasized. This is basically the "paradox of thrift" which is typically resolved by the argument that not everyone is thrifty at the same time. Except now they are, all of a sudden. The government discourages the saving by jamming rates down as close to zero as they can, and trying to dispel the notion that non-zero risk is bad.

This is problem that people who still have money have to deal with, and GOLD!!! as delmoi puts it, is not an answer. Gold is the world's short-term money parking lot. But it is not a long term investment. (and before anyone shows me S&P vs gold charts, please make sure you factor dividends into that S&P chart and don't just link to yahoo! finance.)

US stocks right now aren't an answer, Treasuries have been a pretty good play for the last 4-5 months, and China's stock market has been on a tear in 2009.
posted by Pastabagel at 8:52 PM on March 4, 2009


Here's my response to Malor and Asaparagirl: You guys are probably right in your gloom and doom.

But what's your take home point? I mean, are you saying "go rent Mad Max Beyond Thunderdome, freeze-frame it and take copious notes"? Or "ask Grandma about planting that backyard Victory Garden"? Or is it "remember that documentary about inter-generational debt-slavery in India"? Or just, "forget restaurants and learn to love three-bean salads and tuna casseroles"?

Should I be stocking up on guns, or buggy whips, or going to nursing school, or learning to navigate by the stars? Tightening my belt a few notches or sizing up my neighbors for my stewpot?

I'm not trying to give you guys a hard time, but it's as trivially easy to say 'things will get worse" as it is to say "things will get worse before they get better", and both are true more often or not. I think what's frustrating me (and others who are reading your comments) is that while it's clear you're predicting we will fall off a cliff, no one seems too clear on how far we'll fall or where we'll land.

Now I know that's hard to say, and that anyone sure of the answer would be making himself rich (or would more likely be a fool). And I value your comments, I do, and I don't wish to discourage them or seem like I'm turning on the messenger for delivering an unwelcome truth. And maybe I'm just not understanding you, or maybe there is no answer.

But what I am saying is, it's traditional that a Jeremiah not just tell us our doom, but also suggest a remedy.

"Your way of life is ending. Your standard of living in the future is going to be much impaired -- [...] If [the bailout] works, you lose, and if it doesn't work, you lose."

So, look, are you saying that I'm dead in a food riot in five years, in a DP camp in ten, in a tenement in twenty, or that I live out my life in small house with internet service but no plasma TV and a car in perpetual need of repair?
posted by orthogonality at 9:31 PM on March 4, 2009 [3 favorites]


Is General Electric next up for a bailout?

Growing fears that G.E. may lose their triple A credit rating are ringing some alarm bells, but G.E. denies the rumors.
posted by ornate insect at 9:37 PM on March 4, 2009


ornate insect, The Market Ticker has a post about the GE situation. Denninger has been more right than wrong about this sort of stuff.
posted by ryoshu at 10:36 PM on March 4, 2009


Ya know...in the nigh onto a decade that I've been on this site, I don't think Asaparagirl and I have ever agreed on anything...in fact we've been pretty diametrically opposed to most things, but on the economic situation, I'm in agreement with her and Malor.

To answer your question Ortho, I'd be willing to say that were I prognosticating by staring down the trouser legs of possibility, that food riots are possible. How far away are you from where your food is produced? How much of it requires a working national infrastructure? Because I have my doubts that the infrastructure is going to be standing at the end of this. At least for folks like us. People who made 250 million dollars last year...pfffft, they don't give a rat's ass about infrastructure. They"ll take the Diamond Age and be thrilled about it.

I've always had a garden in the back yard, a small one that is mostly so Boy can try to grow things. This year, I'm actually planting a full victory level garden. I'm getting together with other cooks and canners and growers and ranchers, and we'll trade stuff back and forth. Being a soapmaker means I can trade all kinds of goodies for all kinds of other goodies, like homemade peach preserves when the crop comes in a couple of months.

Why? Because despite having advanced degrees and decades of experience, neither myself nor my husband are having any luck finding a job in our area, where thousands of workers have been laid off in the last year, and employers can demand MBAs for 35k a year jobs....and they get 200 resumes.

Because if the banks fail, and FDIC fails, we're utterly fucked if I can't get to my savings accounts.

Because my house is worth less 30% less than I paid for it 8 years ago...4 years *before* the bubble in this area, which means we can't move, because we can't sell. There are 9 houses for sale on my block, 3 of which have been on the market for more than a year. The foreclosed ones have just been sitting empty. Nothing is selling.

Because some of the stocks in my portfolio are probably going to be delisted they've tanked so much.

Because my IRA is worth 1/2 what I've put into it...and the market is no where near a recovery.

Because my 401k statements are only useful if I were burning them for warmth.

Because nobody in my neighborhood will have any idea what to do when their credit cards stop working.

Because I've been poor and hungry, and it fucking sucks.

So yeah, while I hate to sound like a tin-foil hatter, I do think that people ignore the situation at their own peril.

Then again, I've just opened my portfolio report, so perhaps I'm just in shock.
posted by dejah420 at 11:14 PM on March 4, 2009 [6 favorites]


Our financial system didn't fail because it was overlevered. It failed because it was uncreative

That's just bullshit. Overleverage was the precise reason the financial system failed, to be more specific being overleveraged on fundamentally fraudulent assets. Yes the debt fuled housing bubble was probably leading us to a recession anyway, but normal recessions don't cause the destruction of the financial sector. The reason that happened and all the subsequent fall out is because everyone in finance was lying to everyone else about the value of the assets they were holding. It pisses me off that this hasn't been spelled out more clearly in public.

Wait a second, a few things are getting muddled here. It doesn't actually matter if the banks are insolvent if nationalization is an option. The government can take over the banks, wipe out the shareholders (oh well) and clean them up directly. The problems with doing this are more political than economic. Many of the shareholders of these banks are middle eastern oil government and Chinese govt funds that made investments in the banks in 2007 when things looked bad. If you wipe out shareholders, you wipe them out. And we need them to buy govt bonds, so we have to keep them happy.

This is what is worrying me right now. Why isn't the Obama administration going for nationalization. At first I though it was because Geitner and Summers (and Obama be extension) were to beholden to banking interests, but now people far more under the sway of free market fundamentalism from James Baker to Alan Greenspan! have come out in favor of nationalization, so what is holding the Obama administration back. Perhaps the Chinese are threatening to start selling off Tbills. Since no one outside the banks or the administration really knows the details, it really could be anything, but I fear it is very very bad.
posted by afu at 12:05 AM on March 5, 2009 [2 favorites]


what's your take home point?

That's a really good question. There are things people can be doing right now to try to weather the shit that's coming. I'm sorry we doom-and-gloomers generally don't bring it up more often, but to even get people to the point where the lightbulb goes on for them and they understand, finally, that even the best-intentioned government intervention cannot "fix it!" (to use the SNL catchphrase) is such a frickin' effort...so we concentrate maybe too much on butting heads, and forget to mention there are indeed many things people can do right now to mitigate the fallout.

(For the record, I have given some advice before on MeFi: see, back when saying things like "spread your money out over multiple banks" was considered wacky; and here, although the Canadian dollar took a hit, it wouldn't have been as bad as last fall's market collapse hit, and I guess this could have been considered good stock picking [er, stock shorting] advice... But generally, I don't give advice and don't really want to; I only mention things that I personally am going to do because they happen to work for me and my particular financial situation and my shitty risk tolerance and my Chicken Little sensibility, so I feel I have no right to give other people advice. One size definitely does not fit all, caveat emptor, and all that.)

So, "go rent Mad Max Beyond Thunderdome, freeze-frame it and take copious notes"? Not unless you want to examine how truly fabulous and kick-ass Tina Turner looked. But do watch this twelve-part documentary on YouTube (subtitled in English) about what happened to Argentina in 2001, the causes and the effects it had on their politics and their society. Read blogs from people who lived through 2001 and who write about how it changed their world. Understand that something similar can happen here too.

"ask Grandma about planting that backyard Victory Garden"? YES! I don't know if you've ever checked my profile or certain AskMeFi answers I give, but I garden a lot, as a hobby, and have for years. Specifically, I grow food, veggies and fruits and berries and herbs and such. I think people should absolutely learn how to grow their own food, even just a few types. I'm not saying that you have to become a subsistence level farmer, but you need to think about what would happen if food prices skyrocketed, or if there were a short-term supply chain breakdown, or if you couldn't leave your house for a few weeks, or things like that. And seriously, this isn't that hard or expensive a skill to learn. If you're thinking of planting a tree at your house anyway, why not plant an apple tree? (Or two...actually, you'll want two different kinds for better pollenization.) If you want to plant a vine to cover an ugly chain link fence, why not plant climbing string beans or Thai long beans or cucumbers on it, instead of ivy? And when you're stuck with 40 ripe tomatoes in August and can't eat them all before they go bad, why not learn how to can the tomato sauce and save it (and other foods, homegrown or not) for all year long? Re-read the story of the Ant and the Grasshopper (or watch the not-coincidentally-Depression-Era Disney retelling of it); supplement it with a subscription to Countryside Magazine and Organic Gardening. It's March already and Spring is officially coming in less than three weeks; better order those seeds soon...

Here, I actually have an old 1940's Victory Garden government pamphlet up at my Flickr account (which I managed to procure through an AskMefi question a few years back). It's a little outdated, especially with the old school insecticide love, but still relevant.

"forget restaurants and learn to love three-bean salads and tuna casseroles"? Yes, this one too. Thrift is in, thrift is going to help us all get through this, and that includes thrift in cooking. People need to learn how to take very unprocessed staple foods and learn how to cook them. I am deficient in this area, myself, but I'm going to work on it.

"Should I be stocking up on guns" I understand that this is a really politically contentious thing to say, but I'm serious when I say yes. I asked my husband for an M1 Carbine for a Channukah present last year; he was happy to oblige. We already own a few other guns and know how to use them. (I don't have my M1 yet; it's still out being refurbished, since it's a WWII era model -- and it's taking a long time because every gun manufacturer or restorer is totally backlogged with orders and has been for months. Gun stores have been cleaned out of certain models since last fall, and I hear even common kinds of ammo are getting very scarce in some places. And I live in Los Angeles, not exactly a red state area. Maybe it's a gun bubble? Ha.) But I do expect there to be a certain level of rising societal breakdown and anger and crime in the coming years. A desperate, hungry person -- especially one who feels like he has been ripped off or let down by the government -- will do desperate things. We will have a lot more desperate, hungry people soon...and some of them will be formerly middle-class folks who cannot find work and who are not going to take kindly to their new spot on the totem pole. Again, think Argentina.

"or sizing up my neighbors for my stewpot?" NO! Quite the opposite; we all must create tight knit social or familial groups to weather this thing. Neighbors are just a slightly bigger extension of that. Here's a hypothetical: suppose one day later this year there is a bank holiday, and no one is allowed to withdraw money from any US bank for a few weeks while some latest crisis involving their books is sorted out. Do you really think there wouldn't be panic, even riots after a few days, if ATM cards just stop working? Or, what if a state's budget goes broke and cannot be bailed out and state welfare checks or student loan checks just do not come one month? (This actually almost happened here in California just last month.) Do you think people are just gonna, I don't know, write a letter to the editor of the local paper? Or would a tight-knit group of neighbors be helpful to keep an eye on their area and their people, for protection and help and aid? Think about what happened after Hurricane Katrina, about who managed to band together and help each other, versus who became victims for bad people or bad circumstances.

So I guess the other thing I could say is use your imagination a little. People seem incapable of understanding that yes, bad things can happen here, right in the most prosperous country in the history of the world. Yes, home prices can fall, not just rise, no matter what your magic S&P model for valuation says. Yes, your pension, the one you worked for at your job for all those years, can vanish and leave you a broke 65-year-old. Yes, some companies are going to go bankrupt this year whose names would blow your mind -- I mean even some components of the Dow 30. Yes, the early 21st Century can mean a New Depression, not flying cars. Yes, the laws of mathematics and compounding interest will reign supreme regardless of whether we have an extraordinarily likeable and smart president. Yes, the world is still unusual and surprising and there are fat tails and odd bits of chaos everywhere. Sometimes this works out nicely, like love and serendipity. Sometimes it doesn't, and very bad things happen.

So, to sum up: I think we're headed for an Argentina-like crisis, but on a worldwide scale. Generally, people with access to raw materials and food and decently friendly cohesive neighbors/social groups and the ability to protect themselves and the ability to suddenly become very thrifty will fare better than people who do not. The exact same thing goes for countries, but on a more macro scale.

I could be totally, totally wrong about this. But I submit my long finance-related MeFi posting history (both comments and FPP's) for the past two years to say that I think I've been at least mostly on track. I also submit the fact that I made money in the market last year, and I don't mean just interest and dividends.

On preview: I just saw Dejah's comment, and think it's spot-on. When people from very different political orientations, as we are, all have our spidey-senses start tingling -- no, screaming -- at the same time, then that's usually a bad sign.

OMG, now people on Metafilter will think I've totally gone insane. I shouldn't post this.
posted by Asparagirl at 12:19 AM on March 5, 2009 [11 favorites]


food riots are possible
I have my doubts that the infrastructure is going to be standing at the end of this
I'm getting together with other cooks and canners and growers and ranchers, and we'll trade stuff back and forth
you need to think about what would happen if food prices skyrocketed, or if there were a short-term supply chain breakdown, or if you couldn't leave your house for a few weeks
I asked my husband for an M1 Carbine for a Channukah present last year
I do expect there to be a certain level of rising societal breakdown and anger and crime in the coming years
We will have a lot more desperate, hungry people soon
[suppose] no one is allowed to withdraw money from any US bank for a few weeks while some latest crisis involving their books is sorted out. Do you really think there wouldn't be panic, even riots
what if a state's budget goes broke and cannot be bailed out and state welfare checks or student loan checks just do not come one month
think we're headed for an Argentina-like crisis, but on a worldwide scale. Generally, people with access to raw materials and food and decently friendly cohesive neighbors/social groups and the ability to protect themselves and the ability to suddenly become very thrifty will fare better than people who do not


The loonies really come out of the woodwork for these threads huh.
posted by jckll at 6:21 AM on March 5, 2009


My prediction? Dow 36,000 baby! Wooo! Moar CNBC!!! Yarrr!
posted by ryoshu at 6:33 AM on March 5, 2009


suppose one day later this year there is a bank holiday, and no one is allowed to withdraw money from any US bank for a few weeks while some latest crisis involving their books is sorted out

How likely is this—really—to happen to all U.S. financial institutions simultaneously? Not that I'm saying it's a bad idea to have access to money in multiple financial institutions…
posted by oaf at 7:47 AM on March 5, 2009


I think a lot of what the Fed is doing is perception management: attempting to look like they are in control of the situation. In other words, trying to prevent panic

I agree fully with this point. It's easy to say that the Feds should do this and that. The lots of us make the mistake of thinking of solving this issue on how we as rational individuals would act. But the system is not a system of rational individuals. It's a mob mentality.

In the 36 Stratagems, we have the old Chinese proverb of "if all else fails, retreat". But that's the key point - ALL. In military history, executing a retreat is one of the hardest things to do because if not done with the greatest care and skill, a retreat very easily becomes a rout.

Is it necessary? Maybe. I have no idea. But it is much much harder to do than what it looks like.

As for the doom and gloom sayers - I fully appreciate the scenario you paint. It is certainly highly possible.
But there is nothing to fear.
I am not saying everything is going to be all rosy. That everything is going to return to its place as we've always known it.
Yes there will be change. We will be battered. And bloodied. And we will fall down.
But you know what? We will get up. We will dust ourselves off. And we will emerge the stronger and better than we are right now.

Naive and cliche - yes, I know. I'll leave now with Winston Churchill's quote: "If you're going through hell, keep going."
posted by 7life at 8:56 AM on March 5, 2009 [1 favorite]


I think a lot of what the Fed is doing is perception management: attempting to look like they are in control of the situation.

I still get a little lightheaded everytime I realize that AIG still has its AAA rating...
posted by butterstick at 9:51 AM on March 5, 2009


I still get a little lightheaded everytime I realize that AIG still has its AAA rating...

I'm rather lightheaded because I just found out that the former head of AIG, Maurice Greenberg, is extremely well connected in China.

Not that this necessarily means anything, but if the PRC wanted to get involved in some exotic financial investments, a with the guanxi of Greenberg is exactly who they would turn to.

We really really need to know who the counter parties are to the AIG CDSs.
posted by afu at 10:28 AM on March 5, 2009 [1 favorite]


Understaffed Geithner can't keep up, critics say
posted by homunculus at 11:32 AM on March 5, 2009


Thanks for that hom, found this chilling:

As Geithner strives to address the financial crisis, advance Obama's agenda and work with foreign leaders to stave off economic disaster, he's assembled a 50-person "shadow cabinet" of would-be appointees. Those people have received hall passes and can advise Geithner, but they lack any authority.

I really hope we're in for some serious announcement this Friday. I think Geithner has been a catastrophe. Just put someone disposable in there and let them deliver the hard news we need to hear. By the time the bankers crucify the pawn, we can have someone sane tee'd up.
posted by butterstick at 12:22 PM on March 5, 2009 [1 favorite]


"How likely is [a bank holiday]—really—to happen to all U.S. financial institutions simultaneously?"

It happened 76 years ago today, in fact -- FDR closed all the banks and the markets for about a week. Of course, by that time, many of the banks had already gone under.

And it was within three hours of happening last October (2008), in the UK. I would wager that event would have shut the US banks too a day later, since we're so interconnected these days.

"I'm rather lightheaded because I just found out that the former head of AIG, Maurice Greenberg, is extremely well connected in China."

Then you better sit down, afu, before you read this or this or this...did you know AIG was founded in China? And that they insure a good number of Chinese pensions?

Also, Geithner sucks. Such a tool. Just had to say that.
posted by Asparagirl at 2:00 PM on March 5, 2009


FDR closed all the banks and the markets for about a week.

And then, two months later, the FDIC was created.
posted by oaf at 2:31 PM on March 5, 2009


three months
posted by oaf at 2:31 PM on March 5, 2009


orthogonality: So, look, are you saying that I'm dead in a food riot in five years, in a DP camp in ten, in a tenement in twenty, or that I live out my life in small house with internet service but no plasma TV and a car in perpetual need of repair?

God, I wish I knew.

This much I'm sure about: the most important thing is to try to stop the bailouts. We have to stop going into debt. Debt is killing us. Debt is the fundamental problem, and why everything is collapsing. Trying to treat the debt problem with more debt is just making it worse. Do everything you can to stop them, because every dollar we transfer to the banks is yet more tax burden on our children.

On a personal level, Asparagirl's got some great suggestions. Mostly, just cut your standard of living down, way down, and use the money you're saving to store some cash, some food, and some commodities. Don't store too much wealth in any one thing. You could even nibble a little at the stock market, although that will probably go further down before it bottoms. Keep your monthly obligations low, and assume in general that your income will go down, your tax rates will go up, and everything will get very expensive. Inflation, assuming we do indeed go down that path, is the debtor's friend, so taking out a loan for the smallest house you can squeeze into might not be a bad idea. This is somewhat risky, though; you could end up stuck there for a very long time. And if I'm wrong about the inflation, if we do have a deflationary debt collapse after all, that loan could be a real albatross for you.

At $300/oz, gold was an obvious buy. Even at $500 it wasn't too bad. I'm nervous about suggesting it now. The risk in buying something is related to the price you pay for it, and while we're in historically unprecedented times, it's also near an all-time high in dollar terms, which is generally a very bad time to buy anything. You could buy a little bit, maybe. But the potential upside is much smaller than it used to be, and the downside is much larger. It's far from a slam-dunk, at least over the short term.

Looking for a job in some kind of manufacturing probably wouldn't be a bad idea, either. We'll need lots more manufacturing to get healthy again. Sewer plant work is also extremely stable, because even if people double or triple up on housing, they still crap. Working as a trash hauler may not be as stable as it has historically been, because the rampant consumerism is going to go away, so there will be less trash.

You can even do fairly well in those areas, if you look carefully.

The super ultra-luxury high-end stuff may continue to do well too. The mega-rich are still going to be be mega-rich; they may get richer from all of this. So companies that cater to the hyper-wealthy may come through the mess just fine.

Mostly, I think it's the middle class that's going to go away. If you get your life structured properly now, you may be able to keep more of what you like in life. Small house with Internet and a bad car might be quite achievable, if you're smart and careful, and if you have a fair amount of assets already.

Unfortunately, it's rather late to be getting ready now -- really, you should have been saving like crazy for the last several years. If you're starting from a position of little savings, there probably isn't much you can do at this point. Manually gearing down your lifestyle before it's forced on you is a good first step.

I would be FAR less worried if we weren't bailing out; if we were letting bad players fail, I'd tell you to focus on surviving the next three or four years and you'd be okay after that, possibly even prosperous. But with all the money we're flushing down the rathole, trying to make the system resume the stupid stuff it was doing before, we could have a grindingly awful economy for decades.
posted by Malor at 6:34 PM on March 5, 2009 [5 favorites]


"This much I'm sure about: the most important thing is to try to stop the bailouts. We have to stop going into debt. Debt is killing us. Debt is the fundamental problem, and why everything is collapsing. Trying to treat the debt problem with more debt is just making it worse. Do everything you can to stop them, because every dollar we transfer to the banks is yet more tax burden on our children. "

Thanks for the answer, Malor. OK, you seem to be saying that you don't see the fundamentals changing: there'll be rich people and poor people and trash haulers and sewer workers, just far fewer of the middle class.

Now, my question is: is your opposition to the bailouts a philosophical/ideological one, or a pragmatic one? (Your comment suggests pragmatic, but I'd like to hear more of your reasoning.)
posted by orthogonality at 1:00 AM on March 6, 2009


Malor and Asparagirl, thank you so much for your in-depth comments. It's good to know there's people out there who are really paying attention and thinking of actual cause-and-effects, as opposed to wishful or ideological thinking about the economy.

Basically it seems people have their heads in the clouds about where the economy is headed. I almost envy them. I feel like I have to rethink my future and my dreams from a much less optimistic perspective, but I'd rather do that than be blindsided.

People will laugh at your predictions, but I suppose they think bare survival circumstances are impossible now. I don't get why they find the prospect ridiculous. Why not? It happened before during the Depression, and numerous times through out US/world history. This is nothing new.
posted by The ____ of Justice at 3:07 AM on March 6, 2009


I suppose they think bare survival circumstances are impossible now. I don't get why they find the prospect ridiculous. Why not? It happened before during the Depression, and numerous times through out US/world history. This is nothing new.

-how is it "not new"

-a few examples of historical note to support numerous times through out US/world history.

-suppose they think bare survival circumstances are impossible now Does supposition really support your claim, are not companies and people in general adapting or trying too?
posted by clavdivs at 7:36 AM on March 6, 2009


Now, my question is: is your opposition to the bailouts a philosophical/ideological one, or a pragmatic one?

Um, well, kind of a combination of both, I suppose. The biggest reason is simply that they won't work. A secondary reason is because they're punishing the people who were prudent, and rewarding those who were reckless, which sends a very powerful signal into the economy to encourage more stupidity, so it helps ensure we'll have these same problems again.

If the government will bail you out once you're big enough, you have these goals as a company: A) get really big, B) take really stupid risks, C) profit hugely over the short term, and then D) have Uncle Sam ride to your rescue when it all blows up. Once you're big enough, you don't have to be prudent anymore -- you loot and run, and leave the taxpayers to clean up the mess.

My strongest opposition, though, is simply that we can't get prosperous again until we stop wasting wealth on stupid stuff. We have an enormous debt load, and we have to pay it down. Our entire economy, over the last decade or so, structured itself around the issuance of ever-greater debt obligations. The financial system requires new annual debt issuance significantly in excess of what the underlying economy can actually pay off. We have to go through a huge contraction of both debt and living standard expectations. We have to find the firm ground that we can build from.

A total collapse isn't really in anyone's interest: focusing on keeping people employed at something and not starving should be a major priority. But we have to let the bad players fail, outright, en masse. There are many good banks and local credit unions, and the "iTulip bailout plan" struck me as sensible, after thinking about it awhile -- get lots of Fed funds at low interest into their hands. This is still debt, and it's suboptimal, but if we go absolutely cold turkey we'll probably die.

Finally, and this is the part that people get all upset about, we need to get money onto a commodity standard of some kind. All money right now is debt; there's nothing stopping it from being issued in unlimited quantities, and it's precisely this "feature" that got us in trouble, because the Fed could paper over economic problems. Yes, you have more recessions on a commodity money standard, but they're there because recessions are critically important to economic health. They're the exercise that keeps an economy fit. With no serious recessions for the last twenty-five or so years, we've built up a phenomenal amount of adjustment that has to, now, be done in a very short period of time. By not correcting our course 16 years ago, 12 years ago, and about 8 years ago, we kept doing stupid stuff, and now the whole freaking system has gone off the rails. It did this because the Fed stopped the pain of economic malaise by, over and over again, injecting liquidity. With no economic pain, ever, people stopped fearing debt, and used it in mass quantities to buy consumption items. Debt for wealth-generating things is often sensible; debt for consumption items is almost always stupid.

But we forgot that, a whole generation didn't really learn it, because with no pain, there's no opportunity to learn how much debt can hurt. Without pain, there was no reason to stop doing what we were doing. We were prevented from adjusting to reality.

No one person or entity should ever have enough power to cause this kind of destruction, and that's what Alan Greenspan has done. I didn't start out as a believer in commodity money (and I say it that way because I don't think gold is magic, and I'd be perfectly happy with anything that was real), but after watching the ever-more-egregious machinations of the Fed over the last decade, I've become convinced that it's critically important. Everything else in our system is about checks and balances; we need a check and balance on the banks and politicians, and commodity money, tightly watched, will do that.

Yes, we could potentially have had a small version of this crash -- we had the 1929 crash on a putative gold standard, although it was being abused by the Fed of that time, just as Greenspan abused it on his watch -- but it would have ended much sooner, been much smaller, and we'd have fairly easily weathered it, instead of facing this tsunami of destruction. The Fed should not have had the economic capacity to bail us out in 2000, no matter how bad it wanted to, because that bailout led directly to this incredible mess. And, likewise, Congress should simply not have the ability to issue unlimited new debt obligations, payable by all of us, to try to preserve the system intact. No matter how much they want to do this, they should be prevented by the simple fiscal reality that we don't have any money. But, because we can pretend we do, they're going to bail out, and those bailouts will do the same thing that all the other, less visible ones have: prevent true adjustment, and sow the seeds of an even more profound disaster.

Mr. Market will have his way; the more we meddle, we the more we piss him off. Regulation is critically important to capitalism, but central management, trying to control outcomes, is anathema to wealth generation. Free markets don't always go up. Sometimes, even often, they go down. Companies go out of business. This is called 'creative destruction', and it's the absolute linchpin of capitalism.

Markets have to be free to fail or they don't work. Privatizing profit and socializing risk combines all the worst features of both systems. We get all the pain of both, but the benefits of neither.
posted by Malor at 10:39 AM on March 6, 2009 [1 favorite]


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