The coming financial crisis

[rjs246]

Obama's budget proposal.

Buried at the bottom despite its obvious importance:

If Congress passed the budget, the deficit in 2011 would reach 8.3% of the U.S. gross domestic product -- down from a high this year of 10.6%. By 2014, it would drop to 3.9%.

The long-term goal is for the deficit to reach 3% of GDP, which many economists consider sustainable.

Progress.

Broken down further...

[Tomahawk]

good signs, but definitely not gonna see true improvement till 2011

Another good sign is Catepillar has been re-hiring engineers and my old company called me back to start work next week. Also, word on the street says the housing market is slowly starting to turn around. I agree we won't see true improvement untill 2011 at the earliest, but it's nice to see we're headed in the right direction

[Sgt PSN]

getting us pointed in the right direction is really about all that i think we can reasonably expect the gov't to do.  it's still up to consumers to spend their money wisely and also save wisely, businesses to provide a good product/service and run themselves efficiently, but not thin themselves out so much that increasing the bottom line risks faulty products/services and banks to lend fairly and responsibly. 

of course, there will always be the naysayers out there who think that the turn around isn't fast enough or that it's the super wealthy who are footing the bill.  but the truth is, the super wealthy are as much to blame for the down economy as anyone else because they were the ones turning the biggest profit while not really providing anything substantial in return to the consumer. 

example:  cheap, put together furniture at wal mart.  great because it's highly affordable.  bad because it's not durable.  so what makes more sense?  spend $50 on a dresser that's going to fall apart in a couple years, or spend $500 on a dresser that's going to last a lifetime?  the $50 dresser is the cheapest way to solve the problem today but it's going to cost you more in the long term. 

it's a loose analogy but i think it fits.  some of the biggest, most profitable companies out there are raking in bags and bags of cash for crappy products.  imo, that's exactly what our economy has turned into.  it's like printing money on cheap toilet paper....not very durable.  obviously, there's so much more that plays a part in the recession, but i think this is one of the bigger reasons. 

[rjs246]

The question becomes, what is 'the right direction'? All of the talk of regulation and reform is purely reactive and pointing us in a direction to avoid the problems we've already encountered. Worse it may just be, and probably is, heading us towards a new disaster.

Capitalism has unquestioningly raised the standard of living across the globe. It has brought countless nations and people out of poverty. It has by extension contributed to a decrease in war, a decrease in slavery and oppression, an increase in democracy, an increase in technological advancements and an ever-extending life expectancy.

But Capitalism has negative side effects too. It relies, by definition, on greed and self-interest. It relies on the homo-econimus model of human behavior that says that man acts in his own best interest and makes decisions rationally based on what is best for them (a model which dis-counts panic, mis-information, ignorance, snap-decisions... essentially it dis-counts human nature outside of a rational, well-informed vacuum and is being seriously challenged by congitive scientists). In other words, it's an imperfect model and the negative side effects are all around us in the form of globalization and consolidation.

For example...
I work with investment banks. 50 years ago these banks had a limited number of things that they were allowed to do. These rules were in place to reduce risk to the populations that rely on these banks to protect their hard-earned money. Fast forward to an era of deregulation and suddenly banks can accept deposits, create investment strategies, own hedge funds, run trading desks, run proporietary brokerage firms, create new kinds of securities to trade and act as custodian for their investment transactions... one company can essentially trade their clients' money within its own walls. This helped create the current mess, obviously.

Now let's take a hypothetical scenario. The US has anti-monopoly laws, but as Microsoft has proven repeatedly, those laws only apply if there is actual competition available. So let's say that Target decides to buy out Wal-Mart. Then let's say that Tar-Mart buys out Best Buy and K-Mart. In court Best-Tar-Mart-K can argue that Mom-and-Pop Incorporated sell boom boxes and cell phones and represent competition, but for all intents and purposes, they control the market. They can set prices at whatever level they want. And drive all competition out of business. (The first steps in this scenario are already happening of course.) So then we have one-stop shopping for all consumer goods, but what incentive is there for them to lower prices now? They've lowered prices over and over to drive out competition, but now there is no competition. Time to drive up prices. Now the government has to step in because we have boom box price inflation the likes of which we've never seen.

Now imagine that the exotic security or the boombox is actually the national food supply. This consolidation is happening there too.

My rambling point is this, reactive regulation is fine and necessary, but it doesn't address the bigger picture which is that we need to look forward for the important issues of the future. The brand of capitalism that we have right now leads necessarily to monopolies and massive, all-encompassing, all-powerful corporations that wield un-balanced control over our lives and our political structures. We can choose to accept that because we want to see our 401(k)s grow and we want one-stop shopping and steroids in our beef and air-conditioning in our Grand Cherokees, but we shouldn't pretend that slapping the financial industry on the wrist and cutting/raising taxes and whatever else people are suggesting is going to prevent the next crisis. Whatever the next crisis is, its already in motion and it isn't the housing bubble or mortgage backed securities or a 10% unemployment rate...

[Munson]

Rusty's a socialist! rabble rabble rabble rabble rabble


I really hate that no matter how much sense that makes, if I were to send that to a staunch Republican, he'd shoo it off and tell me that it's the American way and any other way is communist.

[rjs246]

I don't think it's socialist. I think it's realistic.

Capitalism works, but may only be a stepping stone rather than the end-all be-all of our economic understanding. It's a relatively young concept, after all, and some cracks are starting to show. So it needs to be monitored and tweaked to make sure that we're not just handing control of our lives and governments over to corporations. I mean, that's just royalty (and a tiny elite ruling class) by a different name. In fact it's even worse because ruling humans are capable of human decisions. Ruling corporations would be ruled by one unwavering force, ever-increasing quantities of money.

[MMH]

As you pointed out, assuming people won't shtein on your head because it isn't nice has not been effective government strategy.

[Munson]

I don't think it's socialist. I think it's realistic.

Capitalism works, but may only be a stepping stone rather than the end-all be-all of our economic understanding. It's a relatively young concept, after all, and some cracks are starting to show. So it needs to be monitored and tweaked to make sure that we're not just handing control of our lives and governments over to corporations. I mean, that's just royalty (and a tiny elite ruling class) by a different name. In fact it's even worse because ruling humans are capable of human decisions. Ruling corporations would be ruled by one unwavering force, ever-increasing quantities of money.

Oh of course. It's just frustrating seeing a guy like Obama get painted as a "socialist" by the fear mongering right when he's actually just a Keynesian. And why doesn't it make sense that it should fall somewhere in the middle of capitalism and communism. But common sense seems to elude a good chunk of politicians these days.

[rjs246]

Also, I wasn't touting or berating Obama's view of the economy. In fact, nothing I said had anything to do with Obama. I agree that its frustrating to see Obama or anyone painted as a socialist when clearly he is not, but that has less than nothing to do with what I was talking about.

Further, I'm not even sure that the economic steps I'm talking about are 'between' capitalism and communism. Maybe it's the next step in capitalism. Or a step back. Or a step sideways. Or maybe it has nothing to do with either economic theory. I really don't know.

[reese125]

The question becomes, what is 'the right direction'? All of the talk of regulation and reform is purely reactive and pointing us in a direction to avoid the problems we've already encountered. Worse it may just be, and probably is, heading us towards a new disaster.

Capitalism has unquestioningly raised the standard of living across the globe. It has brought countless nations and people out of poverty. It has by extension contributed to a decrease in war, a decrease in slavery and oppression, an increase in democracy, an increase in technological advancements and an ever-extending life expectancy.

But Capitalism has negative side effects too. It relies, by definition, on greed and self-interest. It relies on the homo-econimus model of human behavior that says that man acts in his own best interest and makes decisions rationally based on what is best for them (a model which dis-counts panic, mis-information, ignorance, snap-decisions... essentially it dis-counts human nature outside of a rational, well-informed vacuum and is being seriously challenged by congitive scientists). In other words, it's an imperfect model and the negative side effects are all around us in the form of globalization and consolidation.

For example...
I work with investment banks. 50 years ago these banks had a limited number of things that they were allowed to do. These rules were in place to reduce risk to the populations that rely on these banks to protect their hard-earned money. Fast forward to an era of deregulation and suddenly banks can accept deposits, create investment strategies, own hedge funds, run trading desks, run proporietary brokerage firms, create new kinds of securities to trade and act as custodian for their investment transactions... one company can essentially trade their clients' money within its own walls. This helped create the current mess, obviously.

Now let's take a hypothetical scenario. The US has anti-monopoly laws, but as Microsoft has proven repeatedly, those laws only apply if there is actual competition available. So let's say that Target decides to buy out Wal-Mart. Then let's say that Tar-Mart buys out Best Buy and K-Mart. In court Best-Tar-Mart-K can argue that Mom-and-Pop Incorporated sell boom boxes and cell phones and represent competition, but for all intents and purposes, they control the market. They can set prices at whatever level they want. And drive all competition out of business. (The first steps in this scenario are already happening of course.) So then we have one-stop shopping for all consumer goods, but what incentive is there for them to lower prices now? They've lowered prices over and over to drive out competition, but now there is no competition. Time to drive up prices. Now the government has to step in because we have boom box price inflation the likes of which we've never seen.

Now imagine that the exotic security or the boombox is actually the national food supply. This consolidation is happening there too.

My rambling point is this, reactive regulation is fine and necessary, but it doesn't address the bigger picture which is that we need to look forward for the important issues of the future. The brand of capitalism that we have right now leads necessarily to monopolies and massive, all-encompassing, all-powerful corporations that wield un-balanced control over our lives and our political structures. We can choose to accept that because we want to see our 401(k)s grow and we want one-stop shopping and steroids in our beef and air-conditioning in our Grand Cherokees, but we shouldn't pretend that slapping the financial industry on the wrist and cutting/raising taxes and whatever else people are suggesting is going to prevent the next crisis. Whatever the next crisis is, its already in motion and it isn't the housing bubble or mortgage backed securities or a 10% unemployment rate...

I seriously picture you in a boston corner coffee house, wth a black J-Crew turtleneck, smoking massive amounts of indian butts, talking with your cronies at all hours about this shtein...except youre not drinking coffee...youre drinking black tea with honey with both hands wrapped around the cup. Am I way off?

[Munson]

I know it's not what YOU were talking about. I read what you said, agreed with it, then talked about what I wanted to talk about.


Carry on.

[rjs246]

I seriously picture you in a boston corner coffee house, wth a black J-Crew turtleneck, smoking massive amounts of indian butts, talking with your cronies at all hours about this shtein...except youre not drinking coffee...youre drinking black tea with honey with both hands wrapped around the cup. Am I way off?

I don't live in Boston any more.
I have no idea what indian butts are unless you're talking about anal with squaws. In which case, sure.
I don't own any turtle necks.
I don't go to coffee houses, starbucks or any other place that doesn't serve alcohol.
I don't talk about politics with my friends, only with you idiots. Why do you think I feel the need to brain dump like that? I would never bore my actual friends with my political thoughts.

So yes, you were spot on.

[Seabiscuit36]

Economy is getting better, im rich

[rjs246]

Krugman once again tries to put the deficit into perspective.

Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they'll have risen to 3.5 percent of G.D.P. How scary is that? It's about the same as interest costs under the first President Bush.

Why, then, all the hysteria? The answer is politics.

The main difference between last summer, when we were mostly (and appropriately) taking deficits in stride, and the current sense of panic is that deficit fear-mongering has become a key part of Republican political strategy, doing double duty: it damages President Obama's image even as it cripples his policy agenda. And if the hypocrisy is breathtaking — politicians who voted for budget-busting tax cuts posing as apostles of fiscal rectitude, politicians demonizing attempts to rein in Medicare costs one day (death panels!), then denouncing excessive government spending the next — well, what else is new?

[Butchers Bill]

The problem with Krugmans analysis is that he expects a return to "normal" GDP growth.  By that I mean non-manipulated economic growth...exports, wages, and productivity rising.  GDP can so easily be manipulated that is almost means nothing anymore; for example in the 3rd quarter of 2004 (if I remember correctly) the annualized rate of growth was something like 9%, but it was based on mortgage refinancing and all of this "new" money being pushed into the economy.  Not real growth, but fake paper.