Monday, October 27, 2008

It's the Economy Stupid

Derivatives, Hedge Funds, Leverage - it's enough to make my head spin. That's not the only thing spinning. The world economy is spinning out of control and no one seems to know what to do. The patchwork band- aid bailout gave the bankers money to pay themselves a lavish bonus and it turns out to be a stop gap measure. Did you see the article showing the report by the Feds on how the money is being spent with the amounts going to the managers and CEO's blacked out? So much for the transparency that Paulson promised.

At first die hard capitalists blamed the whole mess on the stupid people who took out loans that they couldn't repay. It turns out to be much more complicated than that. Unregulated banks with no oversight or controls are a much bigger part of the problem.

Excerpts from an opinion piece by Roger Cohen in the NYT follows.


I was talking to a banker friend, and he told me the “unraveling” could go on for ages. I thought he meant the unwinding of all the leverage that had inflated everything from the price of stocks to the price of homes.But, just to be sure, I asked him: “Unraveling of what?”

He paused, before saying, “Almost our way of life.”It’s now clear that our credit system the world over was rotten all the way through, a giant house of cards maintained by the ingenious connivance of banks, rating agencies and insurance companies in a monumental heist. The only buyers anyone trusts any more are governments.

But as the state intervenes, in what Ed Yardeni, an investment analyst, called “a giant global game of Whac-A-Mole,” the moles keep popping out of new black holes in our financial system.

The U.S. unemployment rate stands at 10 percent. Crime is up across the country. The economy is shrinking. No arm-twisting from the Treasury has managed to restore the broken confidence between borrowers and lenders. Banks, the few still standing, are holding fast to their cash. Property prices are down more than 25 percent from current levels.

The Dow is still heading south as people get used to the idea of stocks trading at no more than 10 times earnings, rather than the much higher ratios our former leveraged world delivered.

The deficit and national debt stand at unprecedented levels.

The hedge fund industry is decimated — its model of flipping cheap borrowings into leveraged bets around the world has blown up — and one desperate, even contrite, former master of the universe has just sold a Rauschenberg for $9 million less than he paid in 2004.

People still have way too much debt, and the collateral for it keeps evaporating. They are angry. Civil unrest is stirring.

On the bright side, gas prices are plunging. There’s a lot of money sitting on the sidelines in places like Dubai. And, as I mentioned, the dollar is up — more than 20 percent against sterling and the euro in the last three months.

In a way, what’s going on with the dollar is a measure of the extent of global desperation. Here’s a currency backed by debt so massive that it will presumably have to be inflated away some day — and it’s rocketing upward.

To read the latest post on the economy by my favorite economist, Paul Krugman, click on the link.

Op-Ed Columnist - The Widening Gyre -

Are you frightened yet? I had hoped that the 'experts' would know what to do this time and that another great depression could be avoided. That hope is looking dimmer and dimmer. Save your Confederate money, boys. The South's going to rise again.


Rain said...

I was listening to something Barack Obama said several years ago, before he was a US senator and it's really made me think. It was about redistributing the wealth, which has the right wing in a dither, but more about a system of fairness where all can have more than they have when some have a lot. The whole thing is mind boggling and makes a person think maybe it takes a crash to let us redo what has gone wrong. Not a happy thought but many things, including natural disasters can rework a lifestyle. Maybe this is our time to rise up and make it work better for everyone. That will definitely not please the right wing to even have ordinary people thinking that way. What we have had is not working; so what can we do to make it work better? That's the interesting and challenging thing to consider.

Darlene said...

I agree, Rain. I was thinking when I wrote my post on the Depression how people helped each other then. Material things no longer mattered because no one else had any. Maybe that's the upside of hard times; we learn to value the important things.

Sylvia K said...

I think our country, all of us probably need to re-think our values, maybe these times can give us a chance to re-evaulte what is important, find more ways to help others at the same time and give us a new appreciation of being able to not only help ourselves, but others. And you're right, Rain, the right wing won't be happy about that. Tough!

joared said...

This is an excellent post, Darlene, and sums up much of what I've had concern about. I think it continues to be clear we have to actively continue to monitor, complain and demand accountability from those who are distributing our money and those who are receiving it.

Yes, I agree for some there may be some significant lessons learned that those of us who've lived a few years have known since we were children and some others learned from their parents.

Darlene said...

Thank you Sylvia and Jorad for your insight. We are going to have to get back to basics and the true meaning of life. I guess that's the upside, but it won't be easy.

Betty said...

I think it's a matter of "what do I need?", rather than, "what do I want?" And, "do I have to have it RIGHT NOW?". That would be a good place to start, don't you think? Start on the individual level, paring back. It's surprising what a relief it can be not to have so many THINGS. That's my "trickle up" theory.

Chancy said...

Excellent post Darlene.

Joy Des Jardins said...

There's always going to be that factor that will not be happy with redistributing the wealth...the greed factor. But it's just what we need now. What is it that we really need and value? I think we can live without a lot of things. Sure it will be hard for some people...maybe not so hard for others. A great lesson learned....a hard lesson important lesson learned. Dire times call for dire change.

Darlene said...

Betty and Joy, You are right, Our priorities will change of necessity. Helping our neighbors who are worse off will be the upside of the coming hard times. Material things will no longer be so important.

Chancy, thank you for your kind words.