It crept into the room unseen, the New Yorker writes in an article titled “The Death of Kings”; a silent presence which everyone knew was there. It grinned at them like a familiar and hailed them in the street and from behind the water cooler, though they dared not return the greeting. An account of its coming, as seen from the eyes of people in the financial industry, is introduced as follows.
Most people may now recall a moment of clarity, an inkling of doom. A private-equity executive the writer talked to said that he sensed the jig was up when his cleaning woman took out a subprime loan to buy a house in Virginia. A big-wheel hedge-fund manager had his epiphany at a Goldman Sachs hedge-fund conference during which he found himself questioning the rapid accumulation of dynastic wealth by the people in the room. The final sign, the big wheel felt, was the opening ceremony of the Beijing Olympics, which cost an estimated three hundred million dollars. A month later, Lehman Brothers collapsed. Some who foresaw the implosion underestimated its power and duration. Writer notes that the event does not yet have a name.
Perhaps it doesn’t have a name yet, but one day it will.
It is variously called the global financial meltdown, the financial crisis, the credit crisis, the recession, the great recession, the disaster, the panic, or the bust. This thing is all-pervading, evolving and ongoing, history-altering yet in many respects banal. … What’s most vexing is that those who saw trouble didn’t do more to stop it. The crisis is the culmination of events and trends reaching back, depending on your perspective, four, seven, seventeen, twenty-two, twenty-seven, thirty-eight, sixty-five, or a hundred and two years. The causes are technological, mathematical, cultural, demographic, financial, behavioral, legal and political.
Things often acquire an historical name only after its survivors see can see it in perspective. To those who actually fought it, and fell in it, the great conflict in Western Europe from 1914-1918 was called the Great War. “Before 1939, the European war of 1914–1918 was usually called either the World War or the Great War. … in Europe, Time magazine first used the term ‘World War I’ in its issue of June 12, 1939, when comparing the last war with the upcoming war.” Even the name World War itself, in reference to the Great War, was coined late in 1918, practically at its end.
The term was probably first used as a proper noun, with capital letters, near the end of the war when English journalist Charles A. Repington wrote:
Diary entry, September 10, 1918]: We discussed the right name of the war. I said the we called it now The War, but that this could not last. The Napoleonic War was The Great War. To call it The German War was too much flattery for the Boche. I suggested The World War as a shade better title, and finally we mutually agreed to call it The First World War in order to prevent the millennium folk from forgetting that the history of the world was the history of war.
Maybe the reason we haven’t found a name for the events which brought us to this point is that they’re still unfolding. The arrow is still in flight. No one can see its career completely. Not even the people who, from behind a mountain of debt, are declaring it over. The “Death of Kings” is a prequel, but to what or whom? Well who do you sense in the room now? What has your cleaning lady told you? And what is the equivalent of the Beijing Olympics opening?
Update: Check out L3′s commentary below.
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Reading about the cleaning lady recalls the famous anecdote about, I believe, Joe Kennedy Sr who was having his shoes shined and the bootblack told him about having made investments in the stock market. Kennedy knew then it was time to get out.
How about “The Day the Chickens Came Home to Roost”? Just like every other investment bubble before it everyone knew in their hearts of hearts that it was too good to be true, but wanted to believe that that knowledge was false. It’s why folks get taken to “the cleaners”. The real question remains, “Who are the cleaners”?
Nick Paumgarten’s “Death of Kings” article is an interesting read, but at the end you don’t have a much improved handle on the crisis. No one seemed to understand what was really happening, or at least when and how it would all end up. In the end, as in philosophy, it seems to come down to a question of the One and the Many: “. . . but the question remains whether, ultimately, our predicament arises out of the venality of the many or of the few. Was it Wall Street in general—or even its clients, and the debt-hungry masses—that behaved abominably, or just a scattering of scoundrels.”
The article following “Death of Kings” is “Drink Up” by Dan Goodyear. That one’s a good read and after you finish it you know something about “Two Buck Chuck,” high volume, low-cost Trader Joe wine.
How about
Great Depression II
OR
The Greater Depression.
(It was not called the Great Depression during the 1930′s)
It was easy to see GDII coming.
1)The wife of an aquaintence in LA became a realtor.
2)The crack house next door sold for 400K in 2004 and the flippers tried to sell it for 800K in the summer of 2005. There was a realtor swarm that included a 20 yewar old on a bike who talked about how many houses he had sold.
3) Fill in your own story here ……
The largest transfer of Wealth from the people to the elites in the history of the US of A.
At the hand of the Great Equalizer,
Spreader of Wealth,
Guardian of the Downtrodden.
Tarnsman,
We’ll have to credit Rev Wright.
Two known unknowns on the near horizon are credit card debt, and ARM resets.
Cap and Trade will bring the largest institutionalized confiscation of wealth from the poor in history.
(to be followed by a program in which the hoi poloi trade their last vestiges of freedom in exchange for partial repayments of their tributes)
I suppose that it is too early to give the current global reverse a name. It takes months just to name a baseball team. Not only will the name need to be politically correct it will also need to be historically correct.
The only thing that keeps reverberating in my current reading of the crisis is that everybody keeps telling me that it will end at some point, but they can’t tell me when. What ever label that emerges should keep that notion of accelerating anxiety in its echo.
Broken,toxic,destruction,poisoned,abyss,arrogance, securitized,derivatives,synthetic,betrayal,and return of the “undead”. Somehow these words will have to fit into a much smaller label. At this time all I can come up with is “The End of the Great Lie”.
To those interested in the truth, the cause and effect sequence is no mystery and has been described by many financial analysts, including some, here in the Belmont Club. Since the causes are primarily in the government beloved of the media, they are largely unwilling or uninterested in setting out the truth.
I recall about two years ago, the WSJ editorial board was grousing about too much easy credit, calling the Fed irresponsible for keeping interest rates too low and openly wishing for a recession to clean things up.
Yes there were mortgage payment defaults, but mark to market accounting rules forced the lenders who held perfectly good securities to value them at zero (at a time when all of the potential defaults amounted to no more than 20% of the face value of the securities involved) and thus the assets on their balance sheet could no longer justify, according to even more accounting rules, their outstanding loans, requiring, according to even more accounting rules to scurry for appropriate equity. Meanwhile the short sellers no longer restricted by legality or regulation were attacking some very large targets with apparently unlimited capital.
Why Bernanke and Paulsen apparently panicked is still a mystery, but their actions were like pouring gasoline on the fire.
“their actions were like pouring gasoline on the fire.”
I prefer:
“Like Handing BHO the Keys to the Kingdom”
Nyquist calls it The Great Crash – http://www.financialsense.com/stormwatch/geo/pastanalysis/2009/0515.html.
Has a certain ring to it that makes your ears go up.
Since the chips are still falling, perhaps it is too early to give it that succinct, defining moniker.
Kinda Sorta on Thread:
Happily Ever Laughter
Jay Leno: My mother was from Scotland, had a horrible childhood—came to the country by herself when she was 11. My grandmother had run off with a younger guy, and my grandfather was stuck with six kids.
Mavis Leno: His mom was the youngest.
JL: But he could only afford to take care of five, so they took her around the neighborhood as a servant girl to try to see if people would keep her for a few weeks.
ML: Jay, how are you telling this story? Her father took her there but not as a servant!
JL: But it gets to the comedy angle. My mother was not a depressed person, but I always sensed a sadness. Every time I could get my mother to laugh, it was like a huge gift.
My dad was Italian and very outgoing. He would say,
“Show people you’re Angelo’s boy. ”
My mother would say,
“Whatever you do, don’t call attention to yourself.”
So it was hilarious to be stuck in the middle.
When I made it sort of big, I bought my dad a Cadillac, and of course, he had to get the white Cadillac d’Elegance with the red velour interior.
My mother was mortified. They would drive down the street, and she would sit below seat level, and people would say, “I saw your father driving and yelling at somebody.” Sometimes if she saw people looking, she would roll down the window and go,
“We’re not Cadillac people. My son got us this.”
My father would yell,
“Of course we’re Cadillac people! We’ve got a goddamn Cadillac! We’re driving the goddamn thing. It’s paid for!”
SS: And they were together their whole life?
JL: My dad was never sick a day in his life, but when my mother died, he was gone in nine months.
When setting up a defensive position, or even an aggressive position in the stock market, people like to hedge their bets. So much of the loss must be chalked up to the ideas and innovations that lead to naked hedge funds. Even branching out provided was no cover at all.
The great french republic thought the Maginot line would stand firm and fend off the Bosch. A naked hedgerow, similar to our southern border and not un-descriptive of our current position in Afghanistan. Yes, that would be a naked breech.
With the amount of technology involved in both the martial and monetary endeavors perhaps we should call it the condition that brought us here a Seminaly NAKEd Breech In Tech or being “snake bit”.
We are in the midst of The Great Regression from Adam Smith to Jean Baptiste Colbert, who ran France’s industrial policy in 1670. He thought he was the smartest guy in the Salon. The Wikis write: “Historians note that, despite Colbert’s efforts, France actually became increasingly impoverished because of the King’s excessive spending on wars.” And maybe because of Colbert’s efforts, not just despite them. In any case, we have a metaphorical war on climate change to bankrupt us (compared to that, our real wars will seem like a bargain). Every time Obama and his guys pillory businessmen I think, “Gee, Colbert use to do that, too!” Only, he’d literally put them in the stocks. The more we get change, the more some things never change.
KING RICHARD II
No matter where; of comfort no man speak:
Let’s talk of graves, of worms, and epitaphs;
Make dust our paper and with rainy eyes
Write sorrow on the bosom of the earth,
Let’s choose executors and talk of wills:
And yet not so, for what can we bequeath
Save our deposed bodies to the ground?
Our lands, our lives and all are Bolingbroke’s,
And nothing can we call our own but death
And that small model of the barren earth
Which serves as paste and cover to our bones.
For God’s sake, let us sit upon the ground
And tell sad stories of the death of kings;
How some have been deposed; some slain in war,
Some haunted by the ghosts they have deposed;
Some poison’d by their wives: some sleeping kill’d;
All murder’d: for within the hollow crown
That rounds the mortal temples of a king
Keeps Death his court and there the antic sits,
Scoffing his state and grinning at his pomp,
Allowing him a breath, a little scene,
To monarchize, be fear’d and kill with looks,
Infusing him with self and vain conceit,
As if this flesh which walls about our life,
Were brass impregnable, and humour’d thus
Comes at the last and with a little pin
Bores through his castle wall, and farewell king!
Cover your heads and mock not flesh and blood
With solemn reverence: throw away respect,
Tradition, form and ceremonious duty,
For you have but mistook me all this while:
I live with bread like you, feel want,
Taste grief, need friends: subjected thus,
How can you say to me, I am a king?
BISHOP OF CARLISLE
My lord, wise men ne’er sit and wail their woes,
But presently prevent the ways to wail.
To fear the foe, since fear oppresseth strength,
Gives in your weakness strength unto your foe,
And so your follies fight against yourself.
Fear and be slain; no worse can come to fight:
And fight and die is death destroying death;
Where fearing dying pays death servile breath.
Humpty Dumpty
imho the shift from coal before WWI –of which Britian had plenty– to oil–after WWII of which the Britian had little(until the 1980′s)– had as much to do with the undoing of the British empire as the WWI.
Similiarly, loss of energy independence over the last couple decades that has played a significant role in the eroding of American wealth.
However, this crises will reverse that.
OPEC doesn’t have the power or the desire to put the American alternative fuels industry to sleep–which is what they should do. This is what they did in the early 1980′s under Reagan. Cheap gas was a tremendous spur to the economy. Now today, already oil is up at $56@barrel. Oil should be at $20 but OPEC has held 4 million barrels off the market. So while there won’t be much capital formation any time soon–every day the alternative fuels industry output grows in the shelter of high oil prices.
Langley: Actually the term great depression was used in the 1930′s, by Hoover and by FDR (it usually appeared uncapitalized). The British economist Robbins wrote a book entitled “The Great Depression” in 1934. (Text is available via the blog at mises.org)
Hoover used the word depression because he thought it would be less alarming to people than the term “panic” that had traditionally been used.
Maybe we should revive the older tradition?
Wretchard, you have a way of haunting with words. Your mastery just needs to be recognized from time to time.
In the immortal words of Forrest Gump Stupid is as stupid does. As a society we have moved away from valuing those who can produce results to valuing those who have “credentials.” If you have a degree from Harvard you must be wonderful, right? The fact that you got into Harvard because your duddy or mummy went there never seems to figure into the equation. Nor does it seem to matter if you got there through affirmative action programs.
Aristocracies inevitably degenerate into kakistocracies. That’s where we are now.
Isn’t there the sense, though, that this is about more than money, comeuppance, wealth of nations?
The greatest nation in the history of the planet is now in the control of those who would be king, who spit in the face of a higher order, and whose ambition knows no bounds. “Atlas Shrugged” and Yeats’ “Second Coming” are invoked over and over, as is the specter of the Antichrist.
What I notice is that I sometimes feel surrounded by those who are in the thrall of a kind of group psychosis. The mainstream news seems so divorced from reality that I prefer to turn it off whenever it comes on. The impulse to head for the hills is strong, and there is this disturbing fact that what seems to be happening was predicted long ago. In which case it has already been named.
Tcobb/20
Aristocracies inevitably degenerate into kakistocracies.
Or cacacracies.
There’s a story that Joe Kennedy saved his fortune back in the 1920s because of a shoe shine boy. While getting his shoes shined, the shoe shine boy talked about the stocks he’d bought on margin. Kennedy got out of the market.
For me, it was when I saw “Flip that House” on TV. If non-realtors were making a living buying and selling houses…that’s a classic bubble. Bigger fool theory and tulips all over it.
I’m wondering when I’m going to hear about how much income inequality has decreased since Obama became president.
John Lynch/23
You mean like… everyone becoming dirt poor?
Charles @ 17: “…every day the alternative fuels industry output grows in the shelter of high oil prices.”
I know of one alternative, bitumin sands recovered by orange oil fractions that are feasible at $38/bbl for the price of oil. The sand fields are in Western Canada where they are not afraid to do what is necessary to recover the liquid gold. Water and orange oil fractions are recoverable and reusable at about 95%. The land is infinitely recoverable and the cost is part of the basis cost. Not bad.
maineman @21: I chose to head for the hills as soon as I can get it done.
25. Robohobo:
even better is the oil shale in colorado and wyoming. but I don’t think the feds will go for that.
The problem is that the very people who caused this meltdown are in charge of fixing it. When that problem is solved , voila, the problem will have an end. Until that time the arrow remains in flight. Problem solved when most all incumbents in Washington are thrown out on their keisters..
If we need a name for the silent presence, something that can capture the event succinctly, I propose “The Great Dedistribution.” F
Pace @ 18
Thank you.
I stand corrected.
But – i do not think “Panic” is accurate (at least not for the last month).
Most of the folks I talk to seem to believe that things will get better soon. They do not want to look at how similar actions in past have lead to very long economic downturns and/or revolutions.
#25 Robohobo,
I know I’m missing something here, but what does orange oil have to do with petroleum extraction? Is that an industry term for some petrol fraction that I’ve never heard of? When I google it, I just get information on the essential oils of oranges (fruit).
It is a fearsome thing, that name, “World War I.”
Sign of the beginning of the dangers of our increasing interconnectedness.
The Great Lunch Crunch?
Langley #29
Agreed, as do many polls which show a lower level of “fear” in April compared to May. Denial was a feature of all the past “panics” at early stages, however. No, we do not learn from history, we merely imitate it.
Maybe the reason we haven’t found a name for the events which brought us to this point is that they’re still unfolding. The arrow is still in flight. No one can see its career completely. Not even the people who, from behind a mountain of debt, are declaring it over. The “Death of Kings” is a prequel, but to what or whom? Well who do you sense in the room now? What has your cleaning lady told you? And what is the equivalent of the Beijing Olympics opening?
Great question – where is this heading? I’ve been giving this some thought of late, and would like to propose an interim response.
[Reader alert: a lot of what follows is recap of previous threads here at the BC. If you don't want to be bored with my overview yet another time, please skip down to the dash below.]
As we’ve discussed before at the BC, the housing bubble (which triggered the overall financial crisis) was caused by decades of government policies directed at increasing the rate of home ownership. These policies – pursued with gusto by both Republicans and Democrats [Ed.: isn't bipartisan good? Not when it's bipartisan stupidity] – had the effect of greatly loosening lending standards. IOW: government encouraged, and then abetted, then forced, easy mortgage money.
I won’t retell the whole story here on what happened next, but wide swaths of the credit market just about shut down. Interbank lending, commercial paper, commercial lending, real estate lending, corporate bond market, municipal bond market, credit derivatives, everything – everything, that is, except for United States Treasuries, backed by the full faith and credit (i.e. the taxing authority) of the Federal Government.
This shutdown of the short-term credit market was the real financial crisis, the true danger to the economy. Short-term credit is the blood supply of the economy. Blood cells are not the “coolest” cells in the body – everyone swoons over the smooth muscle cells and (of course) the sperm and ova. But you can live without muscle, sperm, and ova; you can’t live without blood. The same thing is true of short-term debt and the US economy: no debt, no economy.
So something had to be done. Problem is, like all panics, it was far from clear at the time what had happened, why, and what to do about it. But one thing was certain: we needed to get debt flowing again.
Into the breach stepped the Federal Reserve Bank. It injected staggering quantities of liquidity into the system in an attempt to restart lending. The patient was bleeding (to continue the analogy), and while we didn’t know where the wound was, we knew that blood pressure was dropping and unless we started giving him lots of blood his body would begin to shut down.
The Fed set up, on the fly, huge new programs to absorb illiquid assets into its balance sheet. It bought residential mortgages (prime and subprime), commercial paper, and money market assets, lent money to banks, non-bank financial companies, and even non-financial companies, all in an attempt to bring the short-term credit markets back to life by giving banks liquidity secured by just about any asset. Treasury “helped” by putting capital into banks, and the FDIC helped by raising insurance limits; but the heavy lifting was done by the Fed. Its balance sheet ballooned to over $2T in a matter of weeks, and it held its breath.
Slowly, the system started to work again. Banks started lending to each other; commercial paper markets reopened; mortgages started being underwritten again (although with much tighter standards); etc. We’ve gradually been seeing money come back into the market. The thaw is real.
Essentially, the Fed went “all-in” with liquidity. It was a huge gamble, but it looks like it is paying off. In fact, some of these Fed programs are beginning to shrink – total Fed assets actually fell by $130B in April, and more than $60B of that was a drop in commercial paper alone.
Now, however, the initial game – restart short-term credit markets – is evolving into a new game: keep Treasury rates low during the next year so that the ARM resets don’t bring the system back to its knees. This is a big reason, IMHO, why the Fed has jumped into the long-bond market; it has pushed short rates as far as the can go, so it needs to push long rates down to keep the overall yield curve low and affordable for ARM resetters.
This is a much bigger gamble, and it’s too early to tell if it will pay off.
In summary, as we’ve discussed before, the Fed, with the tight OODA loop of monetary policy, stepped in to try to fix the immediate problem.
But fiscal policy is another matter. The Obama Administration, almost from the moment it occupied the White House, set about increasing government spending in an attempt to “stimulate” the economy. But fiscal policy is much different than monetary policy.
A lot of folks might think, “Well, the Fed injected $1.2T into the economy, and President+Congress injected $800B, so the Fed is a bigger stimulator.” But this misses a key difference. The Fed, when it lends to banks and takes collateral, does not really “inject” anything into the economy. It simply swaps one asset (say, a mortgage) for another asset (cash). The “stimulative” effect only comes when the bank finds someone who will borrow the cash (which, in turn, is usually secured by assets).
The Fed’s actions are also, therefore, easy to reverse. Right now, banks are happy to borrow at 0% against illiquid (but paying) mortgages. They can turn around and lend out at 5% or more, and make good money. But if the Fed raises the interest rate it charges, say to 4%, the banks will pay off those loans, and most of that liquidity will get sucked back out of the economy. And it will happen fast (although hopefully not as fast as it was added).
Fiscal policy, on the other hand, is a transfer of money (not an exchange of assets) from one group to another. The government collects taxes (or prints money) and spends it. Once the spending commitment is made, it’s almost impossible to reverse. It also takes a lot longer to have an impact; as an example, the vast majority of “stimulus” funds will not be spent this year. IOW: big, slow OODA loop.
—
So what’s coming? A showdown between Congress and the Fed.
The Fed is an independent entity. It is a network of 12 Regional Federal Reserve banks. The Presidents of these Regional Fed banks are chosen by an independent board of directors. Each Regional Fed bank is owned by member banks, but the board is controlled by non-bankers (6 non-bankers, 3 bankers).
This means that the control of the Fed banks is in the hands of private citizens, and not Congress. Each President works for their respective board, which hires and fires them.
Some folks complain about this arrangement, but it has saved our bacon, IMHO. This independence has allowed the Fed to act without having to go to Congress or the White House for permission. This keeps its OODA loop tight, and helps shelter it from partisan political fights. Its independence has also allowed the US dollar to be the world’s reserve currency.
But here’s things get sticky. The Obama Administration is proposing the most dramatic expansion of Federal spending in history. Trillions of dollars will be added to the Federal Debt during the next 3-4 years, and if they pass healthcare reform, it will get even worse. In addition, by increasing marginal tax rates, economic growth will slow, and growth is the only way we can eventually pay off the debt we have accumulated.
So here’s the scenario. In the next 12 months we will see all of these factors come together:
1. Dramatic expansion of government spending.
2. Falling tax receipts due to recession and increased marginal tax rates.
3. A projected $10T increase in Federal Debt.
4. Continued unsustainable structural deficit from entitlement programs.
5. Stabilized of financial markets.
6. More “green shoots” of growth creating early signs of inflation.
All of these factors will lead the Fed to conclude that interest rates must be increased, to drain excess liquidity out of the financial system. Unless rates get raised, there will be huge inflationary pressure. The party will be starting, and it will be time to take away the punchbowl.
However, there is one more fact that will come into play:
7. Unemployment will still be high.
This means that Congress and the President will NOT want interest rates to increase, lest the young “recovery” be hurt.
The result will be a showdown, and it will determine whether the dollar will continue to be the world’s reserve currency, and the US the largest financial services provider in the world.
In the coming weeks, you will start to see calls for Congressional influence or approval of the Fed Presidents. To set this up, there will be an increasing drumbeat from folks like Frank and Dodd as well as the Obama Administration (yes, Insty, the country’s in the best of hands) railing against the Fed, and blaming them for every little hiccup or setback, while taking credit for anything good. This will all be part of an effort to undermine the Fed, and position it for a Congressional takeover.
And when the takeover attempt is made, that will be the moment of truth, the time at which we will determine whether the housing bubble bursting will trigger just a really nasty recession, or the next Great Depression.
If Congress gets control of the Fed, the game will be over. Everyone in the world will know that the US is going to inflate its way out of its problems so that it doesn’t have to confront its lack of fiscal discipline. Bond prices will plummet, the dollar will collapse, and the economy will go back into the ICU. Inflation will punish the working man, while the investor class will be fine (inflation can be a good thing for equities and real estate).
If the Fed maintains its independence, interest rates will rise and Democrats will have to face the music and give up on most of their expansionist dreams. If they continue to spend, rates will continue to rise and we’ll get stagflation just in time for the 2010 elections. And they’ll get hammered, just like in 1980.
So Congress can tax and spend responsibly, or they can take over the Fed. Guess which they’d prefer.
From such a crisis of a nation comes the test of a generation.
L3
WW1 has another name by us “la Der des Der” (means the last one of the last ones)
#14 hdgreene,
umm, you didn’t read your link in french, which is a bit more positive
http://homepage.newschool.edu/het//profiles/colbert.htm
Thanks Leo, for this analysis. I am going to bookmark this and return to it often over the coming weeks and months.
I echo starling #37.
Nice fact layout and analysis L3.
How ignorant of all of you! all those past events took several years to unfold and this one isn’t even two or barely there. If it is to be named a truely “Great” anything then we have many more years to go…I think this will not end until at least 2012…..Then it will be called the “Great End”!
L3 – Awesome.
Leo did a really super-awesome job of explaining the last year or two, but I have a theory for how we got here (and a name for the crisis) as well. I call 2008 “The Year the Tigers Broke the Eagle’s Back.”
Since WWII the “Asian Tigers” have used an export-driven model of economic growth. Japan, South Korea, Taiwan, Thailand, et. al. have all done it, and it worked. Then China did it, and it worked “to a point.” The problem is that export-driven growth requires a more dynamic consumer-driven economy somewhere else in the larger system to not save “enough” money to pay for its consumption. But as long as the export-driven economies are smaller than the growth surplus of the consumer-driven economy this model works. China however is not “smaller” than anything.
China’s savings were the kindling on this fire. Their decades-long policy of dollar purchases to keep the Yuan low were what allowed bad housing policy in the USA to keep playing out for decades longer than should otherwise have been possible. Barney Frank is a moron, and his policies a gun pointed at the heart of this nation’s economy, but a moron with a gun but no ammunition is relatively harmless. China gave him the ammunition.
The funny thing is that Japan’s savings (in the 1980′s) were nearly as problematic to US real estate as the Chinese savings in the 2000′s, but Japan’s more free-market economy saved us from experiencing today’s problems back then. The Japanese wealth was distributed through the keiretsu (not held by a central government), and so the Japanese keiretsu (with a greater ability to sift information and make investment choices than a single government) bypassed the Treasury market and bought real estate directly. Once the real estate market collapsed in 1987 the Japanese lost their savings directly. China has been luckier in the sense that they only fueled a real estate bubble without having direct exposure to it. China’s savings are in Treasuries and (so far) that asset class has held its value.
Thanks L3.
Just one thing, investors with assets denominated in dollars will not benefit, in fact they will be losers. Money will be stolen from them, albeit at x% (= rate of inflation) per annum. Won’t feel as painful, but it is still stealing. Investors with assets denominated in, say, real estate, may also feel a bit of pain. Investors with assets of companies denominated in a real product that is in demand will do extraordinately well (guns, for example).
Brock,
China knows that its holdings of dollar denominated US debt is heading for free-fall. This explains why it is desperately pursuing real assets at the moment, such as trying to buy Rio Tinto and other assets in Australia.
ADE
We got Franked
We went to Chicago
I think my Beijing Olympics Opening was when I saw a report that showed that tens of thousands of new houses had been built in the county but that the population was not increasing. Okay, so were people selling their houses and buying new ones? But who was buying the old ones if the population was not going up?
What is perhaps unique about this crash is that you can’t pin it on anyone or even any one group. Sure, poor people who could not afford houses were buying them, but what really sunk the boat were the middle class people who already owned a home and were buying 1, 2, 3, or 7 new homes on speculation. Yes, Freddie and Franny were yelling “Run, lemmings, run!” but Bear Stearns and Lehman and a host of other reputable firms were placing bets on the lemming races as fast as they could get their bookie on the line. Yes, the Democrats in Congress were screaming racism as the Bush Admin tried to reign in Fannie and Freddie, but at the same time the President was committed to keeping interest rates low. Sure, it was an American phenomenon but everyone in the world bought in.
My name for the Crash is the Mass Insanity Bubble.
To put some more color on L3′s post.
The Economy’s October Surprise
For anyone interested in doing their own economic calculations on the fly –here’s a new tool called wolfram alpha.
btw California votes today on whether or not they want to raise taxes to close their budget deficit.
If california votes no and forces the state to cut its work force–that will have some impact on the federal tax and spend programs. What will that impact be? Hard to say. Keep an eye on Pelosi.
Not to detract from L3′s summary, but we haven’t really talked about the explosion in the subprime lending industry due to the securitization of Residential Mortgages.
While I would certainly say the gov’t abetted this crisis, the appearance of thinly-capitalized scam operations charitably described as “subprime originators” probably had as much to do with the crisis as our friends in Congress. Securitization allowed the risk (and fraud at origination) of these subprime loans to be misrepresented, packaged up, and sold off to investors who believed them to be sound.
Many of these scam operations have gone bust, leaving borrowers and investors holding the bag. I would point to MILA, Inc. and New Century as examples. Lucky for the executives, they raked in millions during the bubble, retired, and are now watching their empty shell companies struggle through Ch. 11.
Damn…so my feeble mind generates this take away:
The “arrow is still in flight”, yet we are still unable to judge its trajectory. If Barney Frank in a twisted devil/cupid suit is found to be the one holding the bow with the vibrating string the archer’s paradox may result in the arrow landing in the heart of the FED, if not it lands in the punchbowl. Either way the party is over and we wait until then to see if the hangover kills us or we just puke for a few years…..The damn punch wasnt spiked it was tainted with the poison of greed.
The New Bad Deal comes with the Second Great Depression. Why wouldn’t it?
We are dismayed when we find that even disaster cannot cure us of our faults–Vauvenarquez
A helpful thing to remember about the ancients view of the night sky is that the earliest and most primitive method of assigning their relationship to the stars was to build structures on the ground that could only be seen from high above. Airplanes flying over the coastal deserts inland california and peru can see these forms. In peru they are the Nazca lines They are long lines or shapes that look like birds or other critters. But the people who built them could not see them. Why would they build things they could not see in their totality.Its likely their shamans imagined the view from above just as the Greeks imagined Icarus and Daedelus flying like birds. But whereas Icarus and Daedelus reflect a kind of bottom’s up thinking. The old shaman’s and their ground pictures reflect a top down way of thinking. Top down is an eternal thing. Bottoms up is timely.
Buckets 47, totally agree. It seems like there are fewer qualifications needed for becoming a mortgage broker than for becoming a shamwow pitchman
Charles/50
Well, what if they were flyin’?
A piece of cloth, very light but woven so tightly and with a residue of fatty acids, that it would be a decent material for a hot-air balloon has been found in one Peruvian grave. It is not a proof that they had hot-air balloons, but why would they spend effort on making the cloth if there was no need for it?
Sir Roger Bacon alluded in one of his works that people in earlier times flew using machines. Likely gliders… is my take. Why would he mention that if there was not something that supported that notion? Bacon was a pretty levelheaded guy that stood at the founding stone of modern science.
re: L3 @ 34
This reinforces for me the significance of the fact that the founders never really debated fully or settled the question of how best to handle monitary policy when laying out the constitution (they just sort of tossed it in with the legislative). Structural forms in government are important. The levers of power must be separated widely enough from one another that any small/medium collection of bad actors will have difficulty in reaching enough of them to bring the whole system under permanent control (this says nothing of course, about the chances of a large group of bad actors attempting to capture the system). Leo seems to have no objection to the way Federal Reserve power is assigned… but to me there is room for improvement. The seats in front of the levers of power (all of the levers of power) should be filled by processes in harmony with the principles of a republic. … again more emphasis structural forms.
Its natural that there should be a temptation whenever a wise/competent/benevolent public servant (or one who appears to be these things) comes on the scene to rely on them. To place as many importnat things under their control as they can successfuly administer. to give them expanded powers to enhance their ability to good with their core powers. This temptation to rearrange the levers of power for the seeming benefit of the public must be resisted at all costs. When too many levers can be reached from one seat there is no aparent danger while one of worthy character occupies the seat… but it is an historical certainty that some eventual successor will prove less worthy… and oppression will follow… then the spilling of blood to pry the levers of power from his hands and set them a respectable and safe distance from one another again.
Separation of powers is the most significant structural feature of the US constitution. From grade school civics lessons we all automatically think of the separation of powers as primarily encompassing the judicial, legislative, and executive with the monetary power lumped in with the legislative (where as before the constitution most forms of government would have had monetary power with the executive), but I wonder if the time may not be approaching when monetary power needs to be seen in a similar light to the powers of the executive, legislative, and judicial; and therefore separated and established as its own branch of government. Likely small and relatively independent, something along the lines of the supreme court (but without the bit about life-time service).
L3′s remarkable synopsis lines up with what I have been thinking but couldn’t put that succinctly in words.
The problem is this. For better or for worse, we took the hit on the mortgage markets, took down the world financial markets, pumped in gadzillion dollars in “liquidity” (oh how I hate that term, people say it to sound smart, but there is perhaps no other descriptive word for what has taken place), and it seems that we have averted the crisis and brought things around. The problem is what happens next.
Back in the early 1980s, I put some money into the very bottom of the Volcker-depressed stock market and then took it out right away after hearing about the Reagan “deficits as far as the eye can see.” If I had kept it in and put everything I had in after that over the next 20 years, I probably would have done quite well indeed, even with last year’s reversal.
Reagan was going to stand up to the Soviet “Evil Empire” by a massive military buildup, and we was lowering taxes, and all of the mainstream liberals (Harpers, Atlantic, New Yorker) were telling us nothing good was going to come of all of this, and that we were going broke on the installment plan. I listened to that advice and stood on the sidelines for 20 years.
This time, Mr. Obama is going to reform health care and save us from Global Climate Change without, allegedly, doing much to taxes apart from tinkering with the top rates. This time it is the conservatives who are yelling “head for the hills!” with regard to deficits and stagflation and so on. The stock market is an incredible value right now, but something is telling me to stand at the sidelines even though I was once in that position before and listened to the then liberal doomsayers. We are in such uncharted territory I don’t know what to believe anymore.
Something in the back of my head tells me that technology will save the day for Obama just as it did for Reagan. For Mr. Reagan, it was years of low oil prices fueling the economic boom, brought about by horizontal drilling. For Mr. Obama, it might be years of low natural gas prices along with oil prices fueling the boom, brought about by the new rock fracturing tech in gas production and some form of in-situ recovery of heavy oil in oil production. The windmills and solar farms and carbon credits may be just so much of window dressing to molify the self-styled environmentalists, which will all get swept aside in a gas and oil-fueled financial boom. With cheap oil and gas, Mr. Obama can spend on his special interests without damage to the economy just as Mr. Reagan could sweeten things for his defense contractor associates without doing harm.
Paul M.
There will be no “cheap oil and gas”. It is the Oteams policies to eliminate fossil fuels, no matter what the cost. I think his team is living in a fantasy world where financial impacts of any program do not exist. Prepare for crushing debt, taxes and unemployment before 2012. Riots, looting, and street justice, along with oppressive govt. controls (restrictive movement, trade, etc.) will become the norm. Gas will be rationed, air travel limited, tax enforcement will eliminate unregulated trade (first to go will be paper currency), and restrictions on speach and assembly (no Tea Parties, no govt. criticism) will be imposed. Things will be crazy, then thankfully, JC will return and take his friends home. Be good to your fellow man, and make sure you are on the “friends list”.
Leo: Good stuff!
I’ve been reading various articles about the trillions (nobody seems to know how much exactly) of dollars that have gone up in smoke when all the highly leveraged derivatives deflated. Not sure if I worded that correctly – hope you get my drift…
Seems to me that’s an impending statement that we should be really nervous about.
Can you comment?
Thanks for your comments!
52. twobyfour:
Funny you should mention Bacon. He & Decartes totally screwed up the west with their tree of knowledge.
That tree of knowledge put theology alongside witchcraft as a subbranch of philosophy. Witchcraft belongs there. But theology decided does not. Why not? Philosophy begins and ends in the personality and character of man. Whereas theology begins and ends in the personality and character of God. Man is the measure of all things–is a philosophical proposition. God is the measure of all things–is a theological proposition. Does “God is the measure of all things” sound inexact? Try this, “Man is the measure of all things” Are we talking about a tall, fat green white, red man? How about a woman. How about an aborigene?
By botching their definitions Bacon and Decartes probably pushed Newton over onto the Arian heresy a century later.
Genesis 11
The Tower of Babel
1 Now the whole world had one language and a common speech. 2 As men moved eastward, [a] they found a plain in Shinar [b] and settled there.
3 They said to each other, “Come, let’s make bricks and bake them thoroughly.” They used brick instead of stone, and tar for mortar. 4 Then they said, “Come, let us build ourselves a city, with a tower that reaches to the heavens, so that we may make a name for ourselves and not be scattered over the face of the whole earth.”
5 But the LORD came down to see the city and the tower that the men were building. 6 The LORD said, “If as one people speaking the same language they have begun to do this, then nothing they plan to do will be impossible for them. 7 Come, let us go down and confuse their language so they will not understand each other.”
8 So the LORD scattered them from there over all the earth, and they stopped building the city. 9 That is why it was called Babel [c] —because there the LORD confused the language of the whole world. From there the LORD scattered them over the face of the whole earth.
Likely that tree of knowledge is what shifted Newton over onto the Arian Heresy.
#57 Charles,
But God is a concept of a man’s brain ; since he could say “I” and just not only pointed on an object with a sound
So then, everything bad that’s happened the last year or so is due to real estate and subprime lending to people who couldn’t afford it, and we don’t care about finagling and short-selling (possibly maniuplated by overseas funds) going on in Wall Street, resulting in the collapse of Lehman, Bear Stearns, et al?
58. Marie Claude:
I is a concept of man’s brain too.
Reality/understanding/ dissappears into the infinitely small just as it does the infinitely large.
will pelosi get laid off? if the california tax hikes go down in flames today–as seems likely–that will put a very different spin on democrat spending. after all california is the home of fruits and nuts. if they have had all they can take–well then.
Acronyms based on the trajectory so far:
Bubble Insanity Massive Barack Obama (BIMBO)
Panic-spending Under Know-nothing Electeds (PUKE)
…sounds just like a college party…
Exodus 23
3:13 Moses said 43 to God, “If 44 I go to the Israelites and tell them, ‘The God of your fathers has sent me to you,’ and they ask me, ‘What is his name?’ 45 – what should I say 46 to them?”
3:14 God said to Moses, “I am who I am.” 47 And he said, “You must say this 48 to the Israelites, ‘I am has sent me to you.’” 3:15 God also said to Moses, “You must say this to the Israelites, ‘The Lord 49 – the God of your fathers, the God of Abraham, the God of Isaac, and the God of Jacob – has sent me to you. This is my name 50 forever, and this is my memorial from generation to generation.’
……………
MC
But God is a concept of a man’s brain
No. The man’s concept of God is a model. As any model, it tries to encapsulate reality, to render it so it can be used as a commodity in exchange of ideas.
In reality, God is a concept of God. Even man is a concept of God.
since he could say “I” and just not only pointed on an object with a sound
English, please.
Charles/57
Poor Newton. Those rascals, Roger and Rene pushed him to the Arianist wall. He couln’t help it, they just ensnared his will in their devilish spell!
C’mon… There was no influence from either on Newton’s choice of his theological path. The only influence that was there from them was the notion of a method. Or The Method, as it were.
I am not done with you
Will address the rest later.
#63 Twoby,
>since he could say “I” and just not only pointed on an object with a sound
>English, please
If it can give you an idea of what I ment, I replied that to Charles who was questionning the origin of “I” and “you” a few weeks ago
http://mysoupis.blogspot.com/2009/04/i-and-you-evolution.html
About the model you’re right, though if this human being had not reached the level of thinking of himself as a individual and conscient person, theses models woul still be sky, thunder, storm and mother earth
Poor Newton. Those rascals, Roger and Rene pushed him to the Arianist wall. He couln’t help it, they just ensnared his will in their devilish spell!
…………..
this is true. would you argue that similiarly the unitarians rejected the nicean creed because they read the notes from the 3rd century council of nicea and sided Arius?
…
them was the notion of a method. Or The Method, as it were.
agreed. but if the methodology precludes the possibility that “In reality, God is a concept of God. Even man is a concept of God.” then, well, of course when you get around to asking the question … is Jesus fully God and/or fully Man…then the answer is of course Jesus is fully Man–because that’s as much as we can know because knowledge can only come from man.
Barney Frank was one of the original flying monkeys in the Wizard of Oz.
The Age of Affirmative Retraction
Mc/65
…though if this human being had not reached the level of thinking of himself as a individual and conscient person, theses models woul still be sky, thunder, storm and mother earth
Not really. That is a marxist claptrap. Unfortunately that has been adapted everywhere, without a shred of supporting data, just based on uniformitarian assumptions and preconceptions.
If you find the most primitive group of people on earth, you’d find out that “I”, thinking of himself/herself as an individual, self-conscious and self-aware, is always there. Even if the particular group is still on the level of stone age industries. No exceptions.
You’d find artworks in Altamira, properly signed by artist handprint. If that is not a sign of I-ness, then what is?
As for the models, “sky, thunder, storm and mother earth”, again, BS. Reverence of these was only a form of attribution, not actual worship. A symbolic substitution. It would be the same if you said that the cross hanging on your wall is God.
There was a reason for the reverence, not much theological as practical. Goes back some time when major crap scared most of the tribes shitless. But that’s another story.
Theologies of “primitive” peoples are rather complex and seem to reflect fragments that you’ll find everywhere, and I don’t recall one documented exception when they did not have a concept of God, the ultimate mover and creator of all there is. They may have “insights” into different realms and entities that inhabit them, but that is beside.
MC, BTW, check your email.
Charles, so you are saying that Newton got into Arianism not because he did read minutes of Nicea Council, but because Bacon and Descartes devised the Method?
Brilliant! /sarc
I am not sure whether you did read The Discourse On Method. Probably, although… you tell me. But this edifice was not meant as a denial of the sublime, it was a manual, in a sense. You see, you read it (or a summary of it) and think that is all there to to Rene Descartes.
But that is not the case. That would be a fragment, not the whole. The whole edifice appeared to Descartes in a dream, but in a somewhat incomprehensible form. So, in the dream, Descartes dreamed about having another dream and in that dream within dream, he got the key to the whole. The key was provided by God. That is the content of Descartes’ notes about The Discourse On Method.
Some people call it ironic, but I fail to see the irony. But most of the people haven’t a clue about this aspect of origin of the edifice that they think is in opposition to theism.
Charles
but if the methodology precludes the possibility that “In reality, God is a concept of God. Even man is a concept of God.”
It doesn’t. It is not the purpose of the Method to resolve theological questions.
is Jesus fully God and/or fully Man…then the answer is of course Jesus is fully Man–because that’s as much as we can know because knowledge can only come from man.
I know that many would mistakenly interpret it that way, but that is not the intent. The Method was devised for modeling concepts/object that are within a grasp of man’s sensory functions or extensions of these.
you ownme on the “Iness” argument, though I never saw that the “primitives”, as far as we have some witnesses of their “civilisation”, managed the concept of God like we understand it nowadays, they mainly lived in the fear of uncontrolable superior forces, and their drawings or carvings (seen in our caverns) were kind of sacred prays to avoid a virtual and remnent danger
I must add “kind of sacred prays to avoid a virtual and remnent danger”, like some kinnd of sorcellery
“The impulse to head for the hills is strong, and there is this disturbing fact that what seems to be happening was predicted long ago. In which case it has already been named.”
IF the second part is correct then the first part is futile.
53. El Heffe:
“I wonder if the time may not be approaching when monetary power needs to be seen in a similar light to the powers of the executive, legislative, and judicial; and therefore separated and established as its own branch of government. Likely small and relatively independent, something along the lines of the supreme court (but without the bit about life-time service).”
I like this idea. And lets have them elected by the states representatives. So that the power would not be concentrated in the Federal government. One for each state. NOTHING FOR DC. For two year terms. Rotating out 1/3 every year. Long enough to learn the job and short enough to be mostly immune from corruption. NO adjoining terms. But could be reelected after sitting out for 4 years. They control the monetary policy and the tax policy for the legislative body.
MC/73
Did you hear that one about an archeologist in the future that wrote paper about bowing to porcelain god? (toilet)
Pretty much the same how our esteemed academicians explain the spiritual side of our ancient forebears. It is all assumptions, and for the most part, unwarranted.
I would love to point you towards some anthropological papers, but for the moment, I have to pass on that. I may email you some pointers when I get to it.
nah, Twoby I live amid the caverns places
Folks we are aren’t even at the end of the beginning yet and we just had a red letter day today. One man now runs the government, the banking industry, and the automobile industry or what is left of it and California voters just said they wold rather see the state go broke than pay more taxes. What happens when a state declares bankruptcy? Do they go to court for a quicky chapter 11, screw their bond holders, and sell themselves to the to Obama and AFSCME?
Every politician out there and every person with half a brain knows we are in a train wreck here and all are now powerless to name the causes or fix the problem. Instead they will pile mistake on mistake in a futile effort to avoid a day of reckoning. A housing bubble becomes a banking crisis which in turn becomes a trade war. Lunatics fly around the world in jet aeroplanes proclaiming the sky is falling on account of carbon emissions and California crumbles into bankruptcy while sitting on an ocean of oil it won’t drill and tens of billions of debt from social programs for illegal immigrants it won’t send home.
The markets are not something you control anymore than gravity or the tides are something you control. It is a force of nature that you respect. Every bubble breaks and if you try to protect some people from the consequences of their ill advised investments you necessarily have to pass the costs on to someone else. When you do that you break the social compact that glues society together.
72. twobyfour:
I know that many would mistakenly interpret it that way, but that is not the intent. The Method was devised for modeling concepts/object that are within a grasp of man’s sensory functions or extensions of these.
……….
Heck it confused Decartes. Consider his other writings:-) Heck you don’t even have to do that. When you look at “The Tree of Knowledge” as pictured/dreamed/methodologicalized by decartes–you’ll see in the middle the word “Understanding”. Presumably that is Man’s understanding. Off on one of the tiny subbranches at the very end of one of the subgroups philosophy — is religion/superstition.
This completely inverts the Tree of the Knowledge of Good and Evil in the Garden of Eden.
A more realistic picture is the one provided by Blake which shows man pointing to God and God pointing to man.
Here’s a pretty good picture of where the real economy is at right now.
Excellent posting by L3, as usual. Whither goeth the Fed, indeed,,,,
Meanwhile, from WSJ.com’s e-mail alert comes this news snippet (with links) re: the Fed direction & trendline :
…”Some Federal Reserve officials are open to raising the amounts of mortgage and Treasury securities purchase programs beyond the $1.75 trillion that they’ve already committed to buying, according to minutes from the Fed’s April meeting.
Officials, meanwhile, projected an even deeper recession than they expected three months earlier and a more sluggish recovery over the next two years as labor markets remain under pressure. The unemployment rate is expected to end 2009 between 9.2% and 9.6%, and stay above 9% in 2010….”
http://online.wsj.com/article/SB10001424052970203771904574177673022851160.html#mod=djemalertNEWS
Text of the minutes:
http://www.federalreserve.gov/monetarypolicy/fomcminutes20090429.htm
81. TC Rightwing Goon:
If the economy stays down then the fiscal stimulus won’t ad more heat to a heated environment–so the fed won’t have to drain liquidity from the system to tamp down inflation.
Leo- There is a part of your post I must strongly disagree with:
the housing bubble (which triggered the overall financial crisis) was caused by decades of government policies directed at increasing the rate of home ownership. These policies – pursued with gusto by both Republicans and Democrats [Ed.: isn't bipartisan good? Not when it's bipartisan stupidity] – had the effect of greatly loosening lending standards. IOW: government encouraged, and then abetted, then forced, easy mortgage money.
The frothiness of the upper end of the market, particularly the jumbo loan housing market ended in late 2005 with the introduction of higher interest rates. Prices softened and days on market grew. However at the lower end of the market during that period, Freddie and Fannie stepped on the gas and their subprime lending and other schemes greatly increased. The loosened standards were much more prevalent at the lower end of the market as was the fraud. Special increase rate collateral discounts were still common for the poor. Much of the toxic paper issued by Fannie and Freddie were issued from 2005 onward. So to describe the cause of collapse as a “housing bubble” doesn’t adequately describe the situation.
Moreosver, from 2004 these schemes by Fannie and Freddie were fought by the Republicans, even RiNOs like Mc Cain , and were fiercely protected by the Democrats. The needed reforms were time and again blocked solely by the Democrats. So to paint these subprime shemes in a “Bi -partisan” broad brush for the blame paints a grossly incorrect picture, and does not at all assign culpability in the appropriate proportions.
BTW, the situation in mortgage lending leading to the collapse has not been thoroughly fixed. Right now, in Southern California it is very difficult to get a jumbo or upper end conforming loan particularly for the self employed. Very low loan to value and great credit are required. That market is very slow.
Meanwhile, the lower end of the market is booming due to lower prices and the fact that FHA loans and other low collateral loans
are still widely available to lower income people with reasonable credit.
Additionally, people who have defaulted on their mortgages , rather than being foreclosed, are often being given 40 year 4% fixed loans so the banks don’t have to declare a foreclosure and cover that foreclosure with more reserves.
So the socialist two step keeps on a truckin.
One large cause that has not been mentioned is the jump in oil prices. One major factor in California foreclosures was the increase in gas prices over $4 a gallon. It made it impossible to live in the outlying suburbs where the worst foreclosure markets are. The value of the outlying house had to be discounted by increased cost of travel. If you burn 200 gallons of gas a month, your “housing” costs went up $500 a month. That helped pop the bubble, and once a bubble pops, you know the rest.
I don’t think whoever plotted the rise in oil prices to cause a recession to insure the democrats won, realized they would also pop the housing bubble, to make a recession a depression.
Over the past four decades, a bad economy follows a sharp rise in oil prices.
As far as a name, if this gets as bad as it looks, it will be called the second great depression.