Is everyone over-reacting a bit at this point?
So far we’ve had a series of problems in the economy that have cumulatively sown confusion and panic; but a new chapter might be around the corner. You can’t have “free fall” forever, or can you? To begin with, let’s review some of the problems that have come to light over the last 15 months.
First there was an inane government policy that encouraged massive over-investment in real estate, as well as inappropriate lending and plenty of outright fraud (remember “no income verification“?). Congress enabled this chicanery by rigging the game, and acting as cheerleader for this monumental foolishness. So there were trillions of dollars of bad mortgages and real estate loans created through gross negligence combined with self-interest. Then it turns out that these loans created a global mess because of the many and creative abuses of something called securitization.
As if these problems weren’t enough to deal with, the foolish and greedy investment banks got the rules of their game changed so that they could set their own minimum capital levels, and then they and others proceeded to write $60 trillion in insane insurance policies that had no reserves against them. This turned a typical story of cyclical excess into a potentially catastrophic situation that had the potential of bringing down the entire global banking system.
Finally, while the regulators slept, the hedge fund industry multiplied further all these excesses because it leveraged the heck out of every bet. The speculators rode oil, as they had wheat and other commodities, as a risk free way to short the dollar. Perhaps the funds got panicky for yield as their mortgage investments soured, but whatever the reason, the funds and the banks hugely multiplied their bets both short and long, as the game neared its end, and most everyone went broke, or nearly so. (Some of the wise guys are still in business and up to their old tricks, however.)
Thus every bubble finally burst, including oil, the global financial system was in systemic crisis, and the age of bailouts was born. At first it was just the banks, but then everybody and his brother got bailed out. The cascade of bank failures and subsequent deflation that constituted the Great Depression had to be prevented at all costs.
So, if the systemic problems are largely being handled, don’t we just have a run-of-the-mill recession on our hands, admittedly somewhat worse than usual because the expansion featured such excesses, and past consumer spending increases were closely linked to rising home values? We tend to think so, but the market hasn’t been behaving that way. Though it was up big today, it continues to be like riding a roller coaster at midnight. Maybe it’s the forced liquidations that have been reported that often cause the late-day insanity; we don’t know.
However (among the carnage), we are beginning to hear snippets of good news here and there, from airlines whose bookings are holding up nicely to residential real estate in troubled areas of the country that seems to show some signs of stabilizing. Maybe a chimera; maybe not. But the economy has been given, in effect, a huge tax cut with the declines of oil and other commodity prices, and the magnitude of this impact should not be underestimated. Furthermore, it is usually unwise to bet against the Fed, and with every central bank in the world inflating at the same time, why should anyone be surprised if some signs of recovery begin to appear here and there over the coming months?
It has been most of a generation since there was a serious recession in the United States — isn’t it just possible that the zany, naive over-reaction we have been seeing in the political world has a parallel in an over-reaction to today’s economic problems?
November 14th, 2008 at 4:31 am
Thank you! Thank you! Thank you!
Every time I hear on the radio that unemployment is at a 14 year high (or whatever the terrifying statistic du jour happens to be) my first thought is, “So you mean it was worse than this 14 years ago then, right?” I really don’t remember lines around the block at soup kitchens in 1994, do you?
I think you hit the nail on the head in your last paragraph. The economy from about 1983 to about three months ago had an AMAZING run with only two brief, very shallow recessions. It could not last forever and now it may be time to pay the piper.
I’m not minimizing the pain for those directly impacted by it, but I think it is very important to have a sense of perspective. Of course, that’s difficult when your average financial talking head on TV was in the 3rd grade during the last deep downturn.
November 14th, 2008 at 5:54 am
It may well be that the market rise was caused by Paulson announcing that the Fed’s would not buy up distressed assets, thereby telling the markets that the market would handle the needed liquidation.
It does give a sense that the socialist/fascistic signals coming out of District of Criminals is not as strong as originally perceived.
November 14th, 2008 at 6:16 am
Over-reaction? I hope so, but…
The House Committee on Oversight is holding hearings on the financial crisis. Thursday was Hedge Fund Day. According to George Soros,
Otoh, Soros the trader is said to change his mind in a twinkling and reverse his positions accordingly.
(An old hand at testifying before Congress, Soros used the occasion to market his latest book. Not to be outdone, Indiana Republican Mark Souder took the opportunity to rant in favor of the War on Drugs.)
November 14th, 2008 at 3:35 pm
Mayor Daley of Chicago was in the media saying CEOs are telling him that Chicago will be hit with massive layoffs. I wonder if this was an initial parry to get to the front of the line for bailouts.
Would the usual handling charges be waived during this time of extreme economic duress?
November 14th, 2008 at 4:07 pm
I think California jumped to the front of the line for bailouts. I’m in favor of a second stimulus check – it’s a horrible financial idea but the sooner we starve the monster of cash, the less harm it will be able to do.
You have to laugh. Letting me keep my money was bad. Taking it, sending it to Washington, and sending it back to me was good.
These are elites you are dealing with here, don’t ask tough questions. The one I’d like to ask is “I’ve never given anyone $2000 with no conditions attached. Why did you think it was OK to give that much money for every man, woman, and child in the country to the banks with no conditions attached?”
November 15th, 2008 at 12:30 am
The only bubble left is Obama’s.
November 15th, 2008 at 8:11 am
The crash in commodity prices is somewhat comparable to a tax cut, but how long will it be before State and the Federal Gov’t sop up that excess cash with their planned tax increases?
November 16th, 2008 at 5:08 am
If an action will cause an equal and opposite reaction (basic physics), why is the reaction (global meltdown) several orders of magnitude greater than the action (mortgage crisis)?
It is because investors were no longer able to delay when faced with the prospect of a Marxist president. Every Marxist dominated government that ever existed has produced results that range from bad at best to catastrophic at worst. In the current circumstance it would be foolish for a savvy investor to watch his assets decline or be expropriated, so investor bailed, leaving the pension funds and 401K individuals holding the (greatly reduced) bag.
Trust is like a crystal goblet; beautiful to behold, but once broken it is hard to repair. Recovering the trust of the markets will not be easy, and will depend much on Obama’s actions. Right now the markets are temporizing while waiting to see what Obama does. If Obama really does raise taxes and restrict trade as he has threatened, you will see another major leg down in th markets. If Obama does not raise taxes and restrict trade, some of his Marxist followers will really be upset.
So, what next? I think he will stick with his Marxist program and his corrupt supporters.