The Credit Crisis Visualized

@VideCorSpoon,

Nice video. I had a good idea how this all happened from following the growing time bomb over the years, but I couldn't quite connect the dots.

I was watching the first episode of Real Time with Bill Maher the other night, and one of the guests brought up an interesting solution to the problem. Let the banks go bankrupt, and start new ones that are not allow to run off and start all kinds of ridiculous financial shenanigans.

@Theaetetus,

The question I ask is what happens in a period of hyperinflation? Germany in 1923 experienced a period of hyper inflation. But everything turned out well for them... right? What irritates me the most in all of this is that the three main ways for a national government to raise money (i.e. create debt, hike takes, and print money) are all being laid out on the table. Usually one or maybe half of another can be taken for the team... but dang. I wonder if we will experience $30 McDonald's cheeseburgers. Incidentally, I understand that the stimulus bill will end up costing each person in the united states $30,000 over the course of their tax paying lives to pay off. Is that $250 check in a few months worth it?

@VideCorSpoon,

VideCorSpoon wrote:

I wonder if we will experience $30 McDonald's cheeseburgers.

That might help lower the costs of health care... :whistling:

@VideCorSpoon,

One thing that is potentially on the horizon, is foreign countries wanting their money back from the U.S. If this was to happen the value of the dollar would tank and be pretty much worthless. Of course, the U.S. has been so effective at exporting the financial crisis to the rest of the world that the country is somewhat insulated from this very real problem that could be looming on the horizon.

Rather than propping up dead companies, the United States should be focusing on taking that money and creating new companies. The banks are worthless so start new ones. The car companies are essentially incompetent at best so start new ones. The Federal Reserve continues to make blunder after blunder so get rid of them. I am not necessarily saying that they have to remain in government control, but rather than flushing money down the toilet, we could be investing in the talent of the country, which is the only thing that will save the country from the grave it has dug out by the greedy corporate world. Investing in the future does not mean putting money in the hands of failures.

Thirty dollar McDonald's cheeseburgers would bring about one excellent thing--no more McDonald's.

@VideCorSpoon,

What the 1st world does not recognise is the value Hamburger index :

FXBigMac - World economics based on the hamburger standard

But this does not take into account the quality of the hamburger, and the relative value that a hamburger has compared to other foods, in that country.

Basket for basket, the 1st world's food is 2 to 3 times more expensive than the rest of the world. a few years ago it cost me 1 pound to add 10 little triangles of pineapple on my 10 quid pizza in london. In South Africa I could buy 10 full pineapples for a pound, and a better quality pizza would cost me 1/fifth of the price.

Because of trade blocks and blatant protectionism, the problem gets worse. The illusion cannot sustain.

Eventually Western currencies will lose 50% of their value. Or 70%.

All that is required is some small change, like a floating value of the Chinese currency, perhaps, or a financial crisis which stops the west from rigging the exchange rates the way they do.

Free trade is a nice idea. But its not the way the world is,
and it actually hurts those that rig their currencies so they can buy more 3rd world goods cheaply, package them in the first world, stamp 'USA' or 'Germany' on them, and make massive profits for those that are part of the elite clique who make such laws, which only allow certain people to trade in certain areas with certain goods.

The first world must either allow their currencies to devalue slowly, or they will crash.

This is not the kind of idea that people in the 1st world WANT to hear right now. But if you ignore it, the 'financial crisis' you are in now is going to seem like 'the good old days'.

Don't say you were not warned.

@Poseidon,

Well, if western currencies do lose 50-70% of their values, it will be for good reason. Like I said in the previous post, if a government prints money indiscriminately, there is ample room for hyperinflation. But a currency is still a currency. The Mexican peso is much devalued, but it will still buy the necessities of life. The only thing that makes it any different from the dollar or the euro is just how much of it will buy the same thing.

Ironically, the devaluation of the US dollar for a period of time was a good thing. As the euro continued to rise, the dollar was hitched to a low point. Europeans started coming to New York on shopping trips, investing in real estate, etc. Foreign countries started buying industrial production from the states again. Things have probably changed now.

@Theaetetus,

Theaetetus;50063 wrote:

One thing that is potentially on the horizon, is foreign countries wanting their money back from the U.S.

They can't ask for it like that. They don't just give some money and get an IOU. They loan money by purchasing US Treasury bonds, which have a certain maturation rate. The US pays the interest every year, but can't pay down the principal when it's in deficit.

Theaetetus;50063 wrote:

Rather than propping up dead companies, the United States should be focusing on taking that money and creating new companies. The banks are worthless so start new ones.

The US made this mistake when they dismantled the Iraqi army and tried to start a new one. Correcting bad institutions is FAR cheaper and more effective than purging them and starting from scratch, because there is so much institutional structure and expertise already three.

Theaetetus;50063 wrote:

The Federal Reserve continues to make blunder after blunder so get rid of them.

The Federal Reserve is sitting on about $2 trillion of US government assets, and is the only real internal control over lending rates and our currency's value. Who is going to manage that without a Reserve?

@Aedes,

Aedes wrote:

They can't ask for it like that. They don't just give some money and get an IOU. They loan money by purchasing US Treasury bonds, which have a certain maturation rate. The US pays the interest every year, but can't pay down the principal when it's in deficit.

Countries could dump their holdings of U.S. treasury bonds which could devastate the U.S. dollar. As I said though, the U.S. was so effective at exporting their financial problems most countries would not be stupid enough to dump they dollar holdings due to their vested interest in the recovery of the U.S. economy.

Aedes wrote:

The US made this mistake when they dismantled the Iraqi army and tried to start a new one. Correcting bad institutions is FAR cheaper and more effective than purging them and starting from scratch, because there is so much institutional structure and expertise already three.

Judging by how well the bailout packages have worked, the government may as well burn their cash because that is what the companies are doing with the money anyway. The government may as well take companies over to receive something for the taxpayers' money. By getting rid of all the boneheads that started the mess and putting people with good ideas in charge, the government would essentially be starting over with new companies. Incompetent expertise hardly qualifies as expertise.

Aedes wrote:

The Federal Reserve is sitting on about $2 trillion of US government assets, and is the only real internal control over lending rates and our currency's value. Who is going to manage that without a Reserve?

Who managed the currency before the creation of the Federal Reserve? The government. The Reserve was a terrible idea in the first place. At some point in time, mistakes must be corrected.

@Theaetetus,

Excellent video; nice summary. A week or so ago I spent several hours researching this - 'the why" for my own edification. Such a summary would have been good to find.

I guess for me, the next question might be: Is this situation inherent to our system? Or could there be checks & balances put in play to stave off such potentialities?

Thanks

@Theaetetus,

Theaetetus;50127 wrote:

Countries could dump their holdings of U.S. treasury bonds

How? By selling them on Craigslist for 10 cents on the dollar? I'm not sure the treasury gives refunds. They already partially created the credit crisis by throwing money at investment banks who were gobbling up mortgage-backed securities -- the money for this came from somewhere, and one of the principle motivators was massive treasury growth in large developing countries. A mortgage with a 9% yield is a lot better than a Treasury bond with a 1% yield.

Theaetetus wrote:

Judging by how well the bailout packages have worked, the government may as well burn their cash

What we have in bailout so far HAS largely worked -- 5 months ago when banks were collapsing one after another (not to mention AIG, Freddy Mac, and Fannie Mae), the absence of a bailout would have probably spelled the end of the US economy as we know it. It is conceivable that every bank in the country would have failed and that there would have been an insurmountable run on the FDIC, which would mean that people's savings would vanish. Sure, Bush's TARP allocation seems to have gone for naught (but maybe not -- we don't know enough about it yet), but Ford (at least) has been able to become more solvent and the bailout has made this a much more subacute problem.

Quote:

Who managed the currency before the creation of the Federal Reserve? The government. The Reserve was a terrible idea in the first place.

We've had a central bank in this country since 1791, with a few relatively short periods of respite (but with a vastly different economy than we have now). The current Federal Reserve is the third version of it.

@VideCorSpoon,

Aedes wrote:

How? By selling them on Craigslist for 10 cents on the dollar? I'm not sure the treasury gives refunds. They already partially created the credit crisis by throwing money at investment banks who were gobbling up mortgage-backed securities -- the money for this came from somewhere, and one of the principle motivators was massive treasury growth in large developing countries. A mortgage with a 9% yield is a lot better than a Treasury bond with a 1% yield.

Actually, treasury bills can be sold before maturation to the highest bidder. As I said, this option does not look good for foreign countries holding the bills, because they will not receive a very good return. The U.S. was very effective at dispersing the financial crisis to other parts of the world, thus, protecting the U.S. dollar somewhat.

The biggest danger to the U.S. is actually countries and people abandoning buying treasury bills altogether. The U.S. is running yearly deficits that will top $1 trillion dollars this year. This means that the Federal Reserve needs to print more money to fund the government. In turn, everyone's money is devalued. This will cause skyrocketing inflation.

Aedes wrote:

What we have in bailout so far HAS largely worked -- 5 months ago when banks were collapsing one after another (not to mention AIG, Freddy Mac, and Fannie Mae), the absence of a bailout would have probably spelled the end of the US economy as we know it. It is conceivable that every bank in the country would have failed and that there would have been an insurmountable run on the FDIC, which would mean that people's savings would vanish. Sure, Bush's TARP allocation seems to have gone for naught (but maybe not -- we don't know enough about it yet), but Ford (at least) has been able to become more solvent and the bailout has made this a much more subacute problem.

Ford never accepted any of the bailout funds so they are not an example of how the bailout "worked". They claim they can make it through 2009, because they are in far better shape than the other two due to their much better vehicles on the market. Chrysler is about to go under, because their situation is pretty much hopeless, and GM has recently asked for more money. Citi Bank and the Bank of America received funds and they are about to go under now as well. While a couple of institutions may have been kept floating, a few key groups that received bailout funds are begging for more funds. How much longer must the American taxpayers be asked to prolong the inevitable bankruptcy of corporate institutions?

Aedes wrote:

We've had a central bank in this country since 1791, with a few relatively short periods of respite (but with a vastly different economy than we have now). The current Federal Reserve is the third version of it.

If by a few relatively short periods, you mean the 80 years before the start up of the Federal Reserve then you would be correct. The Fed was created in response to panics over those 80 years that sent financial markets tumbling into recessions. In 1836, the second central bank of the U.S. was destroyed by President Andrew Jackson. National banks were fired up around 1863 to create a uniform national currency, but the Fed was the first central bank authority in the U.S. in about 80 years.

The economy of the past was based on wealth and now it is based on debt. Money is not created out of thin air even if the Fed seems to give that illusion. At some point in time, with interest rates near zero, and the Fed injecting money into the economy like it grows on trees, it will spell out economic disaster for the country--if it hasn't already.

@Khethil,

Thank you VideCorSpoon! For years I just though this whole problem was caused by the same thing that began the wall street crash, with stockbrokers selling as stocks lost value, but now the truth is revealed!

@Theaetetus,

Theaetetus;50264 wrote:

Actually, treasury bills can be sold before maturation to the highest bidder. As I said, this option does not look good for foreign countries holding the bills, because they will not receive a very good return.

Right, I was making the same point. Aside from losing money on it, the countries that hold US Treasury bills have a reasonable expectation that the US will not default on them, especially given that this collapse is still pretty young.

Theaetetus;50264 wrote:

The biggest danger to the U.S. is actually countries and people abandoning buying treasury bills altogether. The U.S. is running yearly deficits that will top $1 trillion dollars this year. This means that the Federal Reserve needs to print more money to fund the government.

No one is going to stop buying treasury bills, for reasons already mentioned. It's in the interest of the world's collective economies for the US economy to recover. The world's second largest economy, Japan, is in utter shambles by comparison to the US, and Europe has had national bank failures as well. It's not like there's some better alternative to the success of the US. I mean we're net importers with a huge trade deficit, you think the countries that export to us want that to crap out?

I haven't heard anything about the Treasury needing to print more money in response to the crisis (so long as it comes in foreign investment).

Theaetetus;50264 wrote:

Ford never accepted any of the bailout funds so they are not an example of how the bailout "worked".

Whoops, you're right.

Theaetetus;50264 wrote:

How much longer must the American taxpayers be asked to prolong the inevitable bankruptcy of corporate institutions?

Well, acknowledging the impossibility of predicting these things, the fact remains that the US will be harmed much more by a long term decline in GDP and tax revenue than it will be harmed by short term "bailout" expenses if the economy recovers as a result. Who possibly knows the answer to the right amount, though?

Theaetetus;50264 wrote:

The economy of the past was based on wealth and now it is based on debt.

As a fraction of GDP, our debt right now is small compared to what it was following WWII. And historically we HAVE had debt economies. The US debt at the end of the Civil War was $2.7 billion as compared with $65 million at the beginning. The debt from WWI was astronomical, and while it occurred immediately after the establishment of the Fed, one has to blame the sudden cost of militarization and not the Fed for it.

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