If Economists Knew Arithmetic, We Might Waste Less Money on Banks
There is no doubt that the economy would be better off if most of our banks were not insolvent, but only those who are really bad at arithmetic would think that repairing the banking system will restore prosperity. The economy would still be faced with a massive shortfall in demand with the unemployment rate soaring into the double digits.
The basic problem is that the economists who missed the housing bubble (EMHB) somehow still don't understand how the bubble drove growth earlier in this decade. There were two main channels:
Residential construction expanded from its average of 4 percent of GDP to more than 6 percent of GDP at its peak in 2005; and
Consumption boomed based on ephemeral housing bubble wealth, as the adjusted saving rate turned negative over the years from 2004 to 2008, compared to a post World War II average of 8 percent.
The collapse of the bubble has derailed these engines of growth. Housing construction is now less than 3 percent of GDP and the adjusted saving rate is approaching its post-war average. This is why the economy is slumping and the unemployment rate is soaring. There is no sector that can readily fill a gap in demand in the neighborhood of 8-9 percentage points of GDP.
The zombie banks don't help matters since their near death condition makes them less willing to lend money to businesses who might be able to get a loan from solvent institutions, but even if the banks were fully solvent, little about this basic picture would change.
Households are not spending more because many have just seen most of their wealth disappear with the collapse of the housing bubble and the plunge in the stock market. The rise in the savings rate is exactly what standard consumption models predict; we don't need any stories about zombie banks to explain the drop in consumption.
Similarly, the plunge in housing construction is the result of massive overbuilding. It will take years for population growth to absorb the inventories of unsold homes. Fixing the banks won't absorb excess housing supply.
There is a similar story in non-residential construction. There was a bubble in this sector that developed as housing boom began to subside. As a result, there is now enormous excess capacity in hotels, as well as office and retail space.
If consumption and construction are not likely to be affected much by the health of the banks, this leaves investment in equipment and software as a potential source of growth. But even here the impact of the financial crisis may be exaggerated.
While some businesses are undoubtedly having difficulty expanding due to lack of access to credit, this is not the case across the board. There are plenty of large healthy companies, like Microsoft, I.B.M, and Verizon that can currently borrow at very low interest rates. Investment by these firms is not being restrained by the state of the banking system.
It is also important to note that many small businesses can't get loans right now simply because we are in severe downturn. This makes all businesses much more risky bets now than in normal times.
However, there are undoubtedly businesses that would be able to get loans if the banks were healthy, but who can't raise capital now because of the financial crisis. But how much difference can this make? Here's where the knowledge of arithmetic would be so helpful to economists.
Let's assume that cleaning up the financial system would increase investment and software by 20 percent. This would be a huge increase, given that many firms would be little affected, either because they already have ample access to capital or because they are complete basket cases.
Investment in equipment and software accounts for less than 7 percent of GDP. This means that a hypothetical bank clean up would increase GDP by less than 1.4 percent. In other words, it will fill approximately one-sixth of the shortfall created by the collapse of the housing bubble.
If the EMHB knew the limited effect that a potential bank clean up could have on the economy perhaps they would not spend so much time thinking of ways to funnel taxpayer dollars to banks. Of course if the EMHB had a better grasp of arithmetic then they wouldn't have missed the housing bubble in the first place and we wouldn't be in this mess today.
Baker touches on a couple of good points in an otherwise lengthy snark. (He doesn't offer much in the way of constructive thinking)
1 Putting lipstick on banks won't address fundamental economic factors. And even healing banks won't do much. And much need to take on or roll over debts is adequately covered at the large scale.
2 The economy was overheated for years (4+) by excessive borrowing (4-25) and bubblicious housing sales at inflated prices (about 4).
Can it be that Geithner, Summers, et al are ignorant of these simple fundamentals? Is lipstick and healing irrelevant, or just not enough, and if the latter then how about a proposal or two, Mr. Baker?
What about the losses at Freddie & Frannie? How bad is it, and is Geithner trying to finesse something really awful with PPIP? (From what I know or have read, PPIP stinks)
April 11, 2009 9:28 PM | Reply | Permalink
eds there is a plan implicit in Baker's comments here which I recall him making before. He describes how bailing out insolvent banks is not going to mend the economy. He might be wrong, but it seems reasonable. Then this leads to a plan of action, which has been discussed over and over here and elsewhere, is to let the bad banks fail. These banks are too large for a simple FDIC takeover so it would require some kind of different mechanism -- one that has been called nationalisation but what that really means is that the government will take them over and liquidate their assets much as the FDIC does on a smaller scale (but make sure that those assets are not concentrated into another bank that becomes to big to fail).
This by itself does not mend the economy. But it does allow for an orderly way to write down the bad debts that will lead to emergence of a new banking system that will be able to support economic growth. This will not be a quick fix and there will much pain in the process. But it is a plan.
April 11, 2009 10:01 PM | Reply | Permalink
Yes, Intervention is an option to PPIP, but you seem to admit that neither deals well with the fundamentals... which was my challenge to Baker.
I like PPIP-eds, a variant on PPIP.
I think Geithner is trying to save a bank before the bank fails. The stress tests are looking out about 2 years. Is it smart to save a drowning man before he even hits the water, just becuase he's drunk? It reminds me of the movie Minority Report (you go to jail before you can commit the crime so that you never commit the crime in fact!).
Is there ANY cure for the fundamentals which is not worse than the disease? (I don't mean to argue for total laissez-faire Republicanism here, btw)
April 11, 2009 10:47 PM | Reply | Permalink
I think Geithner is trying to save a bank before the bank fails.
We disagree. Those banks have already failed; the issue is whether or not to give those failures tax payer dollars to reverse their insolvencies.
A fundamental rule of capitalism is that those enterprises that fail, well they fail. Do we really want the government to try to reverse those failures? Are you aware that about 30% of every new business in the US fails within about two years? Should they all be bailed out? Of course not. It would lead to incredible levels of fraud. Why should City and BoA be exempt from those fundamental rules of capitalism?
April 12, 2009 1:10 AM | Reply | Permalink
How do you know a bank has failed? You don't justify your opinion at all, so it's "I say they failed, so there!"
Do you even follow the news about the stress tests? Why would they look 2 years out, if the bank had already failed?
Please, let's have less polemics and more thoughtful discussions here.
April 12, 2009 4:16 AM | Reply | Permalink
Sure eds, Citigroup traded at 97¢ a share after receiving $360bn from the fed and treasury as well as an implicit guarantee on any future losses but they would have been just fine on their own.
April 12, 2009 9:51 AM | Reply | Permalink
PPIP is different, it's forward looking as are the stress tests. You're talking about the past, I'm talking about stress tests which attempt to look into the future. There's no question that Citi is a problem. Is it THE problem? What is the role of prior government support in stress tests? That is, does the stress test look at the bank with and without the support, or is it biased?
How about BAC, JPM, WFB, et al?
It could be that Citi with the extant support would pass the stress tests.
April 12, 2009 4:14 PM | Reply | Permalink
The collapse of the banking system reminds me of the story of the Goose that laid the golden egg.
Not being satisfied with trying to reign in the abuses, the Fed Raises rates, in order to regain control.
In effect changing the rules of the game of wealth building overnight.
Killing the goose that brought prosperity.
Those lucky enough to have gotten out of the game early enough are the new investor class buying up the destroyed assets of those who played by the rules that had been established.
I find it interesting that the whole house of cards, started busting at the seams after Bush's amnesty for alien residents failed.
These alien residents had lived in many of these homes, which have now become a part of the problem. Having abandoned the homes or rental properties that the earlier investor class had developed and planned for sustaining a financial plan to provide for retirement.
Maybe Obama’s amnesty program will provide buyers for the glut of homes.
I am cynical enough to believe that it may have been the master plan all along.
Instead MY Government decided to cut the rug out, from under those of us who because of the conditions and opportunities afforded to us, only to be kicked to the curb, in favor of a new investor class who didn't like the competition for availability, or affordability or policies?
These new power players thrive on the misfortunes of others. Unfortunate people are the new stepping-stones to riches. That’s the new game in town. It’s not all greed; it’s lack of compassion.
Compassion and empathy should have been the cornerstone of our American Experience.
Having set that as the ideal, all other policies would have supported that mission statement.
Instead we cast about on the seas for lack of a sustainable anchor.
To assure the bankers don’t meet with shipwreck, or lack of lifeboats, even if that means throwing the crew overboard.
April 11, 2009 10:08 PM | Reply | Permalink
Resistance, there seems to a message here stuggling to come out. But nonsentences like
Having abandoned the homes or rental properties that the earlier investor class had developed and planned for sustaining a financial plan to provide for retirement.
makes it difficult to see your message. Perhaps you should do some editing before posting.
But if you are trying to blame the credit crisis on recent immigrants taking out loans they could not afford, you are wrong. Subprime mortgages is not the cause of this current crises. It simply showed up there first. And aliens are not the major customer base among the subprimes.
April 11, 2009 10:29 PM | Reply | Permalink
Should I apologize because I am unlettered in the ways of proper sentencing structures?
Maybe it takes more than the usual attention for some to grasp. So be it, I am not looking for a critique nor do I have the time to keep my thoughts until I educate my self in proper presentation.
I appreciate the opportunity to attempt to clarify my position
The point I was making is this.
Lets assume for arguments sake there are two investor classes. Concerning the financial meltdown: Pre-collapse and post collapse.
The pre-collapse investor based their investment strategy upon the demand for housing with its related products.
Demand, presenting opportunities for Investors buying Lowes and Home depot stock and suppliers stepping up production to fill the shelves to meet the demand.
The immigrant is not the problem, the policy is.
It is estimated that some 12 – 20 million immigrants were in this country, right or wrong. That had a significant impact on the housing market. Undocumented alien residents were consumers of the available housing units.
Dean wrote Similarly, the plunge in housing construction is the result of massive overbuilding.
I disagree with Deans assertion of massive overbuilding.
Inventory increases due to market conditions related to lack of renters ie Undocumented workers.
Pre collapse investors were blindsided by an unstable policy.
Pre collapse investors became victims of a failed immigrant policy.
As Dean wrote “ It will take years for population growth to absorb the inventories of unsold homes”
Population growth is not necessarily birth rate growth. Increasing immigration numbers is one way to increase population growth.
Proponents of open borders have in affect allowed the system to be poisoned.
Like something out of the show “24” you’ve been poisoned and only I have the cure so you better do as I say”
Either we will increase the population growth sooner rather than later makes no difference to the large ‘To Big to Fail” business interests.
Large business concerns dependant on low wages in order to compete. With banking as their tools, in order to bring about their agenda.
I suppose with Obama’ new immigrant agenda, business’s will find a willing pawn.
All the while as Presidential Candidate Gore pointed out, about an electorate voting against it’s own self-interest
Or http://avalon.law.yale.edu/20th_century/froos2.asp
Second Inaugural Address of Franklin D. Roosevelt
WEDNESDAY, JANUARY 20, 1937
"To do this we knew that we must find practical controls over blind economic forces and blindly selfish men…
In fact, in these last four years, we have made the exercise of all power more democratic; for we have begun to bring private autocratic powers into their proper subordination to the public's government. The legend that they were invincible--above and beyond the processes of a democracy--has been shattered. They have been challenged and beaten….Our progress out of the depression is obvious. But that is not all that you and I mean by the new order of things. Our pledge was not merely to do a patchwork job with secondhand materials. By using the new materials of social justice we have undertaken to erect on the old foundations a more enduring structure for the better use of future generations…”
Selfish private autocratic powers will now find a compliant citizenry willing to bend to the wishes of corporate interests.
We will see the glut of homes swallowed up, by increasing population growth, or we will see continued financial malaise.
Either way businesses To Big to Fail” will keep raiding the treasury, in order to survive or outlast a citizenry on its knees.
All the while, the post- collapse investor as previously mentioned, will like the new paradigm and will wholeheartedly support this new financial arrangement, because of self-interest. Selfish interest
April 12, 2009 2:34 PM | Reply | Permalink
That's not quite technically true. There are plenty of people to fill every single vacant/foreclosed house in America (human wants being infinite and all), it's just that prices are still too high for them to buy because banks are still trying to eke out every bit possible from what's left of their bad investments. But in a functioning economy (perhaps in a world without massive bailouts) house prices should adjust relatively quickly and the excess supply will be consumed quickly. In fact, letting the banks fail might be the best thing we can do to promote recovery because it will force them to sell their assets at firesale prices and thus at prices that people seeking a home can actually afford.
April 11, 2009 10:18 PM | Reply | Permalink
Actually, many modest properties are down 50% and foreclosed properties are selling in many areas.
Why should the banks depress housing prices [farther] by flooding the market now??
April 11, 2009 11:27 PM | Reply | Permalink
With your scenario, the new investor class will have a distinct advantage.
If house A and house B are identical, and house A’s owner has a 300k dollar mortgage and house B’s new owner bought his for 100K through a manipulated plan or purposed devaluation.
After 10 years both owners decide to sell. Both sell for 200k
Owner A will have lost 100k but owner B will see a gain of 100K
All because your plan destroyed A in order for B to profit.
Consider too that the B investors may have gamed the system, transferring or redistributing the wealth to the B class.
Unless the new game should be A should wait a little longer and just about the time B having believed they made a wise decision; A should walk away from the house and maybe B will begin to empathize with the A class. Then I suppose from the ashes we’ll see a C class, until finally someone in Washington figures out they should have protected the A class.
4% mortgage rates should have been across the board; it may be to late now.
April 12, 2009 3:38 PM | Reply | Permalink
"4% mortgage rates should have been across the board; it may be to late now. "
How does manipulation of rates to make up for principal errors really work out? The principal still has to be paid back.
April 12, 2009 4:20 PM | Reply | Permalink
Bonds could have been sold. Similar to War bonds
The principle payment could have been suspended temporarily. For a start 2 years , till we sorted out the mess. if it took 5 years. So what?
But no! instead we give millions for bouses.
Millions that could have been used to offset te possibility of defaults.
Defaults because people could not afford to stay in the homes.
Interest only payments would have given the economy the stimulus it needed.
The reduced interest rates would have made it possible for some (NOT ALL) for the people to have stayed in the homes.
With the added benefit of, reducing blight.
With homes being maintained and property values stabilizing.
April 13, 2009 1:56 AM | Reply | Permalink
Instead of helping the people in need, BONUSES, were given priority.
In an attempt to explain away their lack of concern for the needy, Dodd and the rest of the corrupt, use legalese in order to obfuscate the reality of who really is in control and to what measures they’ll take to keep it.
Time to earn your money Mr. Dodd.
April 13, 2009 2:12 AM | Reply | Permalink
"The principle payment could have been suspended temporarily. "
That's a theory. It wasn't obvious from your other comment. You propose driving interest rates down AND suspending the building of equity, to doubly reduce current cash flow from borrowers to lenders. That removes a possibly significant burden from borrowers.
It places a doubled burden on investors who underwrote loans. Maybe it's reasonable, maybe not. My view is that all parties involved need to take losses.
April 13, 2009 3:50 AM | Reply | Permalink
No, there really aren't plenty of people willing to live in a lot of these houses. Not at any price. Developers built huge tracts miles from schools, jobs, stores and other services, because the money was there and they thought they could get enough people in for long enough that they could get out.
The "good" news to that part of the overbuilding phenomenon is that we really don't need to wait for those units (whether residential or commercial) to be absorbed by the market. We just let them sink into decay and move on.
April 13, 2009 1:14 PM | Reply | Permalink
Why wait for the decay?.
Once the insurance company has paid off on the default. Bulldoze the home and eventually we’ll create a shortage.
Don’t let the homebuilders build for an extended period and the laws of supply and demand, will assure a handsome profit for those who invested in homes. If the lesson learned from the oil cartels and the Federal Reserve, control the amount and you’ll create wealth for some.
April 13, 2009 1:35 PM | Reply | Permalink
More than one knowledgable observer has pointed out lately that the government is being held captive by the financial sector and that's why they continue to pursue the bailout strategy of throwing good money after bad by giving the banks trillions of dollars. If this is true Mr. Baker, then perhaps the entire premise of your post needs to be in question. By that I mean you are presupposing the idea is to recreate prosperity and to get the economy moving again. What if the point is simply to service the needs of the banking and financial sector by protecting the interests of the execs and top shareholders and to hell with the rest of the economy? After all, that is the way they behave normally isn't it? Why should it be any different now?
April 12, 2009 1:27 AM | Reply | Permalink
the government is being held captive [with silken threads] by the financial sector . . . .
I doubt Summers and Geithner needed to be captured.
They entered upon their duties holding theories which pretty much mandated the maintenance of the big bank paradigm as the means of generating credit* to reverse the deflationary effects of debt destruction (deleveraging). And of course, the less debt destruction which must be recognized (PPIP) the less deflation there will be to have to repair.
* If you believe that the money supply is necessarily increased when the Fed loans reserves to the banks because your theory tells you the banks will (must) lend those reserves, then, you want to have the banks there to borrow those reserves.
April 12, 2009 4:28 AM | Reply | Permalink
Mr. Baker keeps brushing up against the truth and shies away. The economy is people buying groceries, clothing, furniture, movie tickets... The only way those people can do that is to have cash. A couple months ago someone said that the most effective stimulous would be to hand envelopes of cash to poor mothers but immediately said that of course wasn't going to happen. And that is right on both counts.
We have become so accustomed to the obvious solutions to our real problems being "off the table". We all know that it is disasterous to let the giant banks fail but we also know that they are great black holes and are going to fail no matter what is done. So while we shovel all available cash (as well as unavailable cash) down the bottomless pit we fail to do the one thing that might make a dent. Give cash to consumers. Oh its socialism. You can't give money to the great unwashed. They are just irresponsible welfare queens.
Socalism, welfare queens or whatever scare words you want to stick on it, after all the trillions the banks can suck up have still failed to fix the economy it will all come back to lubricating the skids by getting cash out to people who need things to live. Somehow. The real game is in the streets where people live, work and yes dream. The quicker we stop futzing around with lost causes and get down to reality the sooner we will come to pulling the fat out of the fire. But I'm not going to hold my breath. The real solution is of course off the table.
Oh yeah, single payer health care would do a lot to get cash and jobs moving too. And relieve a great deal of misery and fear while we are at it. And it has the support of the majority of physicians. And it makes sense. And the rest of the civilised world does it sucessfully. But that of course is off the table. Of course!
April 12, 2009 4:37 AM | Reply | Permalink
Very well said!
You should make this into a blog post of it's own.
April 12, 2009 10:54 AM | Reply | Permalink
Minor point, they do not (strictly speaking) need cash: they can, as many did for many years, buy on credit (pledging future cash) instead.
On the whole, buying on credit is a bad plan (with some exceptions: few if any things are wholly good or wholly bad). I just feel the need to point this out before adding more to Purple State's comment below.
April 12, 2009 3:27 PM | Reply | Permalink
What table? Whose table?
Surely by now the realization is; your not invited to sit at the table. "You are not worthy", is their reply.
Having quelled the resistance, life is good for the well connected.
Erect another barn door, when the populace becomes restless. Throw out a few crumbs when necessary.
But above all else, remember who you serve.
April 12, 2009 3:53 PM | Reply | Permalink
Really, the problem with our economy is a lack of wage growth among typical workers. Over the past decade or so we had a huge boom in consumer spending stimulated not by growing wages but by increased borrowing. (Increased borrowing fueled the housing bubble, which in turn made borrowing even easier as home equity values became inflated.) The key to restoring our economy to health is finding a way to increase the wages of ordinary workers. Since the 1970s, our economy has consistently lost jobs in which people make things to countries like China and India. The jobs that have stayed are of two types: jobs that can't be moved offshore (retail and other lower-paying service-sector jobs that essentially exist to move product made elsewhere to consumers living here) and high-paying professional jobs that require special skills that until recently weren't found as commonly outside the US (consulting, engineering, finance, management). During the Clinton years, the high-tech boom temporarily reversed the trend, as new products invented in America and produced here created new good jobs (for software engineers, chip manufacturers, etc.). These high-tech jobs are now increasingly being shipped overseas too, and nothing is replacing them. Further, the high-paying professional jobs are increasingly disappearing here as other countries catch up. The US financial services industry, which had become a disproportionately large part of the US economy, is now in disarray and the "brand" of US finance has been badly tarnished. This will lead to a shrinking US role in finance and therefore the loss of more high-paying jobs.
So what do we do? Three things seem important to me:
1. Encouraging innovation--is there an innovation on the horizon that can do for us what the creation of the PC and internet did for us in the 1980s and 1990s? Alternative energy and environmental technologies seem promising, but so far we haven't delivered, in part because of our pro-oil, pro-coal, pro-big-agriculture government policies.
2. Preserving jobs for people who make things--these are the jobs that can employ a large number of people at decent wages. We need to keep these jobs here rather than shipping them to other countries.
3. Restructuring corporate governance. Right now our current corporate governance structure allows companies to set policy solely in the interest of top managers and (to a lesser degree) shareholders. Increasingly, our companies exist to make the C-suite rich. Employees (and even shareholders to some degree) have little voice, and their interests are sublimated to the interests of top management. This is a disaster, which encourages short-term thinking and little concern for objectives broader than boosting the value of the CEO's compensation.
While stabilizing the financial sector is important in the short term, our economic policy rapidly needs to re-focus on job creation. Without good-paying, stable jobs our economy is headed for a long-term decline. We have been slow to recognize this truth, but we ignore it further only at our great peril.
April 12, 2009 8:19 AM | Reply | Permalink
This is exactly correct:
The income distribution can be viewed as a sort of pyramid. The "typical worker" is mostly found towards the bottom of the pyramid, where there are many people earning smaller incomes, while "the rich" (I prefer the phrase "high income types") are smaller in number and bring in more income. The higher you go in terms of relative income, the fewer people there are collecting it, so the pyramid naturally narrows to a peak.Now, a pyramid that is "well-formed" (broad in the base and not too tall) is structurally sound. But if you raise the income of the top-tier folks higher and higher without strengthening the base (by raising it as well), you get a tall skinny thing that falls over in the first economic storm. This is exactly what "the rich" (the high income people) have built over the last few decades, by cutting taxes on the high income groups while cutting the relative social-service provisions to the people down at the base of the income pyramid.
A single-payer universal health plan would immediately strengthen the pyramid and thus would be quite helpful. Other items (your numbers 1 through 3) would also be good, but when one realizes that towers of any sort, including pyramids, need good foundations, one can immediately see—even if one is in the top tier income group—the wisdom of certain approaches. Unfortunately, many of our high-income-earners are just not very smart/wise.
April 12, 2009 3:45 PM | Reply | Permalink
How is "wage growth" sacred?
I agree with the cite about excesses of borrowing (see my blog on Greed if interested in more on that). But you're not seeing the whole picture if you think wage growth is the key to the current problem or its resolution.
April 13, 2009 4:21 PM | Reply | Permalink
I disagree with Dean on one point. The problems in our economy didn't start with the housing bubble. The housing bubble was, perhaps, the event that brought the whole thing crashing down, but the real problem began with the decision of our ruling elite to crash wages for the majority of the US population. What's interesting is that the same ruling elite was unwilling to live with the consequences of that decision--much lower living standards for the majority of the population--and set about creating a credit system that enabled people to make up the shortfall between their wages and the cost of living. The housing bubble simply enabled the powers what be to keep credit flowing as people exhausted their access to unsecured debt.
And we need a better acronym than EMHB. It is not catchy, it does not flow.
April 12, 2009 3:22 PM | Reply | Permalink
I'm not wise enough to argue what the problem is or was, but I read enough to suggest (at least) a bigger part of the problem was derivatives. The problem didn't start with the housing bubble. The housing bubble was just the open wound that allowed in the fatal infection which is unregulated derivatives. Wendy Graham, while a regulator for Reagan started the problem by removing derivatives from regulatory control. Hubby Phil finished the job by inserting into the budget late in December 2000 law that completed the deregulation. (Clinton's financial team and the Fed. allowed and/or sanctioned the deregulation.) Then Graham and his co-horts went further and repealed the Glass-Steagal Act, allowing single entities to sell mortgages, re-package those same mortgages as unregulated derivatives, without maintaining an interest in the original mortgages. From the early 80's to mid 90's derivatives' notational value grew to about $55 Trillion. Credit default swaps didn't exist until the mid-90s. Now their notational value is about $60 trillion, and derivatives, in total equal about $600 trillion. Weigh this against the WORLD GDP is about $60 trillion.
Without derivatives, even if everything else stayed the same, the entire sub-prime market was worth about one trillion, with a few hundred billion in defaults.
I agree that much of the liquid assets in this country were being generated by people building, buying, selling, remodeling, purchasing for and borrowing against their homes, but it is my understanding that the capital sector, especially derivatives, counted for about half the entire economy.
Isn't the bigger problem not the housing bubble, which at least involved building something, but an enormous house of cards built on unregulated and over-leveraged derivatives that are nothing more than empty side bets? One bad loan is a problem, which can lead to a default of a single house. Trillions of dollars of debt stacked on that same loan is both a crisis and a grand failure of the entire economic system.
April 13, 2009 4:41 PM | Reply | Permalink
I basically agree with your review (or it sits well with me, agrees with me).
Some of the house of cards amounts to gambling debts and some is outright criminal. Neither part should be bailed out by government funds, directly or indirectly. Such contracts should be voided.
"Financialization" is a word Kevin Phillips has used for quite awhile. I discuss "assetization" briefly, and I'm starting to look at "Financial debt" as separate from the usual consumer and producer debts, in my blogs at TPM. I suspect that Financial debt, given at $17T, is almost all funny money.
BTW, notional values aren't all that real, but what can be problematic is the "market value" of derivatives, and last year interest swaps were at $9T and CDS at $3T. Those are still huge numbers unless they all cancel out to better than about 1% which would still be a lot (or .1%).
April 13, 2009 8:33 PM | Reply | Permalink