He's right and he's wrong. Inflation is getting out of the fed's control, and swapping bonds for cdo's is an incredibly risky move which is likely to increase the problem in the medium term. Roger's solution, though, would inflict massive pain not only on the upper investor class but also on the lower home owner class. This is what Bernanke and Treasury and all of the big banks are trying to avoid. They are attempting a "soft landing" at the expense of everyone. So much of economics is perception - if they can just convince the lenders everything will be ok for a while, the borrowers will come back in with incredible demand. Once the credit market starts moving again, (consumer and corporate) spending will start moving again. That is what drives growth. The U.S. is in a terrible mess and lots of people are going to get hurt by it. The question is how many people and how badly. Do we spread it around to everyone, or do we let it fall like a piano on the heads of low income home owners and high income investors? Take your pick -- both scenarios suck, but ultimately one causes less overall suffering.
So much of economics is perception - if they can just convince the lenders everything will be ok for a while, the borrowers will come back in with incredible demand.
You've just outlined why Jim Rogers is right. Banks have been technically insolvent for at least 2 months, and the NY Fed open market reports have shown that there's at least one very large depository institution in deep trouble. The credit crisis stems from people not knowing who is in trouble, and to what extent. The Fed only makes this worse by extending endless credit to institutions which would've otherwise been forced to liquidate their assets, returning confidence to the system.
The credit market won't start moving just because the Fed keeps throwing money at it, because in the grand scheme of things it's the market that sets interest rates, especially to the low income owners that you're trying to protect. They've gambled with this gimmick for the last 9 months and have only managed to create more uncertainty and a weaker dollar.
>> ^Enzoblue: Or we can just take 4% the richest 2% of americans net worth and solve this issue instantly and end world hunger at the same time.
It would certainly fit the third world nation rationale behind the current US economic policy.
The White House should go with the whole banana republic package. Here are some ideas: (1) institute a price freeze on basic food products, also prohibiting their export; (2) start taxing speculative market operations, especially those involving overseas transactions; (3) tax all monetary transactions, irrespective of nature; (4) increase the size of government, increase regulation; (5) start blaming foreign nations; (6) nationalize health and infrastructure services; (7) start a program awarding food/fuel vouchers and money allowances to low income families, where "low income" encompasses a large category; (8) increase government spending with large projects, in order to jump-start the economy; (9) have the president make frequent, 4 hour long speeches.
(2) start taxing speculative market operations, especially those involving overseas transactions;
I agree with this one, as right now speculative market transactions are done at seemingly no risk. But I would also add compounded debt instruments because its exactly that kind of claptrap created this mess in the first place.
I find it ridiculous that the Fed, the banks, credit evaluators and the investors are basically being bailed out for what I believe is careless, greedy, haphazard gambling of the mortgage market through bundling of various financial instruments.
They got themselves in this mess by seeking ridiculous and unrealistic profits but now they are trying to socialize the costs. No one is being held accountable, meaning that playing of the financial system will only continue.
The financial system should be based on evolution, bad ideas and endeavors should hurt those who took part in them or at the very least punished but no one is. It's ridiculous.
My comment was a bit tongue in cheek Flavio, but few people realize just how much money these guys are making. It's not that I don't think they should make more, I just don't think they should make astronomically more.
Perspective PSA:
Take, for instance, Warren Buffet. He's worth 42 billion.
Now say that someone wants to pay you to walk away. This person agrees to pay you 100,000 dollars for every foot, (12") you walk. For the average american, it would take 3.5 years to make 100,000 dollars and you can make that in a single foot.
Now get this, in order to earn 42 billion, Like Warren, you would need to walk 79.5 miles!! that's making one MILLION dollars EVERY 10 FEET for 79.5 miles.
It's staggering to me. If I had HALF a million I could live out the rest of my days without working easily with CD's or stable investment work and living off the interest, and these guys make that in the time it took me to type this.
I say kill the rich and let their blood trickle down instead.
(2) start taxing speculative market operations, especially those involving overseas transactions;
I agree with this one, as right now speculative market transactions are done at seemingly no risk.
Well, it's always like this at the end of a bull market. And the bull market/bear market cycle is a creation of the central banks. It's a cycle of low interest rates, overvaluation and malinvestment followed by the inevitable price corrections and high interest rates.
There's already a way of making institutions accountable: let them go bankrupt. The market is self regulating, and bailing speculators out is stealing from tax payers.
Taxing speculative operations would only further aggravate the crisis, because in times of uncertainty it's the speculators who move the economy.
Great video, and great discussion. I know very little about economics, but it's obvious even to me that the American economy is going to be seriously affecting the rest of the world over the next few years, and I'm really happy that people are talking about it.
Bear Stearns, pushed to the brink of bankruptcy by what amounted to a run on the bank, agreed late Sunday to sell itself to JPMorgan Chase for a mere $2 a share, narrowly averting a collapse that threatened to cascade through the financial system. The companies said that the Federal Reserve would provide special financing in connection with the transaction and that the Fed had agreed to fund up to $30 billion of Bear Stearns’s “less-liquid assets.”
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You've just outlined why Jim Rogers is right. Banks have been technically insolvent for at least 2 months, and the NY Fed open market reports have shown that there's at least one very large depository institution in deep trouble. The credit crisis stems from people not knowing who is in trouble, and to what extent. The Fed only makes this worse by extending endless credit to institutions which would've otherwise been forced to liquidate their assets, returning confidence to the system.
The credit market won't start moving just because the Fed keeps throwing money at it, because in the grand scheme of things it's the market that sets interest rates, especially to the low income owners that you're trying to protect. They've gambled with this gimmick for the last 9 months and have only managed to create more uncertainty and a weaker dollar.
Instead of outlining everything I believe in, I'll refer you to Karl Denninger's open letter: http://www.denninger.net/letters/open-letter.pdf
Or we can just take 4% the richest 2% of americans net worth and solve this issue instantly and end world hunger at the same time.
It would certainly fit the third world nation rationale behind the current US economic policy.
The White House should go with the whole banana republic package. Here are some ideas: (1) institute a price freeze on basic food products, also prohibiting their export; (2) start taxing speculative market operations, especially those involving overseas transactions; (3) tax all monetary transactions, irrespective of nature; (4) increase the size of government, increase regulation; (5) start blaming foreign nations; (6) nationalize health and infrastructure services; (7) start a program awarding food/fuel vouchers and money allowances to low income families, where "low income" encompasses a large category; (8) increase government spending with large projects, in order to jump-start the economy; (9) have the president make frequent, 4 hour long speeches.
I agree with this one, as right now speculative market transactions are done at seemingly no risk. But I would also add compounded debt instruments because its exactly that kind of claptrap created this mess in the first place.
I find it ridiculous that the Fed, the banks, credit evaluators and the investors are basically being bailed out for what I believe is careless, greedy, haphazard gambling of the mortgage market through bundling of various financial instruments.
They got themselves in this mess by seeking ridiculous and unrealistic profits but now they are trying to socialize the costs. No one is being held accountable, meaning that playing of the financial system will only continue.
The financial system should be based on evolution, bad ideas and endeavors should hurt those who took part in them or at the very least punished but no one is. It's ridiculous.
Perspective PSA:
Take, for instance, Warren Buffet. He's worth 42 billion.
Now say that someone wants to pay you to walk away. This person agrees to pay you 100,000 dollars for every foot, (12") you walk. For the average american, it would take 3.5 years to make 100,000 dollars and you can make that in a single foot.
Now get this, in order to earn 42 billion, Like Warren, you would need to walk 79.5 miles!! that's making one MILLION dollars EVERY 10 FEET for 79.5 miles.
It's staggering to me. If I had HALF a million I could live out the rest of my days without working easily with CD's or stable investment work and living off the interest, and these guys make that in the time it took me to type this.
I say kill the rich and let their blood trickle down instead.
I agree with this one, as right now speculative market transactions are done at seemingly no risk.
Well, it's always like this at the end of a bull market. And the bull market/bear market cycle is a creation of the central banks. It's a cycle of low interest rates, overvaluation and malinvestment followed by the inevitable price corrections and high interest rates.
There's already a way of making institutions accountable: let them go bankrupt. The market is self regulating, and bailing speculators out is stealing from tax payers.
Taxing speculative operations would only further aggravate the crisis, because in times of uncertainty it's the speculators who move the economy.
But thats the thing, flavioriberio, I don't believe anyone is going to be going bankrupt. They are gonna be bailed out.
Indeed.
Bear Stearns, pushed to the brink of bankruptcy by what amounted to a run on the bank, agreed late Sunday to sell itself to JPMorgan Chase for a mere $2 a share, narrowly averting a collapse that threatened to cascade through the financial system.
The companies said that the Federal Reserve would provide special financing in connection with the transaction and that the Fed had agreed to fund up to $30 billion of Bear Stearns’s “less-liquid assets.”
Source - http://www.nytimes.com/2008/03/16/business/16cnd-bear.html?_r=1&hp&oref=slogin