...but then it's so hard when you see graphs like this:
When you look at this from a bank solvency perspective, you just gotta wonder how they're going to pay all this back. Or are they? Now that the Fed is even taking credit card debt as collateral1, maybe the plan is just to nationalize all the bad credit, which would be the bail-out of the millennium, and so far beyond the pale that the term "moral hazard" just doesn't work any more.
Students of American history might recognize a few of those "tiny" upward blips....
Yours,
Mr. Sunny Outlook Guy
1 Just because Congress said you can't wipe out credit-card debt via Chapter 11 doesn't mean these'll actually be worth anything in a high-foreclosure environment that actually makes Chapter 7 look like a better long-term deal for the debtor.
11 comments:
You...a pessimist? No, come now, surely not.
Especially not when compared to me. Remember - I was one of the masters of the worst case scenario.
So, I see numbers like this that go off scale compared to the previous 80-90 years of data and....I don't know. It's almost too high to be believable, or, the number is so huge that:
1) The Federal Reserve has been hoarding so much over the past 80-90 years that it has only loosened its borrowing standards recently.
2) The Federal Reserve just literally made money so that no one has to pay it back (it's in the system for good now).
3) The system is even more screwed up than we all think it is.
I heard on Marketplace this morning that you have leveraged buyout organizations now buying bad debt from banks at a discount by getting a loan from that same bank to buy the bad debt.
Loans upon loans upon loans...and it seems like no one is really checking any of this. So either the entire financial checks and balances system just broke, or, none of this really matters at all because no one will be expected to pay it back. It almost seems like what is more important is the flow of currency, not who actually holds it. As long as it is moving along everywhere, no one really cares who supposedly really owns it or owes it to someone else. If it is this way, then the Fed is a major enabler of this cycle of perpetual meaningless debt, and instead they should have let things come to a crashing halt a few months ago.
The answer isn't that the Fed has been hoarding; it's simply recently created new ways to pump liquidity into the markets.
Loans upon loans upon loans is exactly why Ron Paul keeps touting a gold standard (even though that has its own issues). Unfortunately, they should not have let things come to a crashing halt. Having $1.3T of credit instruments suddenly become untradeable because no-one can trust any counterparties would have instantly put us in Great Depression conditions.
What we're experiencing now is Weimar-like money expansion compared to what it would have been otherwise. Of course, I say this, but that doesn't mean that what they did was right; only that they had no choice.
Whether we effectively survive it, is another issue. What I cannot seem to comprehend is why this has been allowed.
and I used to think 19th-century folks who hated banks by definition were quaint....
Hrrmm...I think it was new ways of investment and new ways of creating liquidity that caused the investment banks to create this mess that led to the fed acting this way.
I'm not so sure that the rest us would have really been hurt by the entire investment sector collapsing, since most of the US doesn't even have the money to invest. There certainly would be short term nastiness on the investments that people do have (401(k), mutual funds, etc.) but eventually once all the bad debt had been eliminated those who held onto what they have might return to some level of value.
Or not...I'm remembering the worthless paper of MCI and Enron and I'm thinking again that there will be lots more worthless paper coming, but now it's green and has "US Dollar" written on it. But even that isn't so bad if it gets the rest of the world to start having things made here again since we're high quality AND cheap.
We are indeed living in interesting times and I think life as we know it, especially with the US as a financial superpower, is coming to an end, but what comes out next may not be so bad, but the change and transition will be rough.
Still, I'm not sure that the Fed should have made sure that all that debt could be covered, since so much of it is suspect. I think instead it should have said that it will help lend money for debt that can be explained and shown to be reasonable, not any old collection of new financial innovations that no one can figure out.
Alex; we'd have gotten creamed. Try to imagine an economy in which you're having a hard time selling a Lexus for $1000; that's the kind of situation we're talking about.
Well - you may have a point, but with this much "creative liquidity pumping" I must go back to the point of your original post.
This debt will never be paid back, ever. If the loan upon loan upon loan and (I still love that phrase you used) "6th level arcanum" that set up the financial mess we have is what the Fed is backing up, then the Fed will never get their money back because no one knows who the money is really owed to and who owns what. Or if the debt even holds anything of actual value. It's all a bunch of meaningless paper now.
The fed may have had no choice but to prop up the financial markets, but the real price for this choice may in the end be nothing - or something far worse than we can actually fathom.
It's Scylla or Charibdis; we've avoided immediate disaster only by pointing at eventual disaster. It's not good, but it means there's hope for ameliorating or avoiding the next threat rather than just throwing in the towel (and the global economy with it).
With today's commodity prices, don't forget that for lots of people "disaster" isn't just bankers getting shafted, but people starving.
I agree that you have to pick your pain now or later, but, I don't think the commodity price problem is related to the financial mess at all. Instead that really is supply and demand. While supply has increased worldwide, the rest of the developing world wants our 1st class standard of living and they now have the money to buy it, so demand has increased so much that everyone now has to pay for scarcer and scarcer resources that used to be cheap commodities.
It seems to me that the financial mess affects the ability to finance large operations and purchases outside the reach of daily income (houses, cars, college loans, capital improvements, new factories, etc.) but not day to day living (get paycheck, buy food + gas) UNLESS the companies that pay those salaries can't live without the liquidity of the money from the debt we've been discussing. If a business cannot pay salaries without borrowing because they're not bringing in enough other money then that's a failed business. Move on, nothing to see here. But if what you're saying is that NO ONE can buy or sell without borrowed capital then that is a very different mess altogether.
Are you saying the latter is what we avoided (no one can pay for anything without that debt upon debt)? Because if that is true then all money here in the US is completely suspect and has no real value whatsoever, which means further that those countries with real value to their currency can, and could, control ALL the commodities worldwide.
It's all fiat money; it has no relationship to any assets whatsoever.
Most companies nowadays take on debt as a growth strategy (let's include equity as part of this), because as the world gets smaller (figuratively speaking), barriers to competition drop and the only way to survive and prosper is to attain critical mass fast, or else GM or WalMart will simply start selling your product far more cheaply than you can afford to. If the sh*t had hit the fan, lending in this country would have pretty much ceased. In its entirety. Even if all you needed was a small low-risk float from your line-of-credit that would've been repaid in ten days, you wouldn't have gotten it. This means you miss payroll, which means your employees, even if they keep working for you, have to dig into their assets for cash, which starts a spiral in which everyone's scrambling to convert assets into cash at the same time: catastrophic deflation. And if you think that it would be limited to mega-finance and not spiral out, don't forget we're the land that invented negative savings rates.
Now I finally understand. Thanks...I think.
Guess I know what I'm paying off in my old age. I for one welcome our overseas masters, and hope that they'll accept my organs for food.
Nah, I can't say that it probably won't be that bad, but I can say that it doesn't need to be that bad. I think the credible scenarios are anything from 5-10 years of Japan-esque economic drudgery to a really bad 1970's style stagflation. It is conceivable that we could be in the running for a Weimar-esque hyperinflation, but I doubt it for two reasons:
A) lots of people want to sell us stuff, so they can't afford for our currency to get so weakened that we can't afford to buy things from them, and
B) we can save the currency by jacking up interest rates (HARD); by doing this we face serious doldrums, and it won't stop us from attempting to inflate our way outta debt, but it'd help to ease commodity pressures, especially for fuel
Now the average investment banker will happily sell someone else down the river as long as he or she gets their phat bonus check, but luckily Washington has plenty of other constituencies besides Wall Street. The only downside to this "luckily" is that they don't tend to understand economics at all, so we might see a lot of idiot unionistas demolishing our manufacturing base before it can really get itself re-established. Who knows?
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