The world economy

[taiyuu_otoko]

If I could remember the link, I'd post it. It was Buffet explaining the psychology behind and housing crash.

If you are homeowner with a decent job, and able to make payments, you feel like you've lost a lot even though your monthly balance sheet is the same, because the value of your house crashed 30% or so rather quickly. So because you feel you've lost a lot of money, you spend less.

If you are a homeowner that bought a house with with a cheap introductory variable interest rate, your payments will go up as the variable interest goes up. If you thought you could refinance as the housing value went up, you were suddenly faced with paying off a loan for a house you couldn't afford that was worth three quarters of what you paid for it. Some of these folks were foreclosed on as their payments exceeded their salaries, as both they and the banks thought that continuously increasing housing prices would keep this from happening.

Throw into the mix that mortage companies broke up and re sold loans. When they do this, they don't sell each loan by itself. They break it up into chunks and mix it in with others. What happened is chunks of bad loans got mixed in with chunks of good loans, and is spoiled the whole mix. So banks and mortage companies and other creditors that bought these loans soon had what one analyst referred to as "A case of water, some of which has poison, but you don't know which, so the whole case is bad." This started happening a couple of years ago.

A large part of the economy is based on credit. And when you can't afford to pay back credit, and the creditors can't afford to lend it, people get screwed.

all this ads up to is many people from different walks of life have a huge black financial cloud following them around, so they spend as little money as possible. This of course snowballs and screws everybody over.

Part of the problem is, for a long time, it was an accepted fact that homeownership just wasn't in the cards for many people. When the idea got out there that everbody "deserved" to own a home, banks catered to that idea because they could make a quick buck. Now the music has stopped, and there aren't near enough chairs to go around.

Money is very much a psychological concept. People that have money now, don't want to spend money because they don't feel confident about their future. People that don't have money, can't spend money because they can't borrow it.

When the government talks about "bailouts" and "stimulus packages" and "job programs to build highways" there is'nt some secret pot of money somewhere they can bust out and make everything better. It comes from taxes which comes out of your pocket. If they tax you more, you'll have less, so you'll spend less, which will make things worse.

Many stock analysts say the real reason it took so long for the great depression to finally end after the crash of '29-32 (it took the market, when adjusted for inflation 30 years to recover) was not because of financial policies or the new deal, or the stimulating effects of WWII, but simply becasue most of the people that were alive during the great depression DIED, and it took another generation of people whose minds were free of the memories of hardship to revive the economy.

IF that is true, AND and you havent' made your fortune yet, (like yours truly) you'd better start thinking outside the box when it comes to your own financial health and well being. Cause the old model ain't gonna get fixed for a while.

Of course this is all my opinion, and I could very well be misled or misunderstanding of economics 101, but I think it would be safe to heed the "think outside the box" advice.

despite the doom and gloom you see on the news everynight, there will ALWAYS be plenty of ways to make money. If you need some inspiration, Watch the Sting, or Cinderella Man, or other depresseion era movies of succesful people.

Peace

 

[speakeasy]

Basically they lent out so much money to people who can't afford to pay it back, they got stuck holding their c0ck with no cashflow coming in.
And now good ol' uncle sam is giving these companies our tax dollars to "save them". Where is that fvcker when i fall behind on my credit cards or can't afford my car payments anymore? Big corporations got "bailed out" after years and years of mismanagement, wrong decisions, and insane CEO bonuses, and we're stuck with the bill.

Yeah, it sickens me to no end. It's enough to make you want to send a white powder envelope to every damn one of those CEOs.

 

[KontrollerX]

"Wow yes I agree. Name calling is not necessary. It also shows the posters maturity level whomever they may be."

The guy is a huge troll.

Anyone calling him an idiot is simply exercising their only option at releasing their frustration since your admin won't ban the guy.

Too busy getting rid of good posters like ( . )( . ) I guess.

 

[Rovalier]

The "Small 3" are done. The bailout won't solve their problem just delay the inevitable, perhaps an organized bankruptcy at most. Either ways, anyone with pensions with these companies are done for. Fear not, just start saving now and learn to invest in the right things while you still have the chance.

A bunch of states are veering on bankruptcy now. Like California, New Jersey, Ohio, Nevada, Florida... Goldman Sachs already provided a list of states to do credit default swaps on. Other States like New York are in for a gigantic tax increases with cuts to services like health and education. This is what happens when you rely on taxing a higher percentage from upper income tranches; they are now in a bind from the crisis, so less money for the government to squander, whilst gigantic liabilities remain. I'd imagine a lot of people are going to start "John Galting" sooner or later.

The next two things to pop is the credit card bubble, and the American currency.

So basically if **** hits the fan was a way to describe our economy, we are watching a piece of **** flying towards the fan right now. We haven't even dealt with the worst part yet :crackup:

2009 will be interesting...

 

[STR8UP]

Wow, my comments weren't even directed at anybody. Would you like to get into an online debate about economics? Perhaps you could teach me a thing or two.

Sorry if my name calling offended anyone, I was simply calling a spade a spade. You add very little to most discussions and when you start up with a bunch of liberal propaganda I'm gonna call you on it.

Anyone who believes that it is simply poorly run companies that are hurting needs to wake up and smell the coffee. When you see sales evaporate right in front of your eyes, two years into a new business when you are SUPPOSED to be at a point where you start to make some money, you aren't "making excuses" in order to screw everyone and walk away with the bag of money, you are protecting your hard earned investment so YOU aren't the one who is out on the street.

That's the blessing and the curse of owning a business. you are the last one to get paid, and you are the last one to get paid. This means that everyone gets paid before YOU. This also means that if times get tough, you have every right to cut employee hours, lay people off, and cut benefits. The business owner doesn't owe the "at will" employee any more than the employee owes the business owner. Anyone who thinks otherwise should try running a business like the one that provides them with a paycheck. It isn't as easy to make a bunch of money as you think, and it often entails putting your ass on the line.

There, I didn't call anyone a name. Happy?

 

[speakeasy]

That's the blessing and the curse of owning a business. you are the last one to get paid, and you are the last one to get paid.

Umm, thanks. I'll remember that next time another CEO gets a $50 million dollar golden parachute and parties it up with taxpayer bailout money like AIG.

It's undeniable that wages for the middle class have not kept up with inflation over the last generation, meanwhile salaries at the top of the pyramid have exploded during the same time. You don't have such a huge disparity between the top earners of the company and the average worker in that company in other industrial nations. I think in some ways, we've gone through the Gilded Era part II.

 

[SmoothTalker]

STR8UP, you're talking like a small business owner, and no doubt, they are hurting now when people are spending less money.

However, everybody has every right to be disgusted with big businesses which ****ed up BAD themselves and are still using tax payer's bail out money to pay themselves bonuses. You talk about putting yourself at risk to make profit, but that's the problem, once you're "too big to fail" there is no risk, you will be kept afloat no matter what.

AT&T recently laid off a bunch of workers, and then used the savings to boost their dividend. That's obviously a move that won't look to good to the general public, but its their own money and as a corporation they're responsible to their shareholders, so whether its fair or not, I have no problem with them doing that.

When financials lay off hundreds of thousands of people, and get billions of tax payer dollars, and then pay out huge bonuses (to incompetent management that got into this mess!?) and continue to have exotic company retreats when they know they shouldn't (for the last one they asked the hotel to not put up any signs with the company name to keep it discrete), well yeah, we have a right to be cynical.

In Canada we haven't really had to bail out our financials too much (yet - real estate here is starting to collapse, we'll see...) but we are bailing out failed US car makers that will almost certainly withdraw Canadian production anyway, and I'm not too pleased with that at all.

Speakeasy, you have a point too. No matter how you look at it real wages for average people haven't kept up, but its much much worse if you look at REAL inflation verses the BS official figures. I've studied economics so I know how inflation is calculated, and I don't buy for a minute that intelligent economists actually believe it when they claim CPI OVERSTATES!? inflation.

They use things like substitution bias and unmeasured quality improvements to justify this. In other words, the Walmart effect. I call BS - while certain things may have experienced this, for example cars last longer than they use to now, and computers definitely deliver more each year for the same amount of money or less.

But this is far outweighed by the opposite effect for almost everything else. Things use to be made well, and made to last. Nobody's measured the huge decline in almost all consumer good quality since we started making things in China and designing them to last a year instead of as long as possible. For example my family has gone through 3 microwaves in the last 5 years, and we buy mid to high range brand name stuff. Its just crap. My friends's family on the other hand has one from pretty much when they started making them (thing must be at least 15 years old) and its still going. Nobody measures that impact.

Sure, houses are bigger and fancier these days, but have you ever actually looked at the workmanship in them these days? Absolute **** - most of the carpentry looks like its done by grade 8 shop class students, and my dad tiled our kitchen better than 'professionals' seem to be able to do judging by recently built houses.

Substitution from quality goods to cheap Walmart knock offs also hides inflation, rather than overstating it like they claim.

We're getting ****ed and have been consistently paying more for less for decades now, but at least we have shiny new computers, ipods and SUVs to shut us up and keep us distracted.

 

[Hooligan Harry]

While I agree that executive salaries and bonus structures are obscene, the bailouts had to come for the good of the world economy. If not for the bailouts we would be in the middle of a depression. Companies dont have to pay those salaries, they choose to pay those salaries based on the perceived value of those skills. That needs to be looked at. I deal at board level and can tell you that some of the mugs that are sitting there are there because they kissed the right asses and work 80 hour weeks. Not because they are wunderkinds.

You want to blame someone? Blame your Democratic government under Clinton for wanting to ensure credit and housing was available to the poor when it was simply not feasible. Blaming business for capitalising on the boom in property and credit is ludicrous.

Its the nature of capitalism. Exploit and bend legislation and policy as much as possible to become more competitive and profitable. The bottom line is that if the Clinton administration was a little more strict with their consumer debt policies there would have been no worldwide housing bubble in the first place. The poor would have been forced to save their money before they got a home.

Sorry chaps. You dont get to have 40% of the population paying little to no tax while still expecting to sustain social upliftment programs and a large middle class. Swell move by the Dems eh? Try get private enterprise to fund the upliftment of the poor who were already paying little to no tax.

This is a long over due correction. Its going to be tough for a lot of us and the more money you have now the more it hurts you. However, saying that, its going to bring about tremendous opportunities in the next 2-3 years. I have already been seeing dollar signs

"Let it snow, let it snow, let it snnnnooowwww"

 

[speakeasy]

While I agree that executive salaries and bonus structures are obscene, the bailouts had to come for the good of the world economy. If not for the bailouts we would be in the middle of a depression.

Could very well be that the bailouts are simply prolonging the inevitable. Easy money is what got us into this mess in the first place, yet all the government does is address the problem by loosening the money even more.

Companies dont have to pay those salaries, they choose to pay those salaries based on the perceived value of those skills.

http://www.portfolio.com/interactive-features/2007/06/salary_comparison
Several decades ago, a CEO made 28x average salary pay. the chart stops in the 70s, but in the 50s I believe it was even dramatically lower than that. In the last year of the chart 2005, we were now looking at 465x average pay, that's a bit down from over 500 in 2000, but damn. In a place like Japan or western Europe, that gap may be what it was for us in 70s. The U.S. compared to other industrial nations is just not a very equitable society when it comes to pay. And that's becomes even more glaring obvious when you factor in that Americans are statistically the hardest working of the industrial nations. We work the most hours, have the lousiest health care system and have the smallest vacations(most western economies give their workers at least a month of paid leave per yer, when we are lucky if we get 1 week paid off a year). We are so caught up in "rah rah USA! we are the best!" that we don't realize how we're lacking.

You want to blame someone? Blame your Democratic government under Clinton for wanting to ensure credit and housing was available to the poor when it was simply not feasible. Blaming business for capitalising on the boom in property and credit is ludicrous.

Clinton wasn't responsible for this problem. If anyone can be blamed for the bubble, it was Alan Greenspan holding rates lower for way longer than he should have. Now personally, my view on government assistance in home buying is libertarian, I don't believe it's something they ought to be meddling in. But the real reason the shyt hit the fan is because of massive speculation in the housing market, people flipping homes, buying more house than they should have. It was a gold rush caused by Greenspan's easy money policy.

Sorry chaps. You dont get to have 40% of the population paying little to no tax while still expecting to sustain social upliftment programs and a large middle class. Swell move by the Dems eh? Try get private enterprise to fund the upliftment of the poor who were already paying little to no tax.

People were using that same argument against the New Deal. If people had listened that, we'd have old people in the streets in mass eating out of trash cans.

 

[Bible_Belt]

You dont get to have 40% of the population paying little to no tax

I am guessing that refers to Federal income tax. But there are a lot of other taxes. Poor people buy plenty of beer, liquor, gas, cigarettes, lottery tickets, and other heavily-taxed items. They also pay the majority of the social security taxes, because beyond a certain income level, upper-middle class and wealthy people don't pay those at all.

 

[WC2]

The housing crisis isn't as easy to explain as one may believe.

Speculation that housing prices would keep going up and the inflow of a suprlus of buyers was just a fraction of the problem.

A huge problem was that mortgage backed securities were concentrated not only in investment banks (Lehman's, Bear Stearns, etc), but in commercial banks as well.

Commercial banks would usually just negotiate transactions between these securities, but a little thing called the Basel Accords changed everything. The Basel accords allowed banks to not only earn profit off MBSs, but to hold them for only 1.6% of their capital (compared to 8% for normal loans).

In essence, commercial banks rather would have had a mortgage backed security that makes 5% interest a year as opposed to a loan that makes 5% a year, because by law, they don't have to put up as much capital.

People say, there was so much risk there, but if there was so much risk then why were all the top banks investing in these mortgage obligations?

Half the reason was the inaccurate rating system given to Mortgage Backed Securities. A rating of AAA was supposed to guarantee that the security would not go under. Instead, it just meant that these securities would be the LAST to go under. So when the housing bubble popped, even those who invested in the AAA (the best) mortgage back securities took some if not lots of losses.

Like I said before, commercial banks were involved in these toxic securities and as soon as everyone knew these mortgage obligations were worth nothing, they were stuck with them.

Moreover, banks were afraid to lend to other banks because noone really knew which banks were holding these toxic assets at the present time.

So no one loaned money out, things got stagnant, and our economy went into recession.

Of course Fannie Mae and Freddie Mac will survive this whole mess because they are backed by the government. This is most aggravating, as both these companies account for most of the sub-prime loans approved in the early 2000s. They made a mistake and instead of being punished they are being bailed out.

And all this barely touches the tip of the iceberg when it comes to the housing crisis.

Anyone who tells you they can sum up the housing crises in a few sentences is ill informed and honestly an idiot.

Here's a GREAT article that lists most the causes and myths behind the housing crises.

http://www.criticalreview.com/crf/pdfs/Friedman_intro21_23.pdf

btw, sorry to ressurect such an ancient thread, but I feel as if this is more important than a lot of the present topics here atm..