United States Heading towards a Depression?

Earl,

More controls is what caused the Depression to run so deep. Instead of liquidating malinvestment (bad debt from rotten balance sheets), the institutions were propped up with the promise they would be better regulated.

The debt has to be washed out. Thae capital tied up in failed business, and the capital being used to prop up failed businesses, is misallocated. You have to let the market work, and allocate capital efficiently.

As a side note, you keep talking about liquidity. I have no idea what you mean by this. There is a capital crisis right now, and while yes there is excess liquidity, that is the cause of the capital crisis, as leveraging and investments are coming unwound. So I don't know what liquidity in foreign markets has to do with anything, except that if that liquidity is liquidated at it's market value, you are going to see a global great Depression. When you have a fire, the last thing you should do, is pour gas on it.

I don't want to see the economy collapse and go spinning downward. First, I think it is the polly anna's that cry about the falling sky if Institution X, Y and Z aren't bailed out. Second, I want to see bad debt purged, and a solid market with emerge with real capital replenishing the system (savings from increased production and deferred consumption). When the system is based on real capital, and not debt money, then it will be healthy and thriving again, maybe we could even see the 10% annual growth of the industrial revolution again. I don't see why not.

History has shown, every time the FED steps in, the bubble grows and/or is pushed ahead. The debt and bad businesses are never liquidated, and the capital market becomes one big lie. FED intervention doesn't come for free. Every citizen will pay for it in inflation. Even the ones who don't pay taxes or generate income, will see their standard of living fall under the hammer of rising aggregate prices.

Ron Paul had a prescription for prosperity, a multi-pronged bi-partisan initiative to get the government out of the way, to allow the system to heal and come back stronger than ever. Freeing small banks to help local communities, instead of bailing out big banks who monopolize the industry and survive almost exclusively on moral hazard is one of those tactics. Right now, more liquid banks are needed, and with the big guys going under, someone needs to look out for the small community banks that are not the ones being accused of fraud or theft, and which provide a valuable service to the everyday Joe.

Yes, I agree things will be tough. It can end quickly, if the government does the right things, and that also includes from the Prescription for Prosperity, removing SOX and encouraging capital to return to NY from London. If they choose to take the protectionist, statist approach of Hoover and FDR, you will see this drag on for a long time, and ruin a lot of people's lives needlessly.

 

That's the basic problem right now - there is no market right now.

If all firms start selling their assets in the open market, they won't even get 25% of their current prices.

Government and investors from countries with huge cash reserves (China, middle-east Asia etc) will get all assets at throwaway prices.

On the other hand, equity and debt holders in these financial companies will be wiped out completely.

The time to act was when the bubble was getting created.

There are no "good" choices left now - only "bad" and "worse".

The only thing that can be done now is to spread the damage over a few years and thus minimize the shock effects of the financial unwinding.

 

The FED now owns AIG.

AIG's rescue calls for the U.S. Federal Reserve to lend up to $85 billion to AIG for two years in exchange for a 79.9 percent equity stake.

http://news.yahoo.com/s/nm/20080917/bs_nm/financial_dc

 

Here is an interesting episode from Glenn Beck's programme

Guests are Stephen Moore, who writes for the Wall Street Journal, and Peter Schiff, president of EuroPac. There is more pain to come, coz the dollar may crash.

Bank of America bought Merrill Lynch, and now has become "too big to fail"... The Federal budget Deficit is already half-trillion dollars, and is headed towards a trillion dollars.

Please watch http://www.youtube.com/watch?v=UMstcGRezhw

 

AIG isn't a bank.

From what I understand, and I don't claim to understand the first thing about derivatives. But from what I've read, saving AIG avoids a possible domino effect that would put millions of Americans and businesses at risk of having their assets devalued to the point where it would be impossible for them ever recover.

The number of people affected by an AIG collapse would be like 20-40 times that of Lehman's.

could have meant Dow -1,000??

...so I'm told.

 

The Fed is very consistent.

J.P. Morgan, Bank of America, and Citibank wins. Everyone else loses.

 

That's usually the case.

In this case the men (and women) on Wall St. will be BIG LOSERS come Q1 2009!

 

Korr: Within the business world, and from the long term review of history one finds two things that tend to work:

Debt works. It expands economic opportunities. It is a form of financing that enables investment today for returns tomorrow.

Excessive debt invariably has enormous consequences. In 2007 Lehman basically had investments valued at about $700 billion. It had equity of about $23 billion. It was leveraged to the tune of about 30 to 1. When its investment holdings dropped in value, it had calls on its equity to support those holdings. Its debt was excessive. Bear Stearns collapsed under similar circumstances.

Similarly excessive government debt has similar consequences. Of utter importance, the debt that Lehman and Bear Stearns had was not directly caused by the government. It was there own actions in a free and unencumbered market.

It so happens that Lehman and Bear Stearns also had investments and intertwined relationships with financial institutions around the world. Their collapse and the collapse of a strategic number of similarly intertwined financial institutions could cause the collapse of the US and the world financial systems.

Do you have money in a bank? Do you have a checking account, money market funds, etc.? If you want them to retain their value I doubt you would like to see the US or world wide financial system collapse. Most don't want that to happen.

For every historical statement that rails against government there are similar statements and historical facts that rail against allowing too much power to private individuals or groups.

Invariably and regularly, and more vividly, repeatedly in the last 30 years.....and for decades before that; financial institutions screw up royally in their pursuit of the dollar. Each crisis potentially hits every single individual. Do you have money in a bank? Are most of your liquid assets that pay your every day expenses tied up in a checking account or checking account alternative? Do you want those funds secured? Do you own a business with funds in banking accounts? Are you an employee of a company with funds in bank accounts? Do you get paid every two weeks from the company's bank accounts? Do you want those funds secured?

The financial world exploded in debt. The collapse has cascaded when institutions losses are unable to be secured by their own equity. This was the case with Lehman and Bear Stearns. Both of them were leveraged to the tune of about 30-1 before the collapses.

Whose fault is that? Where is the responsibility?

The most recent example is one of several that represent excesses by industry.

I'd like some watch dogs over them to prevent the excesses.

During my work career I've directly experienced the melt down of Savings and Loans (they hardly exist anymore--they were the ideal definition of community banks); the melt down of junk bonds (We no longer have the Investment banking house of Drexel Burnham); and now we are facing a crisis initiated by over production of sub prime mortgages. Additionally we have faced the potential crisis of falsified financial statements that saw the destruction of Enron, WorldCom and other major corporations. Worse problems were prevented by instituting Sarbanes Oxley. Since then we have seen no reoccurrances of that problem.

Anyone who thinks Wall Street should be allowed to run free of any form of government oversight is ignoring the wisdom of the statement you referenced. The only difference is that you should rewrite the last sentence in this way...."it is their right, it is their duty, to monitor the excesses of financial giants in their quarterly effort to create short term profits

...and to provide new Guards for their future security."

Anyone who thinks that government is the ONLY cause of all problems is a liar, misses endless recent examples of unregulated, unwatched Wall Street excesses, is a paid propogandist from the well paid Captains of Wall Street, has some poltical agenda, or simply hasn't had real exposure to the real world.

 

So how soon we shall be expecting bankruptcy news from Morgan Stanley+ Goldman Sachs+ Banks from Europe & London?

 

Do keep in mind that the banks failing became banks thanks to Jimmy Carter, and continued failed policy by Bill Clinton. Anyone that did not see this coming is an idiot. Hell even old McCain warned about this years ago.

Meanwhile, Obama is number 2 on the list of 354 Congressmen that received money and support from Fannie and Freddie to the tune of over $120,000.00.

McCain got some help to... Like 50 bucks from one and 20k from the other.

I guess we see where Obama stands. Seems he got some hefty CHANGE out of the failing banks, even up until the bitter end. Is this the CHANGE he is referring to?

Never put your money in a bank. That's not how you make money anymore, nor is it how you save it. If you save, use a credit union. If you want to invest, buy art, automobiles and real estate. All of these things appreciate, and all of these things are tangible assets. Placing your money in investment banks is no different than placing it in a slot machine or on a card table. Personally, getting phucked at the card table is a lot more entertaining and you usually get free booze while you are at it.

Hell, you cannot even get a friggin free toaster at the bank anymore. Idiots.

 

It's only a temporary measure.

Actually the Fed has got itself a good deal.

The Fed has only lent money to AIG.

This money will have to be returned as soon as AIG sells its assets.

Moreover, this is a secured loan and most of AIG's assets are now a security for this loan.

The terms are such that the government will get back its money before any other creditors or equity holders.

Add to that the abnormally high interest rate and warrants to buy the company's 80% equity at near zero price.

(Warrants are optional and the government may choose not to exercise them).

Source.

What more could the Fed ask for..?

 

A $500 billion bailout of WaMU

 

Still trying to put all blame on previous administrations I see.

 

That's how it works!

All bad shit = Previous administration
All good shit (can't think of any off-hand) = Current administration

 

When it comes to Fannie and Freddie, er, yes....

All the info you need on that is here: http://forums.digitalpoint.com/showpost.php?p=9240771&postcount=140

 

I just an interview with Barney Frank talking some smack -- He was the guy that was pushing for Freddie/Fannie to expand their lending uthority to 700k loans from the 400k limit. That worked out well.

Barney Frank also pushed for loans for people with marginal credit through the community reivestment program.

We also know how much Obama and Dodd have received in campaign donations from Freddie/Fannie.

 

Not even close to showing 2 previous democratic administrations being to blame.

I remember Bush campaigning and his supporters on the fact that record home ownership, would be logical to conclude if he campaigned on it, claimed credit for it, he'd also take the blame when the 'record ownership' ended up falling apart.

But that's just my unbiased opinion.