Rolling US Economy Into The Shitbin Thread

this american life has a new show up on the banking system (haven't listened to it yet, but but the first 2 they did on the economy were great): http://www.thisamericanlife.org/Radio_Episode.aspx?episode=375

There will be a massive dislocation in the value of the dollar. It is too soon to tell if it will be hyperinflationary, inflationary with high unemployment, or deflationary with massively high unemployment.

If the US government (or any other government) decides that it will try to prop asset values by becoming the buyer of last resort for bad debts of all kinds - CDOs, fucked up mortgages, credit cards, every last bit of stinking shit on the balance sheets of the banks, then woo-hoo! Hyperinflation here we come!

Because the US government is in the business of insuring personal bank accounts up to $250,000, I can see why Geithner and Obama are hesitant to let the insolvent banks go into receivership. There are too many of them already and bound to be many, many more, but it is still it seems better than letting hyperinflation out of the bag. In that case, massive asset deflation will follow, and a cash famine.

It will come down to politics. Which is why hyperinflation is a pretty good wager, starting in a few years. But still, it is a wager, not a sure thing.

updated chart:

http://blog.prospect.org/blog/ezraklein/3333412448_6f0e53b363.jpg

holy crap:

Across the nation, 19 million houses and apartments — nearly one out of every seven — are vacant, the highest percentage since the 1960s. But only about six million of those homes are for sale or for rent. That means millions more could still flood onto the market, depressing prices further.

But tipsy, to paraphrase George W. Bush, no one could have foreseen that building so many new houses and condos on spec could have glutted the housing market.

few extra clips from frontline

The 60 Minutes piece tonight was on what happens when the FDIC takes over a bank, and it was very, very interesting: http://tinyurl.com/c29xo3

Krugman upset w/ Bam today. Ditto.

Phoned my ex-roommate yesterday; he got fired (for the first time ever) last week, position eliminated (medical advertising). Has a mortgage, lives alone in Jersey, in his late 40s. Scared, near tears.

indeed

http://www.businessinsider.com/henry-blodget-krugman-obama-already-out-of-touch-with-economy-2009-3

btw did anyone hear On the Media on NPR this weekend? there were a couple of financial columnists throwing around terms they learned last week. So nobody knows anything.

lol interview with co-author of 1999 bestseller dow 36,000

glassman: "was that dow 36,000? i meant, dow 3,600 -- damn typesetters!"

loving the credibility of any organization called "business insider" these days

if our financial system has become so economically complex that President Obama is right, then is it also too complex to be politically sustainable?

best lines from the 36,000 interview:

"Al-Qaeda is not eating our lunch anymore. Al-Qaeda is stuck in Web 1.0."..."Web 2.0 is anathema to al-Qaeda"

i dunno, there's an al-qaeda recipe site that's pretty dope

terr-r

lol

Do you ever regret having written the book, or regret the title? Do people come up to you at cocktail parties and say "Oh, yeah, Dow 36,000 -- how's that working out for you?"

Anyway, from this story:

http://www.thebigmoney.com/sites/default/files/auctioneer.jpg

other dow 36,000 co-author accuses obama of sabotaging economy, uses phrase 'manchurian candidate'

Top 10 headlines that could signal a market bottom

Dow up 379 today... is that part of #8? what'd I miss?

no, it was good news unfortunately

i think it's because pandit sez citi's having a "good quarter" so far. whatever counts as a "good quarter" these days.

meanwhile ... dude-in-the-know: stocks still too high.

Yeah let's not go sucking each others' dicks just yet...

that guy in the pic that ned posted above looks like and is behaving in the manner that i imagine Henry Paulson was behaving right after lehman bros. collapsed.

http://online.wsj.com/article/SB123672965066989281.html

"All things considered, I personally prefer Milton Friedman's performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: "There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind."

this is i guess not news, but pretty interesting.

The moral hazard theory is tempting but I don't buy it. It's too neat, and it ultimately serves to rationalize the laissez faire mentality that got us here in the first place (after all, people are perfectly rational wealth-maximizers and risk-minimizers, so if only we could guarantee that there would be no bailouts, people wouldn't take these risks!)

The reality is that it's the hands-off, deregulated approach that leads to the kinds of "rational" short-term profit maximizing behaviors that in the long run endangered the financial system. People are NOT always so good at minimizing their long-term risk, especially when short-term gain gives them incentive not to think about it. Think of a drunk driver trying to get home with his hot pick-up from the bar -- risk-perception is totally distorted in the moment.

I also don't really buy the moral hazard thing, at least not when it comes to the big picture issues. Don't think it was "Well if we fail, the government will take over" but rather "Fail? lolz did u see our how much money we made this year?" It's not like the financial system acts as some collective brain...or rather...the fact that it appears to act like a collective brain when it comes to pricing etc. makes it too easy to assume that it actually is a collective brain that can make complex historical/moral decisions.

The hazard-ness doesn't come from government bailouts, it comes from the fact that:

a. banker X's 2005, 2006, 2007, 2008 paychecks aren't in jeopardy no matter what happens in 2009
and
b. as long as he's not explicitly breaking the law, banker X isn't going to go to jail, no matter how he performs his job

otmfm, by which I mean you basically just explained my thoughts better than I could

The hazard-ness doesn't come from government bailouts, it comes from the fact that:

a. banker X's 2005, 2006, 2007, 2008 paychecks aren't in jeopardy no matter what happens in 2009
and
b. as long as he's not explicitly breaking the law, banker X isn't going to go to jail, no matter how he performs his job

yeah but i'd say the existence of those conditions pretty much constitutes its own moral hazard. i think that's kind of the point. you have to regulate against that.

yeah, that's what I meant.

from what I've seen in the past year, the phrase 'moral hazard' has very often been used to refer to the gov't bailout moral hazard (which I'm not buying to begin with) and not the others.

it's not like people don't talk about a. and b. - but that particular phrase has been esp. linked to the gov't bailout - the nyt article being a good example.

well the bailout is essentially the flipside of the lack of regulation. either you police it on the front end or you have to make up for it on the back end. so it's kind of the same thing. i agree that's it's not a conscious thing -- like, "oh, the government will bail us out" -- but you get systemically learned behavior based on expectations of personal consequences or lack thereof.

'expectations of personal consequences' seems to = my a. and b. no?

yeah. which is what "moral hazard" is all about.

I think I'm just not expressing myself clearly -

I absolutely think that moral hazard exists. But the term is being used heavily to refer to one type of moral hazard (gov't bailout) and not as often to what are arguably much more important moral hazards.

basically my argument boils down to: when it comes to a person's decision-making 'expectations of personal consequences' is far, far, far more relevant than 'expectations of consequences for the bank' and 'expectations of consequences for the world economy'

(and the theoretical existence of a gov't bailout only really would affect the second two)

well, but what are the expectations of personal consequences based on? whatever's built into the system, basically. and consequences are or are not built into the system based on a variety of factors. you show up to work at one of these places and you learn pretty quickly what's expected, what's rewarded, what's punished, etc. while there may not be at any level a conscious thought pattern of "it doesn't matter, because the government will bail us out," there is an implicit understanding built into the system that there will not be severe consequences for severe fuck-ups. so the challenge is to change the system in such a way that that is not the case.

There is simply no way that the "system" is going to "build in" the risk of a once-in-a-century catastrophe of its own accord, even if there's no hope of a bailout. And we can't afford the severe consequences that would result, which is why they need to be prevented from without via regulation.

surowiecki on moral hazard: http://www.newyorker.com/talk/financial/2009/02/09/090209ta_talk_surowiecki

There is simply no way that the "system" is going to "build in" the risk of a once-in-a-century catastrophe of its own accord

...which is why it needs regulation...

i got drunk and put my entire tax return + a couple hundred more into my IRA when the market nose-dived last week. this was a dumb idea y/n

xpost:

the point of the guys leonhardt is quoting is not, "we shouldn't do bail-outs because of moral hazard" (which is the right-wing anti-bailout argument that surowiecki is talking about). it's that the system as it's set up defaults to bail-out when things go south, and that there are probably some intermediating steps you can build in there to reduce the chances of getting to that point. most of which have to with how you regulate and constrain it.

newyorker article otm

tipsy, when hurting said:

There is simply no way that the "system" is going to "build in" the risk of a once-in-a-century catastrophe of its own accord

he meant it in the sense that the system isn't building in the moral hazard idea of a government bailout

the point of the guys leonhardt is quoting is not, "we shouldn't do bail-outs because of moral hazard" (which is the right-wing anti-bailout argument that surowiecki is talking about). it's that the system as it's set up defaults to bail-out when things go south, and that there are probably some intermediating steps you can build in there to reduce the chances of getting to that point. most of which have to with how you regulate and constrain it.

What's the evidence that the system as it's set up defaults to bail-out? I mean it does when there's a crisis serious enough that can't be solved without government intervention...this is unavoidable - of course the government will need to be involved when there's something so big that nothing else is gonna work...that's true by defintion.

I'm not quite sure what these intermediate non-default steps would be. I mean if it's just more regulation to keep this from happening in the first place, is this really a moral hazard issue we're talking about?

http://www.nytimes.com/2009/03/11/business/economy/11bailout.html

Some bankers say the conditions have become so onerous that they want to return the bailout money. The list includes small banks like the TCF Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette, La., as well as giants like Goldman Sachs and Wells Fargo.

They say they plan to return the money as quickly as possible or as soon as regulators set up a process to accept the refunds. On Tuesday, Signature Bank of New York announced that because of new executive pay restrictions in the economic stimulus package, it notified the Treasury that it intended to return the $120 million it had received from the government only three months ago....

bankers be wantin their bonuses

conditions have become so onerous that they want to return the bailout money

Praise be! How about paying some nominal rate of interest, too? I mean wtf did they take the money for in the first place, if they can get along fine without it?