Ask an Economist (Post #1005 and counting)

[JerichoHill]

Oh, man, I thought we were all being serious...

But while we're on the topic of comparisons, JH, how do you think this will stack up against other economic recessions and rough periods?

I still stand by my assertation from several months ago that we're looking at something a bit more mild than the 1970s provided

That said, that's not good. Worse than 87, fo so

 

[Snorrius]

I still stand by my assertation from several months ago that we're looking at something a bit more mild than the 1970s provided

That said, that's not good. Worse than 87, fo so

And what about Great Depression scenario on the global scale?

 

[Gabryel Karolin]

GM taking a huge hit today. Now it was known that the automobile industries have had troubles for a while, but they are very big American icons (Ford and GM). At what point do you imagine they will be allowed to fall?

 

[GinandTonic]

If small Eurozone nation guarantying it's banks were to be forced into a level of direct debt that made it functionally unable to gain credit itself what would happen? Assuming the euro itself isnt broken how can it continue when someone who can print it is bust?

Any ideas?

 

[DNK]

I still stand by my assertation from several months ago that we're looking at something a bit more mild than the 1970s provided

That said, that's not good. Worse than 87, fo so

So, you'll probably keep all your limbs then at least...

I'm concerned about the debt situation today. It's far worse than in the 70s. The US has never (as far as I know) had a debt situation like we have now, and it's going to be "interesting" to see how this plays out if and when it starts to roll back down. I'm pessimistic, but that's generally a given

 

[Princeps]

All I said is that Keynesian economics has been debunked, even by mainstream economists.

Nope. Remove some of the post-war additions, improvements and you're back to the General Theory pretty much as it was written.

 

[chad187]

Why is the Swiss banking sector not being hurt as hard as say Iceland's?

 

[innonimatu]

I still stand by my assertation from several months ago that we're looking at something a bit more mild than the 1970s provided

That said, that's not good. Worse than 87, fo so

This resident doomsayer wants to know how many major banks got nationalized in the 1970s. Quite a few in Europe, I know, but only in peripheral regions.

The financial troubles are just a symptom of an exhausted economic model, even if the banks are zombified the debt-driven consumer spending which drove the "economic growth" will not resume. And the accumulated debt has still to unwind, and economic activity has to be reorganized for the new spending patterns. It'll not be just stagnation. The solution for that stagnation was relaxed finantial rules and debt, what's the solution now?

 

[Whomp]

Inno--in the US the banks were making bank during the high interest rate environment of the 70's when there was plenty of margin for loan rates versus cost of carry (deposits). The economic circumstances were the true disaster of the 70's.

However, the price wasn't paid by the finance business until the 80's and 90's when we had the loan participation debacle of Penn Square/Continental Bank and later the S&L debacle (partly fueled by 1986 tax legislation taking away tax breaks on commercial properties).

From 1982 to 1992, something like ~2,000 U.S. financial institutions failed, FSLIC was absorbed into FDIC and half the S&L's in the country collapsed requiring a $350 billion bail out which ended up cost taxpayers about $150 billion.

The story of Penn Square is probably more interesting because it meant a bank "too big to fail"(heard that lately?) $41 billion Continental Bank failed in 1984. The bank was recapitalized through a government bailout and new shares were issued at $5.25/share and the government owning 80% of the shares. I believe Continental was bought out by Bank of America (looking for a midwest presence) for $30/share in 1994.

Continental failed due to loans made to Penn Square Bank in Oklahoma. Penn Square was a bank that grew from $62 million to over half a billion in assets in five years and was aggressively lending to the oil and gas industry (drilling etc due to exceptionally high oil prices in the 70's). At the same time the bank sold over two billion in loan participations to Seafirst in Seattle and Continental, along with other banks. When oil prices tanked, so went the loans, and in turn the banks. 140 banks in Oklahoma failed due to Penn Square. What was even more difficult for the Fed and FDIC to handle was when the bank folded, it had $470 million in deposits and $517 million in assets, and it was servicing about $2 billion in loans but only $207 million of the deposits were insured.

Any student of the current credit crisis should google search Penn Square and S&L bailout.

What's should be interesting to watch in this crisis is how much is made from distressed debt. Personally, I'd love to have the capability to take my social security payroll deduction go towards the Treasury purchases. If I don't get anything back then cut my benefits. However, if I do make money on the cash flows and warrants then let me keep 75% of the gains. I'd do it all day long because these bonds could cash flow out at better than 10% and the warrants will be worth a lot more thant the 4% treasury constant rate we're earning right now...imho.

 

[Agent327]

Why is the Swiss banking sector not being hurt as hard as say Iceland's?

Swiss banks are notoriously safe. (Even the Nazis knew that.) I have a sneaking suspicion Swiss banks don't engage in speculative banking (like extending mortgages to people who - o my! - can't afford it). Swiss banks have no interest in going belly-up - nor should any solid banking institution. US banks on the other hand are notoriously deregulated (free enterprise and all that) until the going gets tough. at which point the poor bums welcome any state intervention that saves them from going bankrupt. (I'm simplifying somewhat, ofcourse.)

BTW, I think several OT threads could be closed if the just Asked an Economist.

 

[innonimatu]

Inno--in the US the banks were making bank during the high interest rate environment of the 70's when there was plenty of margin for loan rates versus cost of carry (deposits). The economic circumstances were the true disaster of the 70's.

However, the price wasn't paid by the finance business until the 80's and 90's when we had the loan participation debacle of Penn Square/Continental Bank and later the S&L debacle (partly fueled by 1986 tax legislation taking away tax breaks on commercial properties).

From 1982 to 1992, something like ~2,000 U.S. financial institutions failed, FSLIC was absorbed into FDIC and half the S&L's in the country collapsed requiring a $350 billion bail out which ended up cost taxpayers about $150 billion.

The story of Penn Square is probably more interesting because it meant a bank "too big to fail"(heard that lately?) $41 billion Continental Bank failed in 1984. The bank was recapitalized through a government bailout and new shares were issued at $5.25/share and the government owning 80% of the shares. I believe Continental was bought out by Bank of America (looking for a midwest presence) for $30/share in 1994.

Then it went economic crisis (actually caused by war-related economic costs, or at least that was my impression) -> financial crisis. Not the financial crisis blew even in the absence or a visible economic crisis, but the world is certain to go through one. How much worse will that make the financial crisis?

It's not like the 1970s, unprecedented measures will be required. If I was a politician, I'd be cooking up the nationalization of the whole banking system, to later inject capital there without these useless loans.

 

[Mise]

Swiss banks are notoriously safe. (Even the Nazis knew that.) I have a sneaking suspicion Swiss banks don't engage in speculative banking (like extending mortgages to people who - o my! - can't afford it). Swiss banks have no interest in going belly-up - nor should any solid banking institution. US banks on the other hand are notoriously deregulated (free enterprise and all that) until the going gets tough. at which point the poor bums welcome any state intervention that saves them from going bankrupt. (I'm simplifying somewhat, ofcourse.)

BTW, I think several OT threads could be closed if the just Asked an Economist.

Err, after Citigroup, UBS wrote down more loans and CDOs than any other organisation on the planet.

 

[kronic]

So, Mise, did you already get a letter from Iceland's government?

 

[Mise]

So, Mise, did you already get a letter from Iceland's government?

I transfered my money out of Kaupthing on Monday evening, which should take 3 days (from Tuesday morning) to arrive in my nominated current account. But obviously on Wednesday, Kaupthing in the UK got put into administration, and all deposits were bought by ING Direct. My Kaupthing account says Zero, and my nominated current account still shows no difference... so my money's in limbo... I'm not entirely sure what will happen to it, but it will turn up somewhere, eventually =/

 

[Agent327]

Err, after Citigroup, UBS wrote down more loans and CDOs than any other organisation on the planet.

UBS? CDOs? Numbers please.

Loans aren't considered speculative banking, just part of normal banking. (Loans on non-existent collateral are ofcourse quite something else.)

 

[Mise]

UBS? CDOs? Numbers please.

Loans aren't considered speculative banking, just part of normal banking. (Loans on non-existent collateral are ofcourse quite something else.)

http://en.wikipedia.org/wiki/List_of_writedowns_due_to_subprime_crisis

 

[Agent327]

Thx - and sorry about your money... a lot of ordinary people are getting shafted (to put it nicely)... I'm sure they'd like some "bail-out" money for their troubles.

 

[JerichoHill]

@Whomp: Nice reply on the 1970s history. When I mention the 70s I'm talking about economic effects, mainly low growth rates and stagnate wages, a morass, if you will. That's why I don't think 90s Japan is that bad of an analogy.

As you all can imagine, being federal economist is a rather busy job these days.

GM taking a huge hit today. Now it was known that the automobile industries have had troubles for a while, but they are very big American icons (Ford and GM). At what point do you imagine they will be allowed to fall?

--They're not financial institutions. Ford's the healthiest, if I recall, of the big three. There's a reason why Detroit is an empty city.

And what about Great Depression scenario on the global scale?

I don't view the "market" as a perfect indicator of the "economy." The variables around the US economy have indicated a contraction, and one that probably sticks around a big. But unless we react in the same manner that Hoover et al did (ie, isolationist, monetarially hawkish (raise rates, which isnt happening) I don't see a GD scenario.

So, you'll probably keep all your limbs then at least...

I'm concerned about the debt situation today. It's far worse than in the 70s. The US has never (as far as I know) had a debt situation like we have now, and it's going to be "interesting" to see how this plays out if and when it starts to roll back down. I'm pessimistic, but that's generally a given

--I'm employed by the Fed. I'll be fine. =) Yes, the US has a debt situation (see the blog in my sig) but so do many, many other developed countries, and many have a worse situation than the US.

 

[bender19]

What are you talking about? Did you mean to quote some other post, because I do not see how this is relevant to my post at all. All I said is that Keynesian economics has been debunked, even by mainstream economists.
But if you wanna go there, I do not believe in perfect capital mobility (nor does anyone else) so why are you making it out like I do?

What are you on about?
You've gone on a couple of anti Keynes rants because I said tight fiscal policy is generally a bad idea in a recession, it is. While little of Keynes original work survives its still the basis of a large part of macroeconomics. Suggesting that tightening the budget (essentially tightening fiscal policy) in a recession is a bad idea isn't Keynesian economics, its pretty much mainstream economics. I wouldn't advocate a lot of use of fiscal policy as a tool myself due to my preference for small government, free markets, lag issues and crowding out. Even though monetary policy is the clear preference today it shouldn't be assumed that fiscal policy won't have an effect, and if it is used using it pro cyclically in a recession isn't a smart idea.

As for capital mobility, in a credit crunch it will be relatively low, thus crowding out will be less, meaning fiscal policy would be theoretically more effective.

 

[IglooDame]

Why are people so worried about their housing prices falling? For those of us that don't plan to sell anytime soon, doesn't this mostly just mean lower property taxes?

Bank's don't like it much when your mortgage is worth more than the home it backs up

I don't mean this to be snarky even though it probably sounds that way but - why should I worry if the bank doesn't like it? I'm paying on time every month on the mortgage I got a couple years ago, my property tax assessment just went down about 10% below the purchase price of my home (so I am technically underwater on it right now), but the bank (well in my case, credit union) has enough problems with people going into default, surely they'll just be happy that I'm paying?

And would now be a good time to get into the stock market? I've got $500 or so that I could use against credit card debt, but surely there are opportunities to make a killing right now? I just saw Ford at $2/share...