Monday, September 29, 2008

death spiral

I don't think I need to say anything this week, the news headlines speak for themselves.

Monday, September 22, 2008

Attempted Revolution

As one of the contributor's to Jim Cramer's said, "We just had a revolution". Not quite. Although by the end of the day last Friday it seemed inevitable that Congress would authorize Henry Paulson's proposed bailout of the entire Financial System, today Congress is pushing back, as some commentator's like Paul Krugman weigh in and point out that this bailout may not work unless it pays inflated values for the toxic securities. In which case the taxpayers get stuck with the bill and the financial companies make money on the deal.

Of course the bailout of AIG, the insurance giant, is already accomplished. But it looks like this last step may not be a certainty, and hopefully it won't be. What a way to make policy - basically at gunpoint. What can't be accomplished in decades by the legislative process can be engineered in 10 days if you have a sufficiently large crisis.

Tuesday, September 16, 2008

Finally Taking Notice

Last week Fannie and Freddie were nationalized, this week Lehman Bros. goes bankrupt and Merrill Lynch is bought out for half its value. And now the news media at least is starting to notice that something is wrong. NPR anchors sounded genuinely worried Monday morning, and CNN gave breaking news coverage to the Lehman/Merrill story. News stories now openly mention the comparison to the bank panic of 1907 and the great depression.

One thing that strikes me is that back in the 1930's probably half the U.S. population were farmers, industry and manufacturing were located here, and we had large oil reserves. Now our food is raised and distributed by giant agribusinesses, we import most of our manufactured goods, and import a large amount of our oil. I think we're a lot less prepared for hard times now than we were in the 30's.

Monday, September 8, 2008

The Economy

First I'll just mention that as we anticipated in the last post, Fannie and Freddie have been nationalized. This rated a front page fairly bold headline in the Salem Statesman Journal and an interview with Secretary of Treasury Henry Paulson on NPR this morning. I have the suspicion that I could ask ten people on the street and I'd be lucky if one of them knew about it.

Now back to our topic: what is "the economy". We are told that Fannie and Freddy had to be nationalized to save the economy. For the some workers this means that we can now be assured that if we sit in front of a computer screen for eight hours every day we will be able to make our house payment and car payment and buy food and household items produced in distant countries, and so life will go on as usual. For others the 8 hours in front of the computer may be replaced by eight hours or more driving a UPS truck or maybe wiring an office complex. For almost no one will it mean growing food for local consuption or manufacturing something. Manufacturing has been outsourced to other countries with lower wages, and likewise much of food production.

So what does the US economy actually produce that is of any use? I can't think of much, they say that 70% of our economy is in the service sector and retail. So we buy and sell stuff to each other and maybe provide services (James Kunstler's ubiquitous tanning salons, fitness centers, perhaps auto repair, carpet laying, etc.) Some of these things do seem useful around here, but can't be exported to the other parts of the world that we get our food and goods from.

It seems to me that right now we're pretty much living off the generosity of the rest of the world, which makes the stuff that we actually need. I can't see that we're giving them anything they need in return.

Wednesday, September 3, 2008

Fannie, Freddie will be nationalized

Heard a story on NPR this morning saying it is pretty likely that the two home mortgage Government Sponsored Enterprises Fannie Mae and Freddy Mac will be nationalized, i.e. the taxpayer will assume all their debts. This is necessary to keep the housing market from totally freezing up (which would happen if there were no Fannie and Freddy since they are the only ones offering mortgages right now) and to keep big foreign stakeholders like China from losing their investment. We can't afford to have China lose the money they have invested in Fannie and Freddy because we depend on them so much for other debt; I believe we have about an 800 billion dollar trade imbalance with China.

Ben Bernanke and the Federal Reserve took fairly extreme action to try to prevent this around a month ago, but they still ended up in this position. The recurring theme in this housing/economy crisis seems to be that we can stall the inevitable for a little while, but it always ends up happening anyway. Why do we try to stall it? Because it is bad. Therefore when it actually does happen, as is happening to Fannie and Freddy now, I don't believe the reassurances that things are actually okay and it's perfectly fine to do this.