17 July 2008

The Greatest Economic Crisis of All Time

Are we really living through a depression? Are these truly the worst economic times in North America since the 1930's era? Many bankers and financial analysts seem to think so. But what do the numbers say?
In the past few weeks, US industrial production, consumer spending and trade figures have all come in much stronger than expected and now point unambiguously to accelerating economic growth, rather than a further slowdown. On Tuesday the Federal Reserve Board published a sharply upgraded estimate of 2008 growth. The near-recession growth range of 0.3 to 1.2 per cent predicted in April is now seen as a much more respectable 1.0 to 1.6 per cent. Even the gloomiest private economists on Wall Street now expect second-quarter GDP figures to show a strong recovery to growth of around 3 per cent.

Looking at the recent indicators, the clouds are now much darker over Britain and the eurozone than the US. The correction in housing, which has now been running for almost two years in America, started in Europe only a few months ago. The main effects of the slowdown, in terms of falling house prices, lost jobs and weak consumer spending, are only just starting to be felt in Europe _Timesvia_KimduToit
What has changed about the banking and financial sector to create a "disconnect" between financial reality in the real world, and financial reality in the financial world? In a word, "hyperfinance."
In the old world before the arrival of “hyper-finance”, if a family wanted a £100,000 mortgage, they would simply go to the Halifax and borrow £100,000. Now consider what happens in the new financial world. The family would borrow £100,000 from Northern Rock, which would sell £100,000 of bonds to hedge funds, which buy these with £100,000 borrowed from Bear Stearns, their prime broker, which would raise this money by selling £100,000 of commercial paper to Citibank, which would then borrow £100,000 through the inter-bank market from Halifax.

So now the original £100,000 mortgage transaction has created £500,000 of new debts.

In principle, this entire chain of transactions could be squeezed, like a concertina, back to the original £100,000 transaction between the householder and Halifax, reducing the total amount of credit in the banking system by 80 per cent. This huge reduction in credit would do no great harm either to the homeowner or the ultimate lender, but eliminating all those intermediate transactions would devastate jobs and profits within the banks. _Times
Sure, ordinary people feel the pinch of the dampening effects of high energy costs and the credit crunch--not just bankers and brokers. But because of hyperfinance, bankers and brokers live "higher than high" in good times, and can suffer more than most during economic corrections.

Not a depression, no. Not even a recession by the correct definition of recessions. Rather, sluggish growth caused by a weaker dollar and higher overhead costs, with a hint of inflationary pressure. The bailouts of Fannie and Freddie will not help the situation. The economic impact from that particular government action will hit the US taxpayer and the US dollar much in the same way the S&L bailout hit them back in the late 1980s and early 1990s.

Of course, if the cost of oil gets pushed over $200 by a war with Iran, all the economies of the world will be in trouble--for a while.


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Blogger SwampWoman said...

While people are busily working themselves into a frenzy about how bad housing, finance, and everything else is, I have to say that the conditions aren't nearly as bad in Florida as after 9/11.

What will they do when economic conditions become much worse, as they inevitably will because that's the way the economic cycle crumbles?

Friday, 18 July, 2008  
Blogger al fin said...

Capitalism goes through cyclic expansions and contractions, as you say. Businesses and governments need to be able to fluctuate in an orderly manner to meet the needs of the cycles.

Instead, governments only know how to grow larger. Businesses are hamstrung by unions, trial lawyers, and government regulators so as not to be able to meet the exigencies of economic conditions.

New businesses are prevented from coming into existence due to the high cost of entry due to government regulation, litigation, and the sheer weight of paperwork required.

No economy can prosper that chokes off new enterprise like big welfare states do. Huge built-in entitlements cripple an economy, unless new enterprise is encouraged.

Sunday, 20 July, 2008  

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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