3.18.2008

The economy: How bad is it?

Beware the Bailout: In rushing to fix one problem, has the Fed created others?


Excerpts:

It's said that we're in the worst financial crisis since the Great Depression. Maybe. But remember the S&L crisis of the early 1980s? Or the commercial banking crisis of the late 1980s (from 1988 to 1992, 905 banks failed). Or the 1997-98 Asian financial crisis, which sent South Korea, Indonesia and other countries on a boom-bust roller coaster? All were frightening. But what distinguishes this crisis—which brought down Bear Stearns over the weekend—is that it involves the entire financial system, not just depository institutions, and it's more mystifying than any of its predecessors.

...
At the epicenter of the crisis are the now-notorious "subprime" mortgages made to weaker borrowers and subsequently "securitized." On paper the financial system seems to have ample resources to absorb losses. Commercial banks have $1.3 trillion in capital; U.S. investment banks in 2006 had an estimated $280 billion in capital—and other investors, including foreigners, may hold half or more of subprime loans. But no one knows who or how much. Recent estimates of subprime losses range from $285 billion to $400 billion or even higher. Such guesstimates, and outright ignorance, breed caution and fear.


Comment: How bad is it? Seems that no one knows. See underlined sections above.

2 comments:

  1. No one knows is correct. Here's a guy says he didn't know and is beginnning to realize it's actually worse than he thought:


    "This is not a pretty picture. The losses to come are probably large enough to wipe out the banking system, and the interconnected network caused by modern finance is sufficiently fragile that the failure of any one major house, if carried out through normal bankruptcy processes, would be sufficient to bring down the world economy as a whole."

    It's from: http://www.atimes.com/atimes/Global_Economy/JC19Dj01.html

    Hmmm, makes me wonder if that little movie clip on an earlier post might not be so off after all. Have a nice day :)

    ReplyDelete
  2. "On paper the financial system seems to have ample resources to absorb losses. Commercial banks have $1.3 trillion in capital; U.S. investment banks in 2006 had an estimated $280 billion in capital..."

    Of course, the danger is that there are unlimited resources (on paper at least) because more money can be printed. But what good is more money if it just causes inflation? It reminds me of the old stories of Germans after WWII going to the bakery pushing a wheelbarrow full of bills in order to pay for a loaf of bread.

    Here's an excerpt from the Asia Times:

    The Fed is doing everything it can to stave off disaster, but frankly, it is not rich enough. With assets of about $800 billion, having instituted $400 billion of rescue programs in the last week plus unspecified intervention with Bear Stearns, it is pretty nearly tapped out. It does of course have available a further source of liquidity, the Federal printing press. With inflation already moving at a brisk trot, use of that source will replace an incipient recession with a deeper and highly inflationary recession.

    ReplyDelete

Any anonymous comments with links will be rejected. Please do not comment off-topic