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What next?

September 18th, 2008

I don’t think even the most alarmist of doomsayers could have anticipated the pace of events in financial markets over the past couple of weeks. In that time, the casualties (bankrupt, nationalised or firesale) include Fannie and Freddie, Merrill Lynch and Lehman, AIG and HBOS and probably others I’ve missed. And the new names on the list are even more startling: Goldman Sachs, Morgan Stanley, Macquarie Bank, GE, even the Federal Deposit Insurance Corporation.

As late as last week, columnists were asking (and answering in the negative) the question “Should I take my money out of the stock market and put it in a money market fund”. Now the question is “If I pull out of the money market funds before they shut down redemptions, what’s the safest alternative: a bank account, T-notes or gold?”.

No doubt, this too will pass. But it’s just about impossible to see things returning to the status quo ante. A severe recession now seems inevitable. And when it ends, we’ll be looking at a greatly contracted financial sector, with governments deeply enmeshed in both ownership and regulation. Among the likely consequences, a huge decline in the economic importance of New York City, as the firms that defined Wall Street disappear. London may gain relative to New York, but is still likely to suffer badly, as will Switzerland. And that will have implications for the national economies that depend heavily on playing a central role in the financial systems.

Politically, even allowing for the incredible triviality of US election campaigns, it’s hard to see McCain surviving once the implications of this sink in. From the Keating Five to deregulation in the 90s, he’s been in the pockets of the financial sector throughout his career.

No doubt there’s lots more I’ve missed. Jump in and comment.

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  1. Jill Rush
    September 18th, 2008 at 23:02 | #1

    Whilst Bill Clinton thought it was “the economy stupid”, belief is possibly of equal importance. It wasn’t the economy that had Bush re-elected. The numbers of people in the USA who believe in creationism and don’t even know that it is just one of many stories of how the world began shows the strength of belief over evidence.

    McCain sounded very convincing when he announced “Enough is Enough, enough is enough” whilst Obama sounded weak in comparison. Those looking for a President who has the answers, because they themselves don’t have a clue, may well vote for McCain because of his comforting statements about knowledge of the financial system and because the VP is an outsider. Voters are often ill informed and emotional. McCain and Palin are possibly better suited to tapping into this political vein. The test will be if Obama can succinctly put a case which convinces the population that he has a better plan.

  2. Steve Hamilton
    September 18th, 2008 at 23:50 | #2

    I’ve noticed a lot of commentary suggesting that the outcome of all of this turmoil will be an increased and enhanced level of financial market regulation. Many have even heralded the end of capitalism as we know it. But I wonder;

    a.) To what extent does this crisis indicate a failure of the capitalist system (the freedom of markets etc.).
    b.) To what extent is this simply a “necessary evil” of the capitalist system (creative destruction etc.)
    c.) To what extent might this actually be a result of government intervention (bankruptcy protection, government backing etc. creating a kind of moral hazard whereby an excessive level of risk-taking has been encouraged by govt.).

    Additionally, it appears clear that the Australian financial system has escaped the worst excesses that characterise the current US crisis; are Australian financial institutions really significantly more heavily regulated than their US counterparts, and given this, what other institutional factors can explain the disparity between the conditions facing the respective nations’ financial markets.

    Just a few things I’ve been thinking about, and would love to hear views on.

    Cheers

  3. observa
    September 19th, 2008 at 00:40 | #3

    “I don’t think even the most alarmist of doomsayers could have anticipated the pace of events in financial markets over the past couple of weeks.”
    With all due respects John, Austrian commentators largely banished from Western media to the Asia Times have been portending exactly such doom well before the sub-prime broke. In Australia that silence has been deafening apart from the odd Gerry Jackson or two. Here’s the Mogambo Guru (actually Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.) of ‘We’re all freaking doomed!’ fame telling it like they all have for so long-

    ‘Naturally, I turned a jaundiced eye towards the new Total Fed Credit (the magical fount from whence spews new credit, which becomes new money and a new debt when somebody borrows this new credit) that was created during the week that the federal government nationalized the bankrupt and corrupt behemoths called Fannie Mae and Freddie Mac. It was, surprisingly, down by US$5.5 billion!

    This is, theoretically, Bad, Bad News (BBN), in that we cannot stop creating new money and credit, as we are already too far down the Rocky Road Of Destruction (RROD) of a fiat currency that comes into existence by virtue of somebody going into debt, and the “point of no return” has been long passed, sort of like when an airplane is taking off and it reaches that place and speed down the runway where it can no longer stop, and the pilot must therefore continue to take off and try to fly that sucker, even if the engines quit and the wings fall off, which makes the task that much harder, as I understand it.

    The good news is that “Rocky Road Of Destruction (RROD)” is the new hit release of the band called “Mogambo and the Mogambo-Tones”, where the fabulous band now takes a dark foray into Goth, with a tune propelled by the catchy hook “We’re freaking doomed!” which is constantly repeated over a soundtrack of wolves howling, people screaming and crying out “We’re freaking doomed because of the inflation that was set in motion in the ’30s when the corrupt Supreme Court overruled the Constitution and declared that paper money was the same as gold money, and then it was brought to a head in 1997 when the Federal Reserve under Alan Greenspan started an exponential creation of so freaking much money and credit so that, in 1999, when the loathsome Bill Clinton repealed the Glass-Steagall Act, the banks had the wherewithal to create so much more debt and thus an increase in the money supply to finance asset bubbles and derivative bubbles (now approximated at $1.25 quadrillion world-wide, or about $200 for every freaking man, woman and child on the freaking planet), which makes you laugh at the audacity of such lunacy, but then we did it for so freaking long that the resultant inflation in prices no longer appears as inflation in stocks, no longer as inflation in bonds, no longer as inflation in houses, but always as more and more inflation in the size of government and the cost of living (price inflation), which means that the Federal Reserve must create more money that the Congress needs to borrow, which will make inflation in prices worse, which was the original problem in the first freaking place! Oh woe! Oh woe!”

    And locally how many times does Gerry Jackson have to point out the obvious-
    “From March 1996 to December 2007 currency rose by 110 per cent, bank deposits by 178 per cent and M1 by 163 per cent. (Monetary Aggregates – D3 ). What we had was a monetary boom, not a genuine investment boom. It was this boom that sent house prices rocketing, fuelled the current account deficit and greatly worsened the foreign debt.”
    and the inevitable bust before mainstream economic pundits get it? If they don’t get the global picture now, when will they ever get it? Essentially we have Govt monopoly on the issue of fiat money and as such central banks have the responsibility for how much is issued by whatever means. They have totally failed at the task by any objective analysis and the chill winds of that failure are everywhere evident now. We traditionally define money as a store of wealth, a unit of account and a medium of exchange. How does that square with using it to deliberately target 2-3% annual reduction in its value we must all ask ourselves and the Glenn Stevens now. We all need to understand now that there is a further, more dynamic definition of money that has been missing. Money over time is also the claim over production during that same time. Get the money wrong and you get the claims wrong too. That’s the eternal problem with irredeemable fiat money as some claimants are now only too painfully well aware.

  4. observa
    September 19th, 2008 at 01:02 | #4

    The answer to your questions Steve lies in answering a couple more. What’s wrong with your money being worth 2-3% more goods and services in a years time and why can’t you imagine it, but if you could get your head around such a revolutionary concept, how much more circumspect would you be in lending its claim on production to another, than the case where it was worth 2-3% less in a year? In which case would you rather a borrower than a lender be?

  5. codger
    September 19th, 2008 at 02:43 | #5

    ‘I don’t think even the most alarmist of doomsayers could have anticipated the pace of events in financial markets over the past couple of weeks.’

    Come on John, where have you been etc.? I’m still towing the gemeni out of the rodent’s 7K bog…let’s see, that was a while back…post Milton of course. Come on indeed; observa sniffs close to the dung hill; put the politics in bed with the economics light blue touche paper & stand well clear.

    A long slow time cominmyfriend.

  6. jquiggin
    September 19th, 2008 at 05:51 | #6

    For those who wish to challenge my opening observation, the task is simple. Find a commentator who two weeks ago predicted events as severe as this for the following fortnight. My preferred alarmist commentator is Nouriel Roubini, and I’m pretty sure he didn’t.

    I predicted how a crisis of this kind would play out six years ago, and again in February. Nonetheless I was surprised by how fast things have happened recently.

    Generalized claims that Austrians predicted financial disaster don’t cut any ice here. Austrians always predict financial disaster, and don’t seem to have been particularly specific about the way this one would play out.

  7. September 19th, 2008 at 08:24 | #7

    It’s part of the decline of the American Empire. The inevitable shift to Asia, and back to Europe to some extent, is now in full swing. The Chinese should be able to buy up U.S. assets at bargain basement prices. They’ll just be redeeming debt.

    One aspect which is very concerning is the impact on climate change. carbon reduction strategies that put pressures on national economies are not going to be popular. On the other hand a recession should bring lower consumption of energy, at least in the so-called West.

  8. paul walter
    September 19th, 2008 at 08:52 | #8

    From the time of Fukuyama, they never thought they could get it wrong. Observa says it- they casinoed; never invested. Morphing after Bataille’s Economy of Excess more a malign sociological phenomena than a humane and rationality driven system for efficient production that discerns need from want.
    Iraq proved proof was in the pudding, exclusive concern for signatures attempting to determine the fate of Iraqi oil, ad infinitum- useless if they can’t be enforced and at the cost of millions of lives.
    “Better half as million Iraqis than one American”, as one US secretary of state once notoriously is alleged to have proclaimed.
    Jill Rush’s “creationism” analogy is the determing enabling factor for denialism,and Quiggin well identifies how out of whack they have become with reality, when fantasy has imposed its rule over all and Murdochian censorship is the norm.
    The same superstructure manifestations revealed in the unsuspected paranoid delusiveness of creationism and climate denial; victim/hood entitlement; degenerating to “do what thou wilt” that determined the Iraq fantasy and casinoism, is so accurately given tangible form in the motif that is Sarah Palin; myopism, incoherence, euphoria and psychosis, and surely resulting failure.
    But not before we got final public sponsorship of private increase as rule rather than exception. There is no market self-correcting apparatus, no Keynesian oversight mechanism since its dismantling, and the fear of the Marxian purging mechanism just further entrenches medievalism; the world stays a giant open-air concentration camp burning while deluded Nero fiddles denialism and a complete refusal of personal inventory.
    Giv’em cake!

  9. Katz
    September 19th, 2008 at 09:27 | #9

    Among the likely consequences, a huge decline in the economic importance of New York City, as the firms that defined Wall Street disappear. London may gain relative to New York, but is still likely to suffer badly, as will Switzerland. And that will have implications for the national economies that depend heavily on playing a central role in the financial systems.

    You’re eyeing the future here JQ, an activity that you (on behalf of the rest of humanity) have already admitted to being quite bad at.

    But that evident lack of skill never prevents us from trying. Thus my question:

    What are the processes that will drive the relative decline of NY, London and Switzerland? I understand that some major institutions have collapsed, but the expertise and networks remain largely intact.

    Why is it less than likely in your view that new, improved institutions will emerge from this much-vaunted creative destruction in NY, London and Switzerland?

  10. Steve
    September 19th, 2008 at 09:31 | #10

    Here’s a nomination for an alarmist commentator:

    http://theautomaticearth.blogspot.com/

    a post from the 5th of sept:
    http://theautomaticearth.blogspot.com/2008/09/debt-rattle-september-5-2008-cement.html

  11. charles
    September 19th, 2008 at 10:02 | #11

    The cost of the rescue to date is less than one year in Iraq. The US has been blowing up treasure for years, borrowed treasure.

  12. Ernestine Gross
    September 19th, 2008 at 10:17 | #12

    To predict the exact course of the unravelling of the hierarchy of private sector generated debt (‘de-leveraging’) would require access to information which is not publicly available, namely complete information about all individuals’ and companies’ records of transactions, denominated in national currency units, and complete information about the details of financial contracts (‘securities’).

    However, I would be surprised if there aren’t people with insider knowledge in the banking and finance sector who had a good idea of things to come (eg the top management of AIG, Lehman, and all others who have been queuing up for aid.)

    Back in August 2007, you, JQ, conveyed to me, your reader, that you anticipated a calamity in the making, being careful in your language regarding the extent and the time.

    Steven Keen, UWS, has long been writing and speaking on ABC TV, about the unsustainability (significant dis-equilibrium) of the debt generating ‘financialised economy’.

    Since August last year I repeated several times in comments on this blog site theoretical arguments (based on Roy Radner’s and O. Hart’s work from the 1970s) and empirical observations which led me to the conclusion that what is going on is not sustainable. I say repeated because I presented the same arguments in the 1980s at a meeting in Sydney, named ‘a pocket full of change’. This was the time when the ‘financialisation of the economy’ commenced in Australia. Shortly thereafter I wrote the same arguments in paper submitted to a local journal. It came back with the comment that economists know that (at the time I was working at the then new School of Banking and Finance, UNSW).

    Some people pursue the idea that humans learn from experience (eg the comments by the new member for Bennelong on last nights ABC Q&A program). I would agree that humans learn from experience, even in the area of economics, but this learning can be undone in an intergenerational context. The mechanism is to tell the young generation something which appears to them as ‘new’ while it is old to the predecessor generation. (eg M. Friedman, v. Hayek. Undergraduate textbooks should also get a mention: ‘new’ means more glossy print and changes to the typeface, size of the margin and other aids to ‘improved learning’. I should also mention a University librarian I met at a Library Committee meeting who proposed to remove all textbooks that contain Keynesian economics because “this is no longer trueâ€? – she didn’t last long). The said mechanism is interlaced with politics and power and the mind-set of the ‘movers and shakers’. (I’ve learned a bit about these aspects from your blog)

    A few days ago, I spoke with a retired Professor of Economics who has banking experience. He indicated that he anticipates things are getting worse in the immediate future.

    The private sector rating agencies are an interesting aspect of the ‘financialised economy’. Their role has been to provide a false sense of security (about securities) during the problem production time (I am trying to say something about the financial sector technology and its productivity). After the bubble burst, their output is, IMO, contributing to the speed of the de-leveraging. But this is not really the interesting aspect, IMO. The most interesting aspect is that these private sector centralists have, possibly unwittingly, provided evidence that centralised resource allocation doesn’t work.

    IMHO, the prediction of a recession is not as interesting as the question: How can it be prevented?

  13. smiths
    September 19th, 2008 at 10:21 | #13

    steve ‘the automatic earth mentions the carry trade as part of his prediction of doom,

    but here is Ambrose Evans-Pritchard warning the same in march 2006

    Global Credit Ocean Dries Up
    Ambrose Evans-Pritchard

    March 18, 2006
    The Telegraph – 2006-02-28

    One by one, the eurozone, the Swedes, the Swiss and now even the Japanese, are turning off the tap of ultra-cheap credit that has flushed the global system for the past year, keeping the ageing asset boom alive.

    The “carry tradeâ€? – as it is known – is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1pc in Switzerland, to re-lend anywhere in the world that offers higher yields, whether Argentine notes or US mortgage securities.

    Arguably, it has prolonged asset bubbles everywhere, blunting the efforts of the US and other central banks to restrain over-heating in their own countries.

    “The carry trade has pervaded every single instrument imaginable, credit spreads, bond spreads: everything is poisoned,� said David Bloom, currency analyst at HSBC. “It’s going to come to an end later this year and it’s going to be ugly, even if we haven’t reached the shake-out just yet,� he said.

  14. jquiggin
    September 19th, 2008 at 10:22 | #14

    Steve at #11 Your commentator is at the alarmist end of the spectrum, but given that the post refers to the AIG strategic review, to be unveiled by management on Sep 25, I think we can fairly say,not nearly alarmist enough. Somehow, I suspect the strategic review is not going to happen.

    I’ll remind readers again that, if what you want is an undated prediction of the kind of disaster we’re seeing, I provided that six years ago, with more specifics than the sources quoted above. What I said in the post was that no-one two weeks ago, was predicting the pace at which the disaster would unfold in the immediate future.

  15. smiths
    September 19th, 2008 at 10:42 | #15

    thats a fair point john

    for people who have felt that this illusion was bound to come to a nasty end there is vindication,

    i have personally been ridiculed consistently for my views that the ship was heading for the rocks,

    to then have you say, “show me where someone exactly predicted this thing at this speed” feels like a bit of trickery

    steve keen has been pretty bloody good in his general predictions

  16. O6
    September 19th, 2008 at 10:48 | #16

    PrQ, Is there consensus that the unwinding of the yen carry trade is what has driven down our dollar, and caused a lot of other ‘problems’, especially the pricking of housing price bubbles?

  17. September 19th, 2008 at 11:28 | #17

    I’ve expanded on my earlier comments. Please see: McCain’s sky hasn’t fallen just yet His advisors are the usual suspects.

  18. carbonsink
    September 19th, 2008 at 11:50 | #18

    “If I pull out of the money market funds before they shut down redemptions, what’s the safest alternative: a bank account, T-notes or gold?�.

    And what would your recommendation be ProfQ?

    I’ve been in 100% cash (even my super) since March when a Macquarie Bank structured investment “product” of mine evaporated overnight. My money is parked at Westpac for the time being (which is the bank I feel most comfortable with) but who knows what will happen next. A run on the banks? No-one its predicting that either!

  19. MH
    September 19th, 2008 at 14:09 | #19

    As any passing glance at cconomic history shows you; debase the currency and you wreck your economy, let inflation out of the box and you wreck your economy, fight major wars and your bankrupt your treasury and wreck your economy. It has always been thus and ever will be since the nation state existed. The American problem is they have managed to achieve through various acts of folly the grand trifecta; debased their currency, let inflation out of the box and fought major wars.

    As Econ 101 taught you about banking and money creation, the mulitplier works as long as it is regulated and anchored in controlled deposit schemes, open the national treasury to all and sundry, allow the traders to call themselves to be called merchant banks without regulation, amend all your accounting standards to allow any form of intangible to suddenly be tangible, abandon oversight and add a hefty dose of disgenuity or outright lies disguised as spin and the outcome was obvious.

    I am most concerned by the polarisation of the american populous and as the effects of this disaster sink in expect some very erratic and chaotic response. The US government is now so deeply in debt and its economic base so severely compromised that it can neither tax nor spend its way out, in short, no source of magic liquidity to replace the lost liquidity, will global action come to the rescue, I somehow think not, not after two decades of neo-con absolutism and arrogance.

    JQ well called the trend as have others but predicting the future from here on in is simple almost impossible other than to say, each day is a new day.

  20. jquiggin
    September 19th, 2008 at 14:28 | #20

    #16 Sorry to drag you in, smiths. I was reacting to earlier commenters who snarked about the opening sentences of the current post. Like you, I took some flak for suggesting that this crisis could be a big one. It may be small comfort being right, but it’s all the comfort we are likely to get for a while.

  21. jquiggin
    September 19th, 2008 at 14:29 | #21

    #19 I don’t generally give financial advice, but I am comfortable with the safety of deposits in Australian banks.

  22. September 19th, 2008 at 14:32 | #22

    Ron Paul sounded the alarm on Fannie and Freddie five years ago:

    http://www.lewrockwell.com/paul/paul128.html

  23. September 19th, 2008 at 16:05 | #23

    some questions have arisen in my simple mind, about the possibility of a better world:

    is there sufficient computational power, and data acquisition capacity, to create a ‘full-size’ model of the australian economy? assuming every business and government entity and various hybrids reported their activity at least weekly.

    would such a model allow effective guidance of tax, regulation and justice activities?

    it seems to me much harder things are routinely accomplished nowadays.

    if ‘yes’ and ‘yes’, why aren’t we doing it?

  24. Ian Gould
    September 19th, 2008 at 16:24 | #24

    “The US has been blowing up treasure for years, borrowed treasure.”

    Yes and Ch9ina has effectively been financing its economic development by lending money to America so America can afford to buy Chinese products.

    You have to think that that has to end eventually.

  25. sean
    September 20th, 2008 at 02:54 | #25

    No 24, computer models are the BIG problem here, academics have this thing in their big heads that maths is some sort of science, and some of them take it even further and even think economics is a science too.

    As to the original post, I think Mr Academic, you need to have a good look at some of the folks advising the chosen one Obama. Between someone who understands the questions but does not have the answers and someone who does not understand the questions and has no hope in maybe one day understanding the answers ill ill choose McRage, at least he might give the right people a good kicking.

    All in all the Austrian school wins in the great credit quake bubble, not that I am favour of the gold standard, but a dual currency system and breaking the monopoly of the Fed and all central banks would be welcome, but I don’t think the politicos would ever give up the powers to the market.

  26. sean
    September 20th, 2008 at 06:08 | #26
  27. Ikonoclast
    September 20th, 2008 at 06:22 | #27

    I’d nominate Steve Keen and John Quiggan as two who have been consistently sounding alarm bells on the unsustainability of the asset-bubble debt-driven financial markets since 2000 (that I know of.) I suspect SK and JQ were writing on these issues well before that. Ernestine Gross sounds like another who assessed what was coming well before it arrived.

    It’s one thing to predict an avalanche when a slope is unstable. It’s another thing to predict exactly when it will happen and where every large boulder, including unknown ones buried in the slope, is going to end up. In other words, it is reasonable (in my opinion) to respect the pundits who made early predictions of gnereal disaster and unreasonable to expect them to predict the fine detail of the disaster.

    Whether my analogy holds true about the pace of the disaster I do not know. Could anybody have reasonably been expected to predict the pace of this disaster? My answer is possibly yes (and maybe some did). Given factors like the high level of interconnectedness of the financial system, high communication speeds, automation and data flows, automated stop-loss systems (is that the right term?) and the seeming domino or daisy-chain structure of securitised debt obligations etc. then perhaps one could have reasonably expected some pundits to predict a very rapid collapse and again maybe some did.

    However, that is only me being wise in hindsight. I’ve been one of the gloomiest prognosticators on this blog. However, my predictions have been more about the lack of environmental, energy and resource sustainability in the world civilization system rather than its economic unsustainability as such. I see economic unsustainability (on the modern scene) as a secondary phenomenon based environmental unsustainability.

    If we can take a lesson from the financial crisis it is that these environmental and resource crises now will be very rapid when they break. And of course they will compound into economic and social crises.

    The simple facts that suggest these crunches and collapses will be rapid are these. We have an exponential growth curve (populations and industrialisation) going up and meeting a reverse exponential collapse curve (resources remaining) coming down the other way.

    What this suggests we should do or can do at this late stage I am not sure.

  28. sean
    September 20th, 2008 at 07:11 | #28

    As lets not forget the forecasting of the greatest capitalist on the planet, Mr Buffet.

    Berkshire Hathaway letter of 2002:

    http://www.order-order.com/2008/09/greatest-capitalist-versus-geeks-of.html

  29. observa
    September 20th, 2008 at 08:48 | #29

    Mogambo points out where we’re at-

    ‘Welcome to modern America, where the rich get richer by borrowing money and credit created by the Federal Reserve, and then loaning it to the government, while everybody else gets poorer as the resultant inflation in the money supply is diffused through the economy as inflation in prices, unless the workers demand higher wages, which makes the prices of things that much higher, as the companies recover their higher labor costs! Hahaha! Idiots! We’re freaking idiots!

    Bill Bonner here at The Daily Reckoning concurs, although if you ask him, he is most emphatic that he has NOTHING in common with The Mogambo, he has NEVER knowingly agreed with me about anything, and in fact he never even HEARD of anyone named Mogambo.

    Nevertheless, I cleverly twist his words to prove my point that the majority of investors have to lose money by quoting him revealing the grim statistic that “From the peak of 2000 ’til today, stock market investors have earned nothing for their trouble. In nominal terms, stocks are about where they were 10 years ago. Adjusted for inflation, they are down 25%-80%, depending on how you measure it.” Yikes! Ten years! Gone!

    Ten years ago, the average investor invested a whole six-slice pizza. Now, they have as little as one slice of a pizza to show for their efforts? And somebody still thinks that they can fund a retirement on that kind of performance? Hahaha!

    And not only that, but since you invested when a pizza cost $10, only to get back $12 later (a 20% gain!) when pizzas cost $14, you are obviously a loser, thanks to inflation in prices caused by the Federal Reserve creating the excess money and credit to let a greater fool borrow the money to pay for your 20% gain.

    In short, you “made” $2, paid some taxes on the “gains”, only to find that your loss of purchasing power means you actually lost money, and you had to pay a tax for the privilege!

    And you are going to fund a retirement by constantly losing buying power of every dollar you invest? Hahaha!’

    While Spengler encapsulates sussinctly where we should be at-

    “There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear.”

    Except for that last demographic oversight. My take is, it was that last unprecedented historical anomaly this time round that central bankers missed for so long, allowing their oversighted ponzi scheme to run for as long as it did. It is the length and depth of those consequent malinvestments that is the massive problem now for the crisis managers. It is probably beyond their best efforts to ameliorate now.

  30. observa
    September 20th, 2008 at 08:51 | #30

    sussinctly?- no Freudian slip intended here

  31. Ian Gould
    September 20th, 2008 at 09:50 | #31

    “As to the original post, I think Mr Academic, you need to have a good look at some of the folks advising the chosen one Obama.”

    Sneering anti-intellectualism and the need to cast everything in terms of partisan spite in a single sentence, wonderful.

    And, of course, guaranteed to make the reader taking everything you say seriously.

    Really.

  32. September 20th, 2008 at 10:00 | #32

    To go back to the title, I just wonder whether we are seeing the beginning of the disunited states of America, the breakup into several different countries. Remember those maps of the United States of Canada and JesusLand? The USSR fell apart surprisingly rapidly and the demographic differences between different geographic areas weren’t much greater than the differences within the US. Perhaps the election outcome will be the final critical breakpoint?

  33. Ian Gould
    September 20th, 2008 at 10:04 | #33

    Shorter Observa: the stock market is lower now than at the peak of the greatest boom in history.

  34. observa
    September 20th, 2008 at 11:46 | #34

    That’s true enough Ian but the question is where to from here with those assets and associated income? Unlike roulette wheels where you’ve had a succession of black outcomes, the chance of red next is not the same vis a vis roulette and asset prices. Monetary expansion is a favourite of central bankers and politicians alike, with those progressive income tax scales and taxation by stealth, not to mention indexed Govt fees and charges. Nice work if you can get it to facilitate that ever burgeoning demand it seems-
    http://www.theaustralian.news.com.au/story/0,25197,24374072-601,00.html
    but there appears to be a very prickly problem now on the supply side and more credit won’t cut it anymore by all accounts.

  35. sean
    September 20th, 2008 at 21:33 | #35

    Re 32, “Sneering anti-intellectualism and the need to cast everything in terms of partisan spite in a single sentence, wonderful.”

    Well its a pity that all the Quants where not listened to and we would not be living this nightmare. SO yes I admit, I think a good dose of anti-intellectualism is called for.

    SO sack the risk managers, close down 90% of local statistics office, stop awarding prizes for economics, stop recruiting risk takers from economics depts at our universities, in fact a lot less economics from universities please, Im sure JQ can sell his goods elsewhere, and we will be making a start.

    As for sneering partisan, see my comments on Mcrage, HARDLY PARTISAN, Thats the replay no26.

    Ill let Taleb fill you in on the rest.

    http://www.nakedcapitalism.com/2007/10/nicholas-taleb-attacks-pseudo-science.html?widgetType=BlogArchive&widgetId=BlogArchive1&action=toggle&dir=close&toggle=YEARLY-1199163600000&toggleopen=WEEKLY-1220155200000#MARKER

  36. Ernestine Gross
    September 22nd, 2008 at 10:47 | #36

    What next?

    A 30 min delay in the opining of the ASX, Mo, 22 September 2008.

    Too much information or too little?

  37. Ernestine Gross
    September 22nd, 2008 at 10:49 | #37
  38. Ernestine Gross
    September 22nd, 2008 at 11:28 | #38

    Re # 38. The link is automatically updated. So I need to update my comments, too.

    At 10:49am the box had nothing in it. At 11:17am the box shows the behaviour of the ASX200. The ‘market failure’ lasted 1 hour.

    The worst possible outcome of the crisis (setting aside people’s wishes on ideological grounds) is an empty box in all markets – systems collapse.

    In the specific instance of ‘market failure’ today at the ASX we were told that there was a 30 minutes delay in opening the ASX due to an announcement (change of rules including suspension of short sales). It took apparently twice as long.

    The idea of the crisis management is to prevent observing a picture of an empty box in all markets. Not easy. Personally, I’d feel more confident if Prof. Krugman and a team of his choosing would be in charge.

  39. Ian Gould
    September 22nd, 2008 at 13:10 | #39

    I’d love to see Krugman as Obama’s Secretary of the Treasury.

    I doubt he wants the job.

  40. Majorajam
    September 23rd, 2008 at 07:37 | #40

    jquiggin, long time no post.

    I think you’ll find if you can search your archives that I’ve been banging on about this endgame for four years now (at times inviting your comment, though to my recollection you were unmoved), though I don’t claim to have called what institutions when (I tried googling for my name and yours and only get 2006 on). My prescience was really only a function of my appreciation the importance of Doug Noland’s analysis- the uber-perma-bear- at the time and still. I have the advantage of being able to evaluate people on the merit of their ideas irrespective of their standing in one community or another.

    Anyway, as far as your opening gamet goes, I can assure you that the only thing that surprises him about the unfolding events was the lack of a Lehman bailout which accelerated the undoing (actually, he also claims to be surprised at the timing of the policy response, though don’t ask me why. In any case, that’s nothing to do with what his 10 year old analytical framework accounts for).

    I suggest checking into the Credit Bubble Bulletin archives for more in the way of detail…

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