IMF Top Economist: Worst is Yet to Come

[Paulie]

DEregulation was PART of the problem.

Why you people insist that this enormously complex SNAFU has but one cause simply amazes me.

Had we not changed the banking charters they could not have gambled with our money they way they did.

Then nothing that the FED did would have caused this ENORMOUS BANKING crises.

Why is that hard for some of you to understand?

It took multiple mistaken policies to get us into this mess.

You know better than to claim I only blame one thing.

The reason I don't blame dereg is because I support it. I support the people's choice to accept a stupid loan. I'd rather us make the mistake and learn from it, than be insulated from it all completely.

It's part of growing as a society. All we had to do was be smarter than the bankers. Some of us were, most apparently weren't.

You say the fed wouldn't have caused this if it weren't for dereg, and I believe the opposite. I believe that if credit wasn't that cheap to begin with, banks wouldn't have offered those loans.

 

[editec]

Had the market been determining rates exclusively, there would have been no sub-prime mortgages because most banks probably wouldn't have taken the risk without having virtually free overnight loans. Although, in light of all these bailouts one has to wonder if the banks knew the safety net would ultimately be there regardless.

Yes, that is true.

If there had been no central bank then the central bank could not set rates.

That is part of the problem, to be sure.

Hardly all of it, but certainly part of it.

Tell me Paul, if the bond rating agencies had been able to really predict risk would we have this problem?

Or if the banks charters hadn't allowed them to GAMBLE on dereivatives would we have this problem?

One of theing you seem not to want to admit is that that CHEAP MONEY also did what to the stock market?

And how did our coprorations do when it comes to borrowing that cheap money?

did they, much like the home buyers, also borrow too much money?

Or did the corporations, and stock buyers and homebuyers ALL makes essantiallyt he same mistake?

Did they ALL borrow assuming that the markets would never turn south?

The mortgage crises is not the avalanche.

It was the snowball that started the avalanche.

The ENTIRE DEBT PICTURE, which includes all debts, public and private is what is killing us, not JUST the morgage crises.

 

[Kevin_Kennedy]

You will discover that it will be the women and children will be the people who suffer with those proposed cuts that some of our resident self proclaimed Austrian economists are proposing.

Not one of them wants to cut the military, the courts or the police, I promise you that.

Simply not true. I've been talking about how we need to end the American empire abroad since I've started posting here. We need to bring our troops home from the 130+ countries we're currently occupying, end the war on terror, end the wars in Afghanistan and Iraq and pull out completely. No more military or economic aid to countries such as Israel that are far too dependent on the United States. No policing the world, no nation building, and absolutely no preemptive war under any circumstances.

Furthermore, I'd take the steps necessary to repeal the 16th amendment to the Constitution and end the Income Tax. Would that hurt the "women and children" in your scenario?

 

[Ravi]

I do not doubt it.

As I recall the myth is that the world-wide economy made major economic downturns impossible.

Anyone here familiar with ship building?

If you are, consider why they put watertight hatches in ships to separate compartments of it.

Now consider the world economy like a ship and national economies used to be like the various watertight compartments of that ship.

Which ship would you rather be on?

The one with lots of watertight compartments that is taking on water, or the one with only one compartment that is taking on water?

Ironically, the argument against FREE TRADE is REALLY the same argument as the one against centralized planning of an economy.

The strength of capitalism is that there are multiple players all playing their own game. Some of them are right and some wrong, so when things go South the righter ones stay afloat thus keeping the ship of economic state afloat, too.

Well, now that we have a one world economy, when one player makes a huge mistake, it effects the worlds economic ship of state.

We are on a very large ship with only one compartment, and that ship has a gigantic gash in the hull and is taking on a lot of water.

Only on this economic ship of State when they announce woman and children first, they don't mean they get on the lifeboats, first.

Oh no, what they mean is that women and children are throw to the sharks first.

Am I wrong?

Ask half this board what are the things we need to cut from our government's areas of responsibility.

You will discover that it will be the women and children will be the people who suffer with those proposed cuts that some of our resident self proclaimed Austrian economists are proposing.

Not one of them wants to cut the military, the courts or the police, I promise you that.

They ALL want to cut social services which help who?

THE PEOPLE, mostly woman and children, that's who.

Very well said, Editec, and sadly very true about the women and especially the children as demonstrated daily here by our fellow posters.

 

[editec]

Simply not true. I've been talking about how we need to end the American empire abroad since I've started posting here.

My apologoies for lumping you in with the nitwits, then.

I do recognize that some of your Misesians are not fools, ya know.

Some of what Mises has been saying is actually incorporated into my world view. The way the FED works is counter productive for example. Doesn't have to be, but it surely has been.

Sadly, the Misesians seem not to understand that we cannot start to fix the economy by allowing half the world's population to starve.

I mean that would fix it, but only if half the world's population (myself and my son included) would willingly starve to death for the greater good.

Since neither of us are responsible for the disasters that our master class are brewing up for all of us, I think we will not go gently into that night no matter how "fair" some of you think it is that we should.

We need to bring our troops home from the 130+ countries we're currently occupying, end the war on terror, end the wars in Afghanistan and Iraq and pull out completely. No more military or economic aid to countries such as Israel that are far too dependent on the United States. No policing the world, no nation building, and absolutely no preemptive war under any circumstances.

We're more or less on the same page here.

Furthermore, I'd take the steps necessary to repeal the 16th amendment to the Constitution and end the Income Tax. Would that hurt the "women and children" in your scenario?

You are aware that at one time our government was mostly financed by tariffs, yes?

ABe Lincoln was a big proponent of tariffs partially because he objected to taxing incomes.

 

[Toro]

I'm not sure how setting the federal funds rate as you see fit is allowing the market to determine the overall price of credit. All it is doing is creating an environment where credit is artificially cheap, and new money is hitting the streets. This is what keeps leading to the recent asset bubbles.

Do you know what the Fed funds rate is today? Last I checked, it was 0.50%, a half point below the target rate. Last week, it traded as low as 0.125%. A few months ago, the funds rate was as high as 7%. That is the market, not the government setting the rate.

In fact, the FOMC sets the target, but Greenspan most often relied on the fed funds future market to set the rate, i.e. he was following the market on where to set rates.

I do agree wholeheartedly that Greenspan and the Fed have more to blame for this than anyone, but he is not the only reason.

If you say the Fed is to blame, then that relies inherently on their manipulation of credit. Setting the fed rate at 1% allows banks to offer loans cheaper than they should be. It's putting too much debt into people's budgets that otherwise have no business indebting themselves.

I highlighted the most important word, and that is "manipulate." The Fed manipulates and influences rates but does not control interest rates. The Fed funds target has been cut from 5.25% to 1% but during that time, mortgage rates have been rising.

Had the market been determining rates exclusively, there would have been no sub-prime mortgages because most banks probably wouldn't have taken the risk without having virtually free overnight loans. Although, in light of all these bailouts one has to wonder if the banks knew the safety net would ultimately be there regardless.

I'm sorry, Paul, but I think you are dead wrong on this. You can argue that the subprime debacle would not have gotten as out of hand but there is zero, zip, nada evidence to suggest that banks would not have created and pushed subprime mortgages. All the evidence suggests otherwise. The proliferation of subprime mortgages was a product of banks, Wall Street and institutional investors

This thinking that "most banks probably wouldn't have taken the risk" is an assumption that is rooted in the ideology of neoclassical economics that markets are everywhere and always rational that has been proven incorrect throughout time. Banking panics are common, and have been for centuries, as individuals dream of riches and become greedy, lowering credit quality and inflating the money supply. History is replete with examples of bad loans made by banks.

This notion assumes that individuals are everywhere and always rational, an assumption in academia that resides only in economics and nowhere else in the humanities. (Its easier to model human behavior that way.) In fact, individuals are rational only part of the time, sometimes acting highly irrational and against their best interests. Jacking up Cisco to 100x earnings as investors did in 2000 or selling Microsoft at an 11% free cash flow yield as they are doing today are not exactly actions of rational human beings.

 

[dilloduck]

In fact, individuals are rational only part of the time, sometimes acting highly irrational and against their best interests.

also often referred to as " marks ".

 

[Toro]

DEregulation was PART of the problem.

Absolutely deregulation was part of the problem.

The SEC allowed the five big investment banks to increase their leverage from 12x-15x to 1 in 2004. They all promptly went to 30x-40x:1. Why? Because Wall Street pays itself on revenues, not earnings. A typical investment bank pays itself about 50% in wages.

So, for example, if a firm has 12:1 leverage, for every $100 in capital, it can have $1200 in assets. If the net spread on the assets is 5%, then the revenues of the firm is $60 and wages are $30.

However, if leverage is 30:1, then the amount of assets a bank can retain on its balance sheet becomes $3000. With a net spread of 5%, revenues rise to $150 and wages are $75.

This is why wages on Wall Street skyrocketed. When I came out of MBA in the late 90s, the average starting wage for an associate in investment banking was $125-$150k. In 2006, it was $300-$325k. To start! 27 year-olds!

This is why Paul's assumption about banks not taking on the risk breaks down. The near-term rewards are too great. The average bonus paid out by Goldman a few years ago was $3 million. You work a few years at Goldman and you can be set for life. Top executives make fortunes. The CEO of Goldman made $40 million last year. The former CEO of Merrill was fired and walked away with $200 million. Most people on Wall Street work for 5-10 years. What do they care what happens a decade from now? They're rich.

So, yeah, they have every reason to take risks.

 

[Kevin_Kennedy]

You are aware that at one time our government was mostly financed by tariffs, yes?

ABe Lincoln was a big proponent of tariffs partially because he objected to taxing incomes.

You are aware that one of the main reasons the south seceded was because of unfair tariffs that benefitted the north and hurt them, right? That is why tariffs were prohibited in the Confederate Constitution. Protectionism, as I've said before, helps a few to the detriment of the rest of us.

- Forces the consumer to pay higher prices.

- Forces other industries to pay higher prices.

- Lack of competition stifles innovation so consumers are paying higher prices for inferior products.

- Other nations will then impose retaliatory tariffs on our goods.

Need I go on?

Abe Lincoln was also a big proponent of suspending habeas corpus, ignoring the Constitution, waging war against civilians, removing all African-Americans from the United States, denying states' rights, etc...

 

[Paulie]

You are aware that one of the main reasons the south seceded was because of unfair tariffs that benefitted the north and hurt them, right? That is why tariffs were prohibited in the Confederate Constitution. Protectionism, as I've said before, helps a few to the detriment of the rest of us.

- Forces the consumer to pay higher prices.

- Forces other industries to pay higher prices.

- Lack of competition stifles innovation so consumers are paying higher prices for inferior products.

- Other nations will then impose retaliatory tariffs on our goods.

Need I go on?

Abe Lincoln was also a big proponent of suspending habeas corpus, ignoring the Constitution, waging war against civilians, removing all African-Americans from the United States, denying states' rights, etc...

I think Editec views tariffs as "fair".

What he doesn't seem to take into consideration, is what the government would be spending (wasting) the extra revenue on.

In the least, the government would need to prove to me that they can restrain themselves to only constitutional spending before I would ever advocate them taxing anything further, or ANYTHING, for that matter.

And then yes, there's the issue of why the tariffs are bad in the first place.

But I'll digress and let Ed speak for himself.

 

[Paulie]

I'm sorry, Paul, but I think you are dead wrong on this. You can argue that the subprime debacle would not have gotten as out of hand but there is zero, zip, nada evidence to suggest that banks would not have created and pushed subprime mortgages. All the evidence suggests otherwise. The proliferation of subprime mortgages was a product of banks, Wall Street and institutional investors

This thinking that "most banks probably wouldn't have taken the risk" is an assumption that is rooted in the ideology of neoclassical economics that markets are everywhere and always rational that has been proven incorrect throughout time. Banking panics are common, and have been for centuries, as individuals dream of riches and become greedy, lowering credit quality and inflating the money supply. History is replete with examples of bad loans made by banks.

This notion assumes that individuals are everywhere and always rational, an assumption in academia that resides only in economics and nowhere else in the humanities. (Its easier to model human behavior that way.) In fact, individuals are rational only part of the time, sometimes acting highly irrational and against their best interests. Jacking up Cisco to 100x earnings as investors did in 2000 or selling Microsoft at an 11% free cash flow yield as they are doing today are not exactly actions of rational human beings.

I'm willing to admit I jumped the gun when I said that. I thought about going back and restating it without it being so absolute, too, but obviously I didn't.

I agree that the banks may still have lent predatorily regardless, but somehow I think it would still have been at least mitigated had rates not been SO low.

Afterall, as a consumer, you have to ask yourself when you may have another opportunity to borrow that cheap. If you don't take advantage THEN, it might be another 5 or 10 years before they're that low again.

It's only one piece of the puzzle, too. The other thing to consider is the money supply expansion. The Fed fosters inflation, which tends to lead to these bubbles.

Do you really think that absent the Fed, the money supply inflation, and the artificially cheap credit, this credit crisis would still exist?

To me, it seems like they are mutually inclusive.

The dereg is an afterthought, in my opinion. Because without the environment existing for consumers to have gotten so far into debt in the first place, it doesn't seem like there is a whole lot of trouble the banks could have gotten themselves into.

Your thoughts?

 

[Toro]

Without a doubt the Fed induced all sorts of bad behavior. They were, IMO, the institution with the most responsibility for this mess.

But I also think that deregulation is a problem. You have to ask yourself, if the market is a self-correcting mechanism, why was it not able to recognize the bubble for what it was? After all, if the market is always a rational mechanism, it would have seen that we were headed for a bubble and not allow the bubble to develop in the first place by selling off the bubbly assets.

 

[Paulie]

Without a doubt the Fed induced all sorts of bad behavior. They were, IMO, the institution with the most responsibility for this mess.

But I also think that deregulation is a problem. You have to ask yourself, if the market is a self-correcting mechanism, why was it not able to recognize the bubble for what it was? After all, if the market is always a rational mechanism, it would have seen that we were headed for a bubble and not allow the bubble to develop in the first place by selling off the bubbly assets.

I think the market learns and progresses. For instance, I doubt consumers will ever over-inflate the housing market again. From this experience, we have learned. This is why history is so important to learn, because had consumers known their history, they WOULD have seen this coming.

We aren't always the smartest people, in this country. But all one can hope for is that we learn from our mistakes and PROGRESS. If ANYTHING should be learned from this, it's that asset valuation will not rise to infinity. The tech bubble should have been a good recent indicator of that. When something seems so valued that it's almost too good to be true, it probably IS too good to be true.

We need to be more educated as a society. Either that, or we can just ask the government to insulate us from it all by regulating our decision making process.

 

[BaronVonBigmeat]

Absolutely deregulation was part of the problem.

The SEC allowed the five big investment banks to increase their leverage from 12x-15x to 1 in 2004. They all promptly went to 30x-40x:1. Why? Because Wall Street pays itself on revenues, not earnings. A typical investment bank pays itself about 50% in wages.

So, for example, if a firm has 12:1 leverage, for every $100 in capital, it can have $1200 in assets. If the net spread on the assets is 5%, then the revenues of the firm is $60 and wages are $30.

However, if leverage is 30:1, then the amount of assets a bank can retain on its balance sheet becomes $3000. With a net spread of 5%, revenues rise to $150 and wages are $75.

This is why wages on Wall Street skyrocketed. When I came out of MBA in the late 90s, the average starting wage for an associate in investment banking was $125-$150k. In 2006, it was $300-$325k. To start! 27 year-olds!

This is why Paul's assumption about banks not taking on the risk breaks down. The near-term rewards are too great. The average bonus paid out by Goldman a few years ago was $3 million. You work a few years at Goldman and you can be set for life. Top executives make fortunes. The CEO of Goldman made $40 million last year. The former CEO of Merrill was fired and walked away with $200 million. Most people on Wall Street work for 5-10 years. What do they care what happens a decade from now? They're rich.

So, yeah, they have every reason to take risks.

You left out the part where Washington has guaranteed Wall Street's losses for decades, thus engaging in moral hazard. And the part where Fannie and Freddy, a quasi-government entity, was buying up junk mortgages at the urging of congress. And the part where various branches of the federal government have been harassing and extorting banks to make subprime loans.

You can talk about "greed" all you want, but that's a copout. Blaming greed for financial crises is like blaming gravity for a plane crash--it's a constant that is always there. Greed can cause financial cataclysms, or it can advance civilization. With the hand of government distorting the decision making process, it's likely to be the former--and that's something that any empirical examination of the evidence will reveal.

 

[Zoomie1980]

Do you know what the Fed funds rate is today? Last I checked, it was 0.50%, a half point below the target rate. Last week, it traded as low as 0.125%. A few months ago, the funds rate was as high as 7%. That is the market, not the government setting the rate.

In fact, the FOMC sets the target, but Greenspan most often relied on the fed funds future market to set the rate, i.e. he was following the market on where to set rates.

I do agree wholeheartedly that Greenspan and the Fed have more to blame for this than anyone, but he is not the only reason.



I highlighted the most important word, and that is "manipulate." The Fed manipulates and influences rates but does not control interest rates. The Fed funds target has been cut from 5.25% to 1% but during that time, mortgage rates have been rising.



I'm sorry, Paul, but I think you are dead wrong on this. You can argue that the subprime debacle would not have gotten as out of hand but there is zero, zip, nada evidence to suggest that banks would not have created and pushed subprime mortgages. All the evidence suggests otherwise. The proliferation of subprime mortgages was a product of banks, Wall Street and institutional investors

This thinking that "most banks probably wouldn't have taken the risk" is an assumption that is rooted in the ideology of neoclassical economics that markets are everywhere and always rational that has been proven incorrect throughout time. Banking panics are common, and have been for centuries, as individuals dream of riches and become greedy, lowering credit quality and inflating the money supply. History is replete with examples of bad loans made by banks.

This notion assumes that individuals are everywhere and always rational, an assumption in academia that resides only in economics and nowhere else in the humanities. (Its easier to model human behavior that way.) In fact, individuals are rational only part of the time, sometimes acting highly irrational and against their best interests. Jacking up Cisco to 100x earnings as investors did in 2000 or selling Microsoft at an 11% free cash flow yield as they are doing today are not exactly actions of rational human beings.

Classic lines from Warren Buffet in the latest issue of USAA's quarterly magazine (USAA is the military person's insurance company and investment bank).

"I get fearful when people are greedy and greedy when people are fearful"

"If you wait for the robins, spring will be over".

Warren Buffet made the bulk of his money during irrational market periods. There is a reason Warren is in a buying frenzy with Berkshire Hathaway right now. And so am I.

And one thing Mr Buffet isn't even remotely considering buying.....Gold....

hmmmm....

 

[Zoomie1980]

I do not doubt it.

As I recall the myth is that the world-wide economy made major economic downturns impossible.

Anyone here familiar with ship building?

If you are, consider why they put watertight hatches in ships to separate compartments of it.

Now consider the world economy like a ship and national economies used to be like the various watertight compartments of that ship.

Which ship would you rather be on?

The one with lots of watertight compartments that is taking on water, or the one with only one compartment that is taking on water?

Ironically, the argument against FREE TRADE is REALLY the same argument as the one against centralized planning of an economy.

The strength of capitalism is that there are multiple players all playing their own game. Some of them are right and some wrong, so when things go South the righter ones stay afloat thus keeping the ship of economic state afloat, too.

Well, now that we have a one world economy, when one player makes a huge mistake, it effects the worlds economic ship of state.

We are on a very large ship with only one compartment, and that ship has a gigantic gash in the hull and is taking on a lot of water.

Only on this economic ship of State when they announce woman and children first, they don't mean they get on the lifeboats, first.

Oh no, what they mean is that women and children are throw to the sharks first.

Am I wrong?

Ask half this board what are the things we need to cut from our government's areas of responsibility.

You will discover that it will be the women and children will be the people who suffer with those proposed cuts that some of our resident self proclaimed Austrian economists are proposing.

Not one of them wants to cut the military, the courts or the police, I promise you that.

They ALL want to cut social services which help who?

THE PEOPLE, mostly woman and children, that's who.

The weak are ALWAYS thrown to the sharks. And there is nothing wrong with that at all. The society gets stronger by culling it's weak. It is how life on this planet has evolved and advanced for 2,000,000,000 years and how modern human history has evolved for 5000 years and how modern economies have worked for 500 years....

My best suggestion for those able bodied, sound minded folks who cannot fend for themselves? Go away, die, disappear, you are not wanted because you contribute nothing to the strength of the civilization.

 

[Zoomie1980]

I think the market learns and progresses. For instance, I doubt consumers will ever over-inflate the housing market again. From this experience, we have learned. This is why history is so important to learn, because had consumers known their history, they WOULD have seen this coming.

We aren't always the smartest people, in this country. But all one can hope for is that we learn from our mistakes and PROGRESS. If ANYTHING should be learned from this, it's that asset valuation will not rise to infinity. The tech bubble should have been a good recent indicator of that. When something seems so valued that it's almost too good to be true, it probably IS too good to be true.

We need to be more educated as a society. Either that, or we can just ask the government to insulate us from it all by regulating our decision making process.

No, they will find something else to over-inflate. They always do.

 

[dilloduck]

No, they will find something else to over-inflate. They always do.

They ? Who is they? Who is placing value on things ?

 

[Zoomie1980]

They ? Who is they? Who is placing value on things ?

The American consumer

 

[dilloduck]

The American consumer

and who manipulates them ?