Discussion in 'Economy' started by Toro, Jul 13, 2008.
When the Fed must shore up the bond offerings of Freddie and Fannie by having to promise that if they renign on debt, the government will pay for it, things are pretty damned bleak.
And one wonders how confident the markets will be knowing that Freddie and Fanny can't cut it without such help?
I think the markets will rally because investors were worried about the collapse of Freddie and Fannie.
But its a mess.
The White House and even the Democrats are telling us this is not a problem but when financial institutions begin the hit the skids...we are in toruble IMHO.
I asked Curly and he agrees.
While the markets may very well rally like you say because of this "good" news, the moral hazard that has been created (and is now being reinforced) on Wall Street over the past several years is going to be disastrous when all is said and done. But then again, could we even afford to let those giants go down? The collapse of IndyMac alone wiped out 10% of the FDIC fund, according to the Wall Street Journal if I remember correctly.
Who knows anymore, I'm not an economist...
But Fannie and Freddie both say capital is fine! Don't worry guys, everything will be A-OK!
We'll just bail out everyone! Who cares about the taxpayers, as long as the Dow stays high!
Yeah...I think you got it, Volt.
Of course the real moral hazard is our attitude about making money by doing whatever it takes.
If amnkind is going to avoid this sort of disaster, it is going to have to reconsider its belief that everything that is important can be measured by economists and bean counters.
If you haven't read it, I highly recommend Deep Economy by Bill McKibben. It's basically about how we as Americans are going to have to move towards more local economies, particularly in the area of agriculture, if we hope to actually improve our living situations and live sustainably, rather than be fixated on "economic growth" - Very refreshing coming from an economist!
Thier decision to do this was not taken lightly, I'm sure.
I really think, if Freddie and Fannie go belly up, (what with them holding 50% of all real estate mortgages in the USA) that truly would throw us into a depression.
Banks would start dropping like flies. (and FDIC can't cover that, beleive me)
Getting a loan for RE impossible for a while.
The building and construction industry dead. Anyone selling into the home market (furniture appliances and so forth) dead.
Can you imagine what effect is would have on the economy if real estate values went down 50% or so, nationwide?
You think it's bad now, folks?
We ain't seen nothing yet.
If people feel poorer because the equity in their homes declines, naturally, even those who still are in the chips and who have secure jobs, spend less.
Consumer spending (CS)is about 70% of the GDP.
Changes in consumer spending effect the GDP dramatically.
When CS goes up, GDP goes up more. When CS goes down, GDP goes down even more.
Throw in a moribund real estate market (which I think accounts for about 5 or 6% of the GDP generally) plus the peripheral industries which count on housing sales to generate their business, and you've got an ugly economic picture.
So, while I totally agree that the taxpayer is bailing out tow privately owned financial institutions (and that sucks and creates that moral hazard) allowing those insitutions to fail could be worse.
Of course, I am not entirely conviced that this bail out will work, anyway.
These crappy mortgages that started the problem, PLUS the cost of energy and food, are putting people who have nothing to do with this bad mortgage problem on the skids.
We're drifting dangerous close to the event horizon of a truly horific economic meltdown in my opinion.
I personally think we need a massive period of inflation to save the middle /debtor class.
We've bailed out the rich folks, but it's the middle class which drives the economy.
As long as they're scrared to death of going broke, (and many of them are right about that, I suspect, too) this economic is on hold at best and going down at worst.
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