The Next Financial Crisis: and We Just Made It Worse

[bcassill]

Interesting article in the New Republic on how things are likely to end badly. It also outlines the central role the Fed has played in actually causing financial crises since it's creation in 1913.

http://www.tnr.com/article/economy/t...risis?page=0,0

[ThePythonicCow]

Re: The Next Financial Crisis: and We Just Made It Worse

The article is by Peter Boone and Simon Johnson.

It says we have survived this credit bubble crash and are now on our way to the next bubble, even bigger. It expects the next bubble to be overseas, not in the U.S., fueled by too much easy money again.

It does agree with iTulip in one regard. Whichever bubble is the last, final, biggest bubble will be followed by a crash, where the bigger that last bubble, the worse the crash.

I enjoyed the comments in the article regarding limited vs unlimited liability for bank executives. Perhaps we could avoid the outrage of the outragous bonuses to the executives of failed banks by having their pay above a certain amount held in escrow, to be doled out say over a ten year period. If the bank went bust during the ten years, the executive would lose whatever remained in escrow to the bank balance sheet.

[doom&gloom]

Re: The Next Financial Crisis: and We Just Made It Worse

the Goldman Sux-led kleptocracy will never let it happen.

[vinoveri]

Re: The Next Financial Crisis: and We Just Made It Worse

glad to see this discussion in the press become more mainstream.

disappointed though the authors don't allude to, what I believe is just as fundamentally a problem, and that is fractional reserve banking coupled with fiat money.

Note the following statement (emphasis mine)

All modern economies need a financial system that can connect people who want to save with those who have good investment projects. This is essentially what banks do. But, unfortunately, this process often goes wrong. And that is precisely what is happening now. Our banks have gotten into the habit of needing to be rescued through repeated bailouts

what they should also point out is that the banking system and our debt generated "prosperity" does not work like this in the main, b/c/ as we know, money is lent into existence, out of thin air, there is no/little savings behind it. So, if I'm connected, I can get money (debt) to finance any half baked scheme I come up with, b/c it is not anyone's savings that is being risked.

[ThePythonicCow]

Re: The Next Financial Crisis: and We Just Made It Worse

the Goldman Sux-led kleptocracy will never let it [escrowed bonuses for big execs] happen.

True. I never claimed my suggestion had any chance of being considered.

[ST]

Re: The Next Financial Crisis: and We Just Made It Worse

It does agree with iTulip in one regard. Whichever bubble is the last, final, biggest bubble will be followed by a crash, where the bigger that last bubble, the worse the crash.

I

I look forward to reading it. You bring up an interesting point with respect to bubbles. My view of a bubble is that it always starts out as a fundamentally sound economic boom then progresses to a ridiculous stage. At present, nothing fits my definition - in that I mean if we are seeing flows into emerging markets again creating another potential bubble, what are they based on when virtually every indicator is telling us that there is no organic recovery, anywhere, lest one believes China is turning into a domestic consumer while 40-50 million of its citizens are being laid off.

To me this just looks like a blow off top here - the climax to a 'risk on' again strategy being employed by many at present. It's hard to see how this equity bonanza doesn't end very, very badly very, very soon. Comments? Could the dollar down all else up trade really be back? In which case run for the hills because sudden stop has been brought been brought forward by a Great Leap (?)

[bcassill]

Re: The Next Financial Crisis: and We Just Made It Worse

I look forward to reading it. You bring up an interesting point with respect to bubbles. My view of a bubble is that it always starts out as a fundamentally sound economic boom then progresses to a ridiculous stage. At present, nothing fits my definition - in that I mean if we are seeing flows into emerging markets again creating another potential bubble, what are they based on when virtually every indicator is telling us that there is no organic recovery, anywhere, lest one believes China is turning into a domestic consumer while 40-50 million of its citizens are being laid off.

To me this just looks like a blow off top here - the climax to a 'risk on' again strategy being employed by many at present. It's hard to see how this equity bonanza doesn't end very, very badly very, very soon. Comments? Could the dollar down all else up trade really be back? In which case run for the hills because sudden stop has been brought been brought forward by a Great Leap (?)

Where we are now is that the world's central banks are substituting their own "creditworthiness" for those of the wounded banks. It would be safe to assume that most, if not all, of the world's largest financial companies are basically under water at this point. Though, no one is willing to admit it lest we destroy investor CON-fidence in these companies. The problem is that by flooding the economies of the world with cheap money the central bankers are preventing price discovery on the garbage investments and loans held on the books of the major banks. If that happened, all of their bankster friends would be out of business because everyone would suddenly realize that the "assets" aren't worth a hill of beans.

So, they take the garbage onto their own balance sheets by stealth through actions like TARP, bailouts, etc. In the end, the governments of the world are on the hook for this mess and they can only pay off the monster of new public debt with either higher taxes, more borrowing, or the power of the printing press. The first is not politically tenable, so they'll try the last two. Borrow and print like their is no tomorrow. The problem is that there is not a government on the planet that can absorb the enormity of the bad debt, although they'll go down trying. We've already seen a couple of instances of this in Iceland, Ireland, and Latvia. Printing and borrowing will destroy the value of the currency, destroy the credit rating of the government, or both. Expect to see some larger economies to do a face plant in the coming months and years.

And instead of going to church and counting their blessings, the Wall Street high rollers are using their new found cheap money to head back to the casino after losing their shirts the first time around. I think that this is where the authors are assuming that the next bubble will be in emerging economies. Figures.

If the powers that be would have done the smart thing to begin with and simply bankrupt the banks and investments firms with all the bad stuff on the books we wouldn't be heading down the road we are on now. No, that would have taken some guts and some foresight.

Oh, well. I guess I'll see everyone on the other side of the gates of Hell.

Enjoy the scenery on the way there. Happy Trails!:eek:

[Starving Steve]

Re: The Next Financial Crisis: and We Just Made It Worse

Digging the debt-hole deeper to dig-out is no way to bring about economic recovery. In not facing this obvious truth, central bankers have created calamity around the world, everywhere, for decades, and now a complete loss of confidence in paper money.

The world is begging for an orderly slow deflation, but regardless, the central bankers are giving the world more of the same old failed reflation. So we drift, bubble-to bust-to bubble again, in an economic strategy of shafting the saver and rewarding the debtors--- really an economic strategy of compounding debts forever and destroying the world for our children.

Kids in colleges, instead of attending rock concerts, should be challenging their economics professors and demanding a re-write of the entire economics curriculum.