I don’t think so.
Sure, we bloggers and political nutjobs are pretty sure that we need to do something and something fast. But my students don’t seem all that concerned. They are registering slight concern, but their concern levels are higher about than the fact that college tuition might go up a little next year, and they have a paper assignment due next Thursday. Considering the fact that these kids have not invested in the stock market, have never worked on Wall Street, and haven’t bought a house that they can’t afford, you would think that they would be a little more pissed off that they are going to get stuck paying for this mess.
The really low level of concern and comprehension of this situation among the general public isn’t going to force Congress to come up with a solution quickly.
Apt. 11d 
It’s really the financial system, right — I haven’t liked calling it “Wall Street” when it means that banks might fail. But, I agree that the “public” doesn’t seem to be freaked out. I feel a crisis (but then, I own a house, and have money invested in the tax market, and have saved heavily against rainy days, all things that depend on the integrity of the financial system).
I think the folks in charge are telling us that there’s going to be significant consequences, but I think they’ve been bad at describing those consequences, or the mechanism behind them. Bush’s attempt was clearly a total failure, because it relied on “trust me, we’re in trouble”, a line he has absolutely no ability to pull off these days. We need the wonky version, that describes exactly what the consequences will be. And no one is doing that. The best I heard was Gordon Smith — the Republican congressman from WA who actually made some sense describing what’s happening. (and mind you, I am not a Gordon Smith fan). I just crave information, and I’m not getting any, from anyone.
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I have to admit I’m pretty pissed-off about the whole thing. I agree with what BJ said about the first attempt being a total failure. Every word the Treasury said sounded like a bluff (no oversight, Chuck Shummer was shaking in his loafers, the world ends on Tuesday) or a used car salesman trying to keep me from walking-off the lot. I didn’t even bother to listen to what Bush said.
I don’t understand the entire financial system and I’m not about to be able to figure it out from what I’m reading in the news. But, I do have a useful heuristic. The taxpayer contribution on the bailout had better contingent on Wall Street acting like this bailout is the only thing between them and oblivion. If they truly believe the only options are the bailout or disaster, then they will cave on things like compensation limits, the price to be paid for bad assets, an equity stake in return for the bailout, etc.
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If they truly believe the only options are the bailout or disaster, then they will cave on things like compensation limits, the price to be paid for bad assets, an equity stake in return for the bailout, etc.
I completely agree. As McArdle likes to say, failure should be painful.
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How do I feel about Wall Street? Hostile? Tepid? Deeply grateful for their selfless work allocating resources for the productive economy?
Tepid. Tepid shading towards hostile. Nah, tepid. A lot of guys who convinced themselves they were being rewarded richly for taking enormous risks, who didn’t really believe, in their hearts-of-black-little-hearts that the risks were all that big, and now looking for help when the risks mature.
There were a couple of guys who recently described the hedgies as going for small chances of BIG losses, good chance of moderate gains, and if gains they got a percent. Tails you lose, heads I win. A lot of Wall Street was like that. The compensation structure favored taking huge risks with other peoples’ money.
That said, we really do need the function of allocating capital efficiently for production, and Wall Street has done that pretty well. They just don’t get to be Masters of the Universe anymore.
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“They just don’t get to be Masters of the Universe anymore.”
Yes they will, they’ll just have to wait for the next big thing (i.e. not junk bonds, or energy trading, or mortgage based securities, but something new and just as weird) and just as likely to cause people to take huge risks with other people’s money).
RE MH’s comment. Part of what Gordon Smith said on the radio, that sounded vaguely believable (except for the fact that he’s a Republican) was that the companies that are creating the gumming up of the credit system are not necessarily in bad shape.
Think Bank of America, for example, refusing to lend any money to someone else (who they think might be in bad shape). They’re hording, because they think things could go bad for them, and so they want to maintain a big cash position. It’s pretty similar to people not being willing to spend money now, ’cause they are worried that they will loose their job next year. But, if they don’t spend now because of that risk, the companies selling to them will go under, perhaps never to return. The goal of the plan is to reduce this risk so that BofA will starting “spending” (loaning) again.
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“Think Bank of America, for example, refusing to lend any money to someone else (who they think might be in bad shape). They’re hording, because they think things could go bad for them, and so they want to maintain a big cash position. It’s pretty similar to people not being willing to spend money now, ’cause they are worried that they will loose their job next year. But, if they don’t spend now because of that risk, the companies selling to them will go under, perhaps never to return. The goal of the plan is to reduce this risk so that BofA will starting “spending” (loaning) again.”
What if B of A is right, though, and it is a bad idea to loan out that money right now?
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By the way, I was just looking at a piece comparing the Japanese recession that started in the early 90s with ours. The Japanese had a real estate boom followed by a bust. The whole thing took about 15 years, and there’s talk that they’re heading into a second recession right now.
Is anybody up on the Japanese recession and what courses of action currently proposed for the US are analogous to what the Japanese tried?
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That’s actually another thing I don’t get. I know that interest rates are rising, but the interest rates that people talk about as indicating that banks won’t lend are well below rates from when I was a kid. Not that I’m eager to see the 70s again, but the 70s were hardly the end of the world.
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MH,
You’re right about interest rates. Wasn’t 8% and up pretty normal not that long ago? 5% was an aberration. I disagree on the 70s–they were close to being the end of the world. If you disagree, read Frum’s How We Got Here: The 70s, The Decade That Brought You Modern Life.
In a risky environment, the interest rates should be higher.
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The 70s weren’t all bad. The Star Wars from the 70’s was so much better than the later Star Wars. Star Wars was the first non-animated movie I saw. I loved it even though my dad spent half the movie saying “This is just a Western in space.” But, yes, double-digit mortgage rates were common.
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The 70’s were pretty bad economically. It was a crazy time, with crazy borrowing to pay for houses that seemed like they were going to double in price every minute because of inflation.
If “BofA” is right, I guess we’re in for a tough time. If we’re in for a really tough time, we’ll probably end up spending the money on economic stimulus packages, and housing people who don’t have homes, and all that other stuff.
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“…housing people who don’t have homes”
We’ve got houses coming out of our ears (years worth of inventory in some areas and certain housing categories). Also, high interest rates will bring down house prices (or that’s what the housing bubble folks say). It’s unemployment and supporting retirees who’ve lost their savings that is going to be sticky and expensive. Real estate was the retirement investment of choice for a lot of people who are just about to leave the workforce.
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“The 70’s were pretty bad economically.”
Yes, but we had values. Or according to Frum, we didn’t. Either way, people were used to less. Or, at least the houses were smaller and people were apparently too poor to afford clothing made from natural fibers. Also, you could smoke pretty much anywhere that except for church (outside before and after was fine), school (see previous parenthetical) or gas stations.
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The 1970’s were bad for stock investors. If we experience a similar period of lackluster returns, this will impact the baby boomers and others who might have been expecting the continuation of recent boom times to fuel unrealistic increases in their 401ks into the next decade. Young people will not care as much, because they have much more time to save. However, they should care about other things like employment rates.
Stock market average return per year according to stockpicksystem.com
1900s 9.96%
1910s 4.20%
1920s 14.95%
1930s -0.63%
1940s 8.72%
1950s 19.28%
1960s 7.78%
1970s 5.82%
1980s 17.57%
1990s 18.17%
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Tex,
Thanks! I’d been wanting to see those sort of figures, but was having a hard time locating them. The 20s were less roaring than I expected. The 30s are our worst case scenario, but over the course of the decade, you’d lose just over 6% of your money (if I understand those numbers correctly). That’s not great, but it’s also not an apocalyptic scenario. So, no need to bury gold in the yard or under the mattress.
There’s another chart that I’ve seen but don’t know where to look for that shows that during the 20th century, house prices on average rose at the level of inflation. I wish I had the chart, because it shows how out of line recent house prices were with historical norms, as well as the characteristics of the Depression, the post-war plateau, and the bubble.
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Dreadful news. With the crisis, Hefner is laying off bunnies: http://www.telegraph.co.uk/news/newstopics/howaboutthat/3077911/Hugh-Hefner-to-sack-Playboy-bunnies-amid-financial-crisis.html
Clearly, this is a financial catastrophe…
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investors in stocks aren’t the only ones who loose when the stock market fails, ’cause if people don’t invest in stocks (which they won’t, if it’s failing) there’s no money for businesses to do anything with, like, for example, produce energy.
I think some of us (not me) are too young to remember, but remember when there were laws about the temperature in buildings, because of the energy crisis? Remember schools being closed? (in the 70s).
And, we can’t imagine the average rate of return for individuals. These numbers are interesting, but they depends on how you set the decades. There’s nothing magical about an annualized return that’s calculated from when the decade numbers turn over. For example, the folks who lost all of their money in the first crash didn’t get to stick around to get the annualized -.63% (and the same goes for the 5.82%).
Yes, people expected to have less stuff in the 70s, but they also expected to have less stuff in the 1870’s. But, we don’t want to go back to the economy of the 1870’s, do we?
I don’t think the financial “elites” are doing a good job of describing how all of this is going to affect everyone, but I think it will.
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“For example, the folks who lost all of their money in the first crash didn’t get to stick around to get the annualized -.63% (and the same goes for the 5.82%).”
There’s a quote in the Wikipedia entry entitled “Wall Street Crash of 1929” where Richard M. Salsman says “Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even.” On the other hand, according to Tex’s figures, if they lived through the 50s, they saw the best returns of the century.
I don’t know how all this works, but what does it mean to lose all of your money in the stock market? I’m a newbie (actually, not even a newbie), and I’m puzzled by that expression. If you bought stock in ten companies, and seven of them (or however many) survive the Great Depression, how have you lost all your money? You still have your stock in the surviving companies. Does it just refer to the fact that the stock is worth a lot less than when you bought it?
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Barry Ritholz says itwas enabled by those of us here in Dee Cee:
To: Washington, D.C.
From: Wall Street
Re: Credit Crisis
Dear D.C.,
WOW, WE’VE MADE QUITE A MESS OF THINGS here on Wall Street: Fannie and Freddie in conservatorship, investment banks in the tank, AIG nationalized. Thanks for sending us your new trillion-dollar bailout.
We on Wall Street feel somewhat compelled to take at least some responsibility. We used excessive leverage, failed to maintain adequate capital, engaged in reckless speculation, created new complex derivatives. We focused on short-term profits at the expense of sustainability. We not only undermined our own firms, we destabilized the financial sector and roiled the global economy, to boot. And we got huge bonuses.
But here’s a news flash for you, D.C.: We could not have done it without you. We may be drunks, but you were our enablers: Your legislative, executive, and administrative decisions made possible all that we did. Our recklessness would not have reached its soaring heights but for your governmental incompetence.
Click to access a_memo_found_in_the_street.pdf
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“Saints are no more common on Capitol Hill than they are on Wall Street.” Thomas Sowell
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I think whether one looses one’s money in the stock market depends on whether the company goes under. If it does, I think you really loose your money. Also, If the stock is worth a lot less than when you bought it, you have lost money, right? If it recovers, then you can regain the loss, but if you have to sell it (i.e. need it to pay your bills), you have lost money.
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By the way, I was talking to one of my small business relatives this afternoon. He and I had both recently seen the same news reports that said that major companies need short term credit in order to cover payroll, and we were both flummoxed. What kind of Mickey Mouse operation borrows money to make payroll? Maybe things are different in the big leagues, but at the level that we are familiar with, borrowing to meet payroll means that your business has one foot in the grave and the other on a banana peel. This should not be a long-term business practice.
My relative also told me that they may stop doing business with a former favorite garment supplier. This supplier outsourced production to India, changed to a flimsier weight cotton, and raised wholesale prices $10 per garment, on the strength of their shifting to organic cotton. My relative plans to be circumspect about product orders for spring. And there’s the whole economy, in a nutshell.
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“major companies need short term credit in order to cover payroll”
I don’t find this surprising at all. Basically, what this allows is for all the wealth to be used all the time. If you had to have the money to pay your payroll, it means that you’d have to be ahead in your billings — that capitol is sitting there as a cushion so that you can pay people for the work while you’re waiting to collect the money. Small businesses can’t do it this way, ’cause people don’t feel confident about the accounts receivable.
McDonald’s, on the other hand, has a track record that allows a strong prediction of the money that’s going to come in in October. So, people let them borrow money to pay the September payroll.
It’s a scheme that keeps all the money in “use” all the time, and if credit dries up, everything collapses. McDonalds can’t make it’s payroll, then the employees can’t buy anything, and the small business they buy from fails.
I’m not an economist, but I think I’m starting to understand a little bit of the intricate structure that keeps our world functioning, and that we normally take for granted.
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“I don’t find this surprising at all. Basically, what this allows is for all the wealth to be used all the time.”
Similarly, some people used to talk about not letting your home equity just sit there doing nothing for you. Get it working for you! Take out a second mortgage against your house! Buy a rental house, buy five rental houses! Or, alternately, don’t pay off your house! Buy stock with the money instead! (That last one was very popular with financial advisors, and was practically conventional wisdom. Your home loan was at 5% or so and you could count on making 12% or so on the stock market, so paying off your house was throwing money away.)
I see a strong family resemblance between homeowners borrowing against their houses and major companies paying their payrolls with debt. The difference is that while the public has woken up to the dangers inherent in home equity removal, I’ve yet to hear anybody but ourselves point out that major companies shouldn’t be cutting things so fine.
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Hi guys,
People care, especially in the tri state area of NYC. I’ve worked in finance for 10+ years and there was an old adage I learned to never put your money into companies or markets you don’t understand. Many of these firms got burned because they did exactly that because they wanted to get rich. Risk metrics went out the window because no one planned for the worst case scenarios and the alerts went off after the iceberg had punctured the first two decks of the hull.
The last time this sort of thing happened was LTCM when Yeltsin pulled the plug on debt repayment. Read when genius failed to get a full understanding of how the deal was wound, suffice to say the guys who ran that show all got paid in full. It’s going to happen again.
The Septic as it’s known in the UK, is major and it will be tough for lots of people to deal with. Expect to see lots more companies get bought out by foreign investors in the coming months. Adios jobs in the US(white collar, skilled blue collar will see a resurgence for manufacturing).
Adios people having cash to go to restaurants. Bars will make money because people always drink but its going to be PBR.
Reduction in the value of properties means a lowering of property tax income for municipalities which means less money for OT for Fred Flatfoot, let alone money to hire him, so there will be higher crime.
I think the worst part is that the baby boomers are near retirement age. Their 401ks and retirement holdings are now vapor over the last 12 months, at least the equity component. This means more people needed to draw social security, more people working longer and the increase of people needing Medicaid payments. This makes life a little difficult when we are trying to come up with 4K to cover the 800BN price tag paid off by 200MM Americans while fighting a two front war that has been outsourced to a firm the VP was CEO of.
Hopefully you bought Exxon.
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Stock market average return per year according to stockpicksystem.com
1900s 9.96%
1910s 4.20%
1920s 14.95%
1930s -0.63%
1940s 8.72%
1950s 19.28%
1960s 7.78%
1970s 5.82%
Go to newworldeconomics.com and see that if you price the market in ounces of gold, it has actually gone down in the last 100 years. The gains are an illusion, as is the GDP. If you price the GDP in ounces of gold, then we are all pretty much worse off than in the 70’s, but we have a lot of junk we don’t need while many don’t have enough food to eat and food is getting more expensive due to oil costs and inflation.
We Don’t Need Them (search Dissident Voice for that title.)
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The analogy of using your home equity seems reasonable to me (i.e. the comparison to McDonald’s not keeping cash to fund payroll). It does leave McDonald’s vulnerable. But, if we stop doing that, and decide to keep large piles of cash around, we’ll suck a big part of the net worth of the world out of the system. It could be that we could readjust to a system that has substantial uninvented equity sitting around, but it will be painful.
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Here is Larry Summers saying that too much money was going to the financiers, and not enough to production: http://www.ft.com/cms/s/0/d775399a-a38e-11dd-942c-000077b07658.html
Looks to me like he would like a job in the new administration… they could do worse!
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