by frog
There is an American saying that it ain’t over until the fat lady sings. While it is a southern phrase that refers to opera or to church, it has been popularised by sports commentators referring to the last minutes of a game.
I was watching Michael Cullen on Agenda this morning, discussing the bailout and the financial crisis. I kept thinking back to an email sent through by frogblog reader bjchip some months ago, which I lost. It was an article entitled “Is the fat lady singing?”. It questioned (before the current financial meltdown), whether our financial system was due for a major collapse or not, given the sub-prime mortgage mess of the previous year. One needn’t have been a rocket scientist to read the writing on the wall.
So here we are in late October, several market crashes and several trillion dollar bailouts later, discussing the next round of public cash injections into our sick financial system. Clearly it ain’t over yet becasue the fat lady is still singing. My question is this:
How much longer can we continue to throw money at a bankrupt economic system? Is this really just a liquidity crisis, as the government wants us to believe, or are the fundamentals really so out of whack that any intervention we engage in now is just throwing good money after bad and we would be better off saving it for the cleanup? How much is the election season affecting the debate and the response to this crisis?
I don’t want to push any particular barrow here, just ask the questions and see what happens on the thread. Clearly, the fat lady is still singing. But what happens next, when she runs out of breath?
on the trolls and those who are unable to keep on topic
Hm-m-m, healthy debate required.
Frog, was BJ Chip referring to the US, NZ, or Global financial systems?
Frog, are you directing your comments/questions to the NZ systems?
Yes, I believe that the financial meltdown was to be expected in many countries, especially the USA and, therefore, it flowed on out to everyone.
Can NZ take this chance to look hard at our own systems? and equally hard at how we interect with global systems?
I hope that we certainly can, but yes, the state of the election cycle will hamper free and frank debate from all concerned. I do not mean just the pollies, but economists, academics and so forth.
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While recession-driven demand destruction in the energy sector might have bought us more peak-production hang time, the other shoes are still waiting to drop.
The “great unwinding of imaginary wealth” is still far from concluded and peak oil, climate change and food crises will keep her singing for a while yet.
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Interestingly while I was in America recently at an evangelical conferance they brought up this very issue.
There were some big names there and a few people that evangelicals consider to be “prophetic”. One guy had acurately seen the current situation 20 years ago and felt so stongly about he wrote a book on the subject.
The consensus was that they thought things would get really bad in about 4 years time and that inspite of the govts best intentions they would ultimately lose control of the economy.
They urged people to be sensible with finances and prepare for the worst, but their main message was that people should not become fearful, they rekon fear is going to cause more damage during this crisis than money will.
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Emerging markets aren’t overly affected.
Don’t believe the “end of days” nonsense, so loved by religious factions the world over.
I include greens when I say religious….
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It all comes down to balance of payments, whether that be on a personal or national level, while we spend more than we earn we are going down the gurgler.
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“Don’t believe the “end of days” nonsense, so loved by religious factions the world over.”
The conference I was at was not a “the end is nigh” kind of thing.
More that what goes up must come down, and that greed and stupidity have led to these problems.
Common sense really.
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Well, greed & stupidity have pushed the “up” waaay too high; there’s going to be a swift, hard, correction very soon, and a ‘29-style fall is the one I’m picking.
Stock up on alcohol for your Halloween party now, is my recomendation, ‘cos with the receivership of Real Groovy hitting the fun lovin’ crews hard, it’ll only be a matter of time before alcoholism stops being something the mainstream shoppers can still afford, and the major corporate brewers in this country will begin to feel the pinch, let alone the cut-price outlets.
My grandparents lived through the Depression, and made sure that certain survival skills were passed to their grandchildren, some of whom have ignored that advice. But sustainable living (ie: not on huge debt-servicing requirements) and keeping some skills in the area of DIY are part of my family’s social capital.
Along with gardening nous. So I’m logging out to do some compost shifting, and planting for next autumn’s harvest!
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I don’t think this “financial crisis” is anything to be surprised about. To a large extent it is driven by speculation and bad debts. I imagine that the rest of the economy will also contract considerably, but then bounce back. The cyclical nature of capitalism has been understood by economists (of all persuasions) for over a century, so there really is nothing new in what is happening now.
What is new is that sooner or later we will come up against some constraints placed by nature. I believe this is already happening in some parts of the world with regard to food production, and peak oil can’t be far away (if we haven’t already reached it). Actually hitting natural constraints is nothing new; civilisations throughout history have collapsed because of dwindling natural resources. However, because of technology we have been able to sidestep natural constraints for quite a long time. Can technology continue to dig us out of problems posed by limited natural resources?
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Katie,
Don’t bother stocking up on alcohol … just start home brewing, its _much_cheaper (and after a while, you’ll come to realise commercial beer tastes like crap).
Cheers,
Miuela
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I guess that means the Greens initiative for Auckland rail and nationwide insulated homes will be unaffordable.
PhilU must be worried about his dole payments, as will all benificiaries.
And state servants will be culled from the taxpayers largess.
Yep, another bout of rogernomics is just around the corner.
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The fallout from the financial events is difficult to estimate. So much depends on decisions made by people who control assets and resources in many thousands of places and situations. The magnitude of those decisions through and over time will be a function of the cycles in any particular industry / activity and those connected to it.
It’s like watching a slow-motion train-wreck unfold…and trying to work out where a particular part of the train (NZ) will end up when everything stops crashing.
The other factor her that few have mentioned is the reasons behind those mortgage defaults, particularly in the US.
One report had medicals bills responsible for up to 25% of mortgage defaults. People who fall ill may have to stop work and lose their incomes, health cover – or both. Already loaded with debt, the collapse comes swiftly. No room to breathe when living pay cheque to pay cheque…at the limit.
Another element is the aggregating consequences of outsourcing. When I worked at AT&T, the networks we were proposing in China from late 2002 and onward, for the world’s largest manufacturing multi-nationals, made it obvious that sometime around 2007 and onward there would be a huge number of relatively high-paying manufacturing jobs lost rapidly in North America and Europe.
Until we know why people couldn’t pay their mortgages any more and so much debt went bad, we may well be pouring good money after bad by propping up the banks who lent money as irresponsibly as many did.
The stories of banks paying out dividends after taking bailout cash are growing in number.
Maybe we should have let them go down….and established “national banks” owned by taxpayers who have a public good mission.
Greed clearly doesn’t work well.
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The article was US centered. The problem will be global.
People can’t pay the mortgages because they paid stupid prices for houses, and bought them with loans that offered teaser rates of 1% interest, and/or interest only loans, and now the adjustable rate mortgages (which are STILL not like the loans here in spite of looking similar) are resetting. Loans made during the property spike will be resetting until 2011. House prices WILL continue to go down in the USA, and I suspect here as well. Here will not be as pronounced because the government here is still artificially pushing money into the property-investors veins.
The most common reason people get nailed is medical because there is no medical cover AT ALL unless you pay (big bux) for the insurance, and there is no way to service the loans if you can’t work due to a medical “event”. Here we are a little better insulated because we have (in spite of what some of us may think) excellent medical coverage compared to the USA.
The Fat Lady is warming up. She hasn’t been fully paid yet. The real “Aria of Destruction” is expected to arrive in March of next year.
Some indication of the scale of the problem (from one of my favorite commentators on this mess)
http://globaleconomicanalysis.blogspot.com/2008/10/baltic-dry-shipping -collapses.html
http://globaleconomicanalysis.blogspot.com/2008/10/worthless-guarantee s-and-printing.html
http://globaleconomicanalysis.blogspot.com/2008/10/roubini-discusses-d ouble-ds-deflation.html
The other person to read is Roubini of course.
http://www.rgemonitor.com/blog/roubini
respectfully
BJ
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As samiuela rightly points out, these things go in cycles, but this “cycle” has two big distingushing features from previous reruns which makes its eventual outcome a far less certain thing than history would suggest.
When an “institution” (in the wider sense) gets into a mess, then the appropriate response under the capitalistic system is for that institution to fail, and for the shareholders to lose their investment. An insitution normally fails for a set number of reasons, perhaps the institution is making things no-one wants any more, or a new competitior has figured out how to do the same things for half the price. Institutions coming and going is normal and good.
The problem is that the institutions that now need to fail are sufficiently large that their failure would have a massively deleterious effect far beyond what the failure should be. Hence the phrase “too big to fail”. This is the first big difference with this cycle. There is no will to deal with the fallout of the worlds biggest banks falling over.
The second difference is governments attempting to fix the problem in an essentially naive way. Injecting money into a failed venture almost never solves the underlying reason why the venture needs to fail, and in the absence of sorting the original problem out, is just buying time in a very expensive manner.
The bottom line is that governments are desperate to avoid the correction required to sort out the economic mess that has been brewing over decades as the mess is so deep it needs at least a recession, and a whole lot of people to lose imaginary money. For example in New Zealand, putting house prices back to where they should be would be the right thing to do wiping out all those “gains” made by property “investors”. It doesn’t take any brain cells at all to understand that a property does not “add value” in an ongoing way and therefore there is no ongoing real gain in value.
Of course, robbing all those Kiwis of their alleged gains would be politically really unpopular so dont expect any political party to want to do that if it can possibly avoid it, at almost any cost.
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frog,
You ask the wrong question:
“Is this really just a liquidity crisis, as the government wants us to believe, or are the fundamentals really so out of whack that any intervention we engage in now is just throwing good money after bad”
The ‘29 financial collapse was a liquidity crisis. This isn’t. That why Hank Paulson’s original plan was wrong – he was aiming to fix a liquidity crisis by buying assets off banks to give them some cashflow. Gordon Brown was right, partial nationalization (injecting capital into banks) was the better move. Paulson’s now been forced to follow suit.
But a lack of capital doesn’t necessarily mean the fundamentals are so out of whack that we’re stuffed if it’s small enough for the govts to intervene.
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bj,
You’re a bit too US focussed. If there’s further collapse in NZ/Australia it’ll come in December when our banks run out of funding. We run a huge current account deficit, so we require robust interbank lending to survive.
You’re also not thinking about how bad a property crash is. It’s not just “investors” who’ve been stupid in the property market – there are a lot of young couples with kids who’ve bought a house for too much on too big a mortgage. And they’ve made a really big mistake. Bubbles should be deflated, if possible, rather than burst.
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I wait with bated breath for your suggestions as to how a ‘new’ system might work.
The recent statement from the Green party, that their expectations of a coalition partner was that they would find ways to fund the party’s expectations of them, left me a little underwhealmed as to the party’s economic prowess and fiscal management ability. I can see the logic behind having a major overhaul of the global capital markets, (indeed, I find myself feeling very French in saying such a thing, merde!) However, there is very little influence that a tiny economy like ours, which is, to boot, a net importer of capital, can do to influence such an overhaul. If the Green party has some innovation in this area prey do share
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The local media has been pretty pathetic in addressing this issue, from fear probably of stampeding the populace. Here are 2 links to the Guardian on about where it all is. The only question is, how bad will it get? And with all the money governments are printing we will all pay not only with the collapse of asset value but also with inflation.
http://www.guardian.co.uk/commentisfree/2008/oct/12/marketturmoil-cred itcrunch
http://www.guardian.co.uk/commentisfree/2008/sep/28/usforeignpolicy.us economicgrowth
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Frog said: “It questioned (before the current financial meltdown), whether our financial system was due for a major collapse or not, given the sub-prime mortgage mess of the previous year. One needn’t have been a rocket scientist to read the writing on the wall.”
Indeed you don’t have to be a rocket scientist – anyone other than a banker or real estate agent could have pointed it out.
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BJ
“The Fat Lady is warming up. She hasn’t been fully paid yet. The real “Aria of Destruction” is expected to arrive in March of next year”
>>A lot to read in these links BJ, what is expected in March ‘09 ? Do you think we’ve seen the lows yet in global equity markets or another downward spike yet to hit?
Two things yet to play out in this fin’l crisis;
– The size of the global derivatives market (hundreds of trillions), this must be an accident waiting to happen with regards counterparty risk, how can a market this size “net” out when eventually one or two big players fall over, or maybe that’s part of the reason why the Fed will never allow the likes of JPM & Goldman to go under.
- USD – All this printing of money the gov’t doesn’t have = inflation going thru the roof and a currency crisis in the making. I see the day in my lifetime when the U.S will have no choice but to default on its debt and establish a new currency (worldwide?) Eventually the Chinese & other Asian central banks will tire of funding the US “war on terror” and banking bailouts, albeit a very expensive decision to make. Amazing how far the USD has rallied of late despite all the problems there.
What’s next?
Thanks in advance.
Boot
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The crash of ‘09 was predicted on a group site called linkedin Spin. http://linkedinspin.ning.com/forum/topic/show?id=1601474%3ATopic%3A251 69
It is not the Asians who will bring it about, they are just building their ’savings accounts’, look instead to the middle east, who have been plopping billions on short term revolving credit with America for over a generation! Their trillions are what is keeping the west in credit, and if they suddenly decide to bring it home and pop it under the mattress we are all dead meat.
March is a crux point, because that is when the true impact of the credit crunch can be expected to really hit into the pockets of “Joe the plumber”, Hank the banker, Mark the clerk, Mary at the dairy, Helen the accountant, etc., the time when the trickle reaches the purse and drowns it.
A roman said it well: beware the ides of March!
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Frog…the economic crisis is actually a lot easier to understand than most realise.
Too many people in the west live with debt rather than savings.
Too many people in the west earn more money than is justified from their work or skill output. (particularly Wall Street etc)
It has been a pyramid scheme.
What will be happening over the next 5 years is this……the dollar (worldwide) will be devalued.
A dollar then will not be worth what a dollar is worth now. Inflation will go through the roof.
Take a look at what happened to South Americam or third world economies when they printed off (say) a billion dollars to inject into the economy.
Money ceased to have “real” value.
The bail-out scheme achieve the same outcome as printing off a trillion dollars worth of new notes would do.
It pumps an artificial amount into the economy for just long enough for smart people to rearrange their finances.
Everyone else will be paying $20 for a head of brocolli.
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Icehawk
Actually “Global” focused…. I’d agree that NZ can bottom out sooner and recover sooner than the guys who invented the idiocy. We’ve been paying our dues in most ways, and except for the foolishness around housing investment and what I see as attempts to keep prices high, we’re doing pretty well.
If someone bought a house on a mortgage they cannot service then they AND their bank were fools.
Mal-investment CANNOT be cleared by protecting the foolish.
BJ
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