Archive for the ‘borrowing’ Category

Global Financial Crisis, Intertwined Economies, Too Much Debt: Now What?

November 16, 2008

Barack Obama surely has one of the toughest leadership challenges any incoming president has ever faced. We’re in the midst of a terrible economic meltdown, the current administration has lost all credibility, the House of Representatives is full of knuckle-dragging Neanderthals, and the public is being whipsawed between free-market fundamentalists preaching the virtues of just letting the market rip and left-wingers who think we can punish Wall Street while protecting Main Street. It feels like a mess with no one in charge.
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Now is when we need a president who has the skill, the vision and the courage to cut through this cacophony, pull us together as one nation and inspire and enable us to do the one thing we can and must do right now:

Go shopping.

Obama can’t wait until Jan. 20 to weigh in on this. If we don’t stimulate the global economy fast enough and big enough, some of Obama’s inaugural balls might be held in soup kitchens.

When President Bush told us to go shopping after 9/11, he was right. We needed to stimulate the economy then. The problem was that the Bush economic team never turned off the green light and told people to “go saving.” So with easy credit seemingly endlessly available, American consumers saved virtually nothing and bid up housing prices to record levels. Retailers expanded stores and China expanded factories to accommodate all the shopping. It was quite a party. We had banks in America giving mortgages to people whose only qualification “was that they could fog up a knife,” one mortgage broker told me.

By Thomas Friedman
The New York Times

But when something seems too good to be true, it usually is. When these reckless mortgages eventually blew up, it led to a credit crisis. Banks stopped lending. That soon morphed into an equity crisis, as worried investors liquidated stock portfolios. The equity crisis made people feel poor and metastasized into a consumption crisis, which is why purchases of cars, appliances, electronics, homes and clothing have just fallen off a cliff. This, in turn, has sparked more company defaults, exacerbated the credit crisis and metastasized into an unemployment crisis, as companies rush to shed workers.

Governments are having a problem arresting this deflationary downward spiral — maybe because this financial crisis combines four chemicals we have never seen combined to this degree before, and we don’t fully grasp how damaging their interactions have been, and may still be….

Read the rest:
http://www.nytimes.com/2008/11/16/
opinion/16friedman.html?scp=1&sq=jaws&st=nyt


“You’re gonna need a bigger boat.”

Best Analysis of Obama’s Economic Challenges, From The BBC and Peter Morici, Univ of Maryland

November 6, 2008

This is an audio feed from the BBC, Thursday, November 5, 2008. 

The second audio segment features Professor Peter Morici of the University of Maryland, which is an excellent review of the challenges facing President Elect Obama….

Listen:
http://www.bbc.co.uk/mediaselector/check/worldservice/meta/tx/wbr?nbram=1&nbwm=1&size=au&lang=en-ws&bgc=003399&ls=p23&ls=35603

Recession Will Likely Be Long, Deep Says Consumer Spending Trend

October 31, 2008

By Patrice Hill
The Washington Times

Consumers this summer pulled back on spending by the most since 1980, driving the economy into what analysts expect to be one of the nastiest recessions in decades.

The nation’s legions of shoppers started out the summer cutting back on purchases from food and clothing to cars primarily because of record high gas prices of more than $4 a gallon. But the trend worsened even as gas prices dropped with the approach of fall, when a severe credit crisis caused huge stock losses, job cuts and an unprecedented collapse in consumer confidence.

Battered consumers cut spending by 3.1 percent, curbing purchases of both essential and discretionary goods such as clothing, newspapers, food and fuel by 6.4 percent — the most since 1950 — and slashing purchases of big-ticket items such as cars and appliances by a devastating 14 percent, the Commerce Department reported Thursday.

$100 dollar bills are being counted in this undated handout ...

Consumers barely maintained spending on services from haircuts to sports and entertainment.

Consumers normally fuel 70 percent of economic activity and continued to spend during the last recession in 2001, but their rare retraction in the latest quarter caused the economy to shrink by 0.3 percent.

With a multitude of developments from job losses to falling credit card limits conspiring to keep consumers at bay, analysts say, the economy is in for a long slog. A recovery may not arrive until this time next year.

“The U.S. economy has clearly moved into recession,” said Swiss Re economist Kurt Karl. “The outlook has deteriorated sharply over the past two months. The credit crisis will have a severe impact on the real economy — in the U.S. and globally.”

Mr. Karl held out hope that the economy will improve in the second half of next year after the banking system and financial markets slowly stabilize and the housing market ends its steep fall.

Read the rest:
http://www.washingtontimes.com/news/2008/
oct/31/consumers-signal-bad-recession/

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American Consumers Borrow Even More

By JEANNINE AVERSA, AP Economics Writer

WASHINGTON – Beaten down and watching their wealth shrink, Americans are burrowing ever deeper — cutting back on spending and spelling more trouble for the sinking economy.

One of the biggest problems saddling the country is damage from the housing market’s collapse. Mounting foreclosures, falling home prices and soured mortgage investments are taking their toll on both individuals and businesses alike.

Federal Reserve Chairman Ben Bernanke, who is scheduled to speak via satellite Friday at a Berkeley, Calif., conference on the mortgage meltdown, is likely to call on government officials and lawmakers to keep working on ways to provide more relief.

The Bush administration is considering a plan that would help around 3 million struggling homeowners avoid foreclosure by having the government guarantee billions of dollars worth of distressed mortgages. The plan also could include loan modifications that would lower interest rates for a five-year period.

Fallout from the housing meltdown has spurred the worst global credit and financial crisis in more than a half century. To combat the problems, the government has taken a flurry of bold steps. The Treasury Department is pouring $250 billion into banks in return for partial ownership and the Fed this week started buying mounds of debt from companies. It also slashed interest rates to 1 percent, a level seen only once before in the last half century.

A new batch of economic reports out Friday is likely to offer fresh confirmation of the stresses weighing on American consumers. Income growth is expected to barely budge in September, inching up just 0.1 percent, according to economists’ estimates. Consumers probably trimmed their spending during the month by 0.3 percent, economists predict.

Read the rest:
http://news.yahoo.com/s/ap/20081031/ap_on_bi_ge/
financial_meltdown;_ylt=Al6I_fO7EM5xBSCF2EJtjBCs0NUE

Fear, Panic, the Economy and Ridding Ourselves of Debt

October 13, 2008

By Robert J. Samuelson
The Washington Post

It’s easy to explain the continuing financial chaos — and the failure of governments to control it — as the triumph of psychology. Fear reigns, and panic follows. Everyone dumps stocks because everyone believes that everyone else will sell. Only rapidly falling prices attract sufficient buyers. All this is true. But it ignores the real engine of mayhem: “deleveraging.” That’s economic shorthand for purging the financial system of too much debt.

Just how this deleveraging proceeds will largely determine the fate, for good or ill, of the crisis. The turmoil has already moved beyond “subprime mortgages,” which (it now seems) merely exposed widespread financial failings. These were global, not just American, and their pervasiveness explains why leaders of the major economies have struggled, so far unsuccessfully, to fashion a common response.

An employee of the Korea Exchange Bank (KEB) counts U.S. 100-dollar ...

Alone, American subprime mortgages should not have triggered a global crisis. Losses are smaller than they seem. Mark Zandi of Moody’s Economy.com estimates that all U.S. mortgage losses will ultimately reach $650 billion. But that hefty amount pales against the value of all financial assets — stocks, bonds, bank loans. For the United States, these totaled almost $60 trillion at the end of 2007; for the world, the comparable figure exceeded $250 trillion.

Such a vast financial system should have absorbed the subprime losses without calamity. By way of contrast, the stock market’s drop since its peak in October 2007 to Friday was $8.4 trillion, or 42 percent, reports Wilshire Associates. The official response to the subprime losses also seems larger than the problem. The government has taken over mortgage giants Fannie Mae and Freddie Mac; the Federal Reserve is pumping out short-term loans of $1 trillion or more; and Congress’s $700 billion rescue allows the Treasury Department to buy subprime securities and to make direct investments in banks.

Read the rest:
http://www.washingtonpost.com/w
p-dyn/content/article/2008/10/
12/AR2008101201631.html?hpid=opinionsbox1