Archive for the ‘panic’ Category

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
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