Free Falling

My sister called me this morning and asked me if I was okay. I told her I was fine and asked why she was asking. The answer was that she suspected I had quite a lot of money in the stock market, and as we all know, the stock market’s not exactly a happy vale of ponies these days, and as it turns out, especially today. I assured her that notwithstanding our 401(k)s and IRAs, we were not, and as far as those retirement accounts go, we were no worse off than anyone, and still had three decades to go on them anyway. So in the short run, at least, we were fine, and indeed probably better than many, since I’m getting a lot of foreign sales recently, and they’re denominated in Euros. She was relieved. As am I, come to think about it.

Which is not to say I’m sanguine about what comes next after this. Over at MSNBC, Howard Fineman suggests that we’re at the dawning of the Obama era (whether Obama wins or not, which is a neat trick, really), in which a new set of economics more in line with Obama’s will come into play. I’m not sure I buy Fineman’s police 100%, as Marge Gunderson might say, but I do think today’s bailout bill failure pretty much wraps it up for the Bush administration, in terms of its ability to influence the continuing political life of this country, and certainly does look like the death knell for a certain brand of economic theory that states that free markets are best until their own stupidity gets the principals of that market in trouble. This does not imply that we’re in an “Obama era,” since the bailout plan was largely scuttled by conservative Republicans who view the bailout not as the creeping sort of socialism but the sort that gallops, and is here for your daughter. No; at the moment we’re in a “WTF?” era, in which no one seems to know what comes next.

Which leads back to my sister’s question of whether or not we’re okay in this time of financial uncertainty. In the short run we are. First, I can’t be fired, since I work for myself. This certainly lowers my stress level. Second, thanks to the amusing nature of book accounting, especially “reserves against returns,” I know I have book royalties coming in for the next year, even if I don’t sell another book between now and whenever (which seems a silly proposition, but we’re looking at a worst case scenario). Third, thanks to the awesome financial stewardship of my wife, we’re one of those rare American households that has actually managed to save a fair amount of money — enough to help us scrape by for a fair amount of time even if everything well and truly goes to Hell.

Fourth, we don’t have significant amounts of consumer debt: Our cars are paid off, we don’t keep balances on our credit cards, and while our mortgages aren’t insignificant, they’re well budgeted. We’re also ready to pare down the frivolous expenses (read: the ridiculous sum we pay for satellite TV, etc) if necessary. Finally, and thank God, all of us are healthy, with no chronic health issues to sap us economically. So short of having barrels of rice and beans and lots of crossbow bolts down in the basement, we’re as well positioned as anyone can be in case of a worst case scenario.

Do I think it would come to that? I don’t, really. I suspect if things get bad, my family will find a way to get through it more or less successfully. I don’t suspect other people and families are as well-insulated as we are if things get as bad as they could get. And, truth to tell, we don’t even know how bad things really could get. I want Obama to be the next president, but I certainly don’t envy him (or John McCain, should he win) the economy he’ll have inherited. Whoever gets elected had better hope for two terms, because any pet projects they might have are likely to have to wait for a second term.

(I’m sure there are a few conservatives, anticipating an Obama administration, who would say this is a feature, not a bug; the only possible response to this is to say it would be nice if the conservatives could conjure a way to achieve the relatively minor objective of keeping a lid on a possible future Democratic administration’s initiatives without resorting the major disaster of imploding the global economy. If ever there was a canonical “killing a fly with a nuclear bomb” example, this would be it. I’m not laying this all at the feet of conservatives, mind you; there’s blame enough to pass around. But on the other hand one party was in the majority the majority of the last eight years, so blame, while shared, needs to be proportioned out correctly.)

I’m pretty sure this post sounds more pessimistic than I actually feel at the moment. On the other hand, at this very second the Dow is down 777 points. Maybe I’m not pessimistic enough. I do know we’re in for interesting times, both in the short and long run. In the short run, I know I’m fine. In the long run, well, we’ll see. I guess we’ll all see.

How are you set for total economic collapse? And do you think it’ll come to that? I’m interested in your thoughts.

126 thoughts on “Free Falling

  1. I work in the financial industry, for one of the largest investment companies in the world (and no, we aren’t in danger of collapse). But total economic collapse? Yes, I think that it’s a very real possiblity. HOW real will depend on where we go from here. But there’s an old saying that any country is only three meals from a revolution. And with the price of milk and bread rising faster than the price of gas, how long before the pitchforks and torches come out?

    I’m hoping I’m wrong.

  2. John, I’m not sure how big the ‘correction’ is going to be, or how damaging, or the consequences – although I’m having a flash of some eager eyed blonde youth in a Hitley Youth uniform singing ‘Tomorrow belongs to me’. What I do know is that this isn’t about party politics, or even the undeniable cupidity and stupidity of your present administration. For far too long we have ALL accepted that – in economic terms – e does not =mc2, and that there IS such a thing as a free lunch. It is not possible to indefinitely pretend that the fundamental rules apply to economics as well as physics – what we are witnessing is what went up for no good reason coming back down because conservation of energy applies to everything.

    I don’t know what we can do about it, but what we can do is decide we aren’t going to get fooled again by the snake oil salesmen. Maybe we won’t all be driving new cars in 5 years time, but it might be worth it if the thieves are doing (very) hard time.

    We can but hope.

  3. Its a sad commentary when chronic illness can drastically affect ones position within the economy.

    I figure total economic collapse won’t hurt those overextended — they can’t throw the majority out of their homes and take their cars. They can try, but I’d expect riots. [again with the pitchforks]

  4. Oh, God.

    I’m unemployed and while I am lucky enough to have no debt, my family (who took me in until I get another job) have massive amounts of debt.

    I’m fucking terrified.

  5. “That’s great it starts with an earthquake / birds and snakes and aeroplanes…”

    That pretty much sums up my thoughts. As long as my husband and I stay employed, we’ll be fine. Of course, in an economy like this one, that’s the tricky part.

  6. Moderately prepared, I’d say… then again, I’m in Finland, with all sorts of Scandinavian welfare systems in place (although the funding isn’t as strong as I’d wish…).

    We had a major depression in the early ’90s, caused by the combination of overheated “casino economy” in the late ’80s, the collapse of Soviet Union (eliminating at one fell swoop a lot of our foreign trade), and some very bad financial policy decisions. Unemployment peaked at somewhere around 20%, GDP fell, and things looked pretty damn bleak for a while.

    Thankfully, we got out of the depression fairly well and quickly (in large parts thanks to the rapid growth of telecom sector; Nokia is by far the biggest Finnish corporation), and my family wasn’t affected nearly as much as many others. But the experience left me, and my age cohort, with a wariness about things like huge mortgages or consumer debt. It’s something that people even a few years younger than me don’t have to anywhere near the same extent; by the time they were old enough to start understanding the economy, it was already recovering.

    So, now I am watching the events with a mixture of amazement, a sort of vicarious thrill, and a lot of worry. I’ve got American friends, and I wouldn’t want them to get screwed if your economy gets screwed (of course, I would get screwed as well, but hopefully at a couple steps remove.)

  7. I’d like to see a stat on how many families are living paycheck to paycheck with little or no savings. There’s your marker for how bad it can get.

  8. Well, I’m glad we held off on buying that new couch but wish that we’d planted potatoes and beets in our front yard instead of inedible ground cover. I’m also wondering what kind of omen it is that the economy goes into Armageddon mode the day I made my first fiction sale.

  9. I’ve pretty much been at the bottom. I’m not anticipating any radical changes for my own family.

    I have been sharpening my pitchforks, proverbially speaking. I kind of have a hankering to use them, too.

    We’ll see.

  10. Even though we don’t have any credit card debt, and we have a little bit of money in savings, and our mortgage fits in our budget just fine, I’m still feeling rather unprepared and anxious. My guess is that it’s because we’re facing uncharted territory for this generation. No one who lived through the Great Depression thought it would (could) happen again and I don’t even know if there are any still living to tell us what it was like.

    Perhaps I will just switch off the news and go read a nice, comforting book.

  11. The bailout was the sort of socialism that gallops in and is here for your daughter. The only question was whether or not it was better than the alternatives. As far as blame goes, there’s plenty enough to go around. This has been brewing for at least 20 years, during which time both sides have been in control quite a bit.

    My side of the political sphere has been floating around videos of the various Democrats protecting the corrupticrats at Fannie Mae and Freddie Mac, as a primary cause of this. And there’s some truth to that. But there’s also some truth to the idea that massive de-regulation pushed through by Republicans hurt us.

    So now we enter uncharted territory.

  12. I’ve been trying to find out why it wouldn’t make sense to just use $1 trillion to subsidize a high interest rate on a new, widely available, no-minimum balance FDIC-insured savings account.

    At 8%, $1 trillion could pay interest on $12.5 trillion in deposits.

    Surely that’d provide lots of capital, especially for small and midsize banks, rather than just larding up a few giants. The money would eventually bubble up to the big banks anyway, but the small banks would have money to make car loans and otherwise serve their communities.

    Using taxpayer money to reward saving (which we are always told we need to do more of) would be far more popular than buying worthless Wall Street gambling chips.

    I kinda suspect savings accounts aren’t sexy enough for the Goldman Sachs people in Washington.

  13. All those years of Lucifer’s Hammer and The Stand and the glorified post- worlds, wondering how I and my friends would fare. I really never expected to face the possibility of such a monumental change to the lifestyle I know. I don’t think we should start welding the armor onto the Civic, but I am rethinking my insistence that 3000 miles away from family is the perfect way to live. Family support might be the thing that separates those who do well, and those who don’t in the coming times.

  14. I confess there is a small part of me that wants to see the whole thing go kerfuffle.

    It is the same part of me that wanted the Large Hadron Collider to spit out some baby black holes to devour Geneva, and boy did that let me down.

    I guess I am a hopeful nihilist.

  15. For that matter, while a 770 point drop sounds like a lot, it is not (yet) as large percentage-wise as a number of other stock-market plunges in recent memory. That’s out of over 10,000 points, after all. It will probably be bad, but it’s only a few percent at this point, nothing like the 40%-in-a-week drop that they had in 1929.

  16. Jon@13,

    If we did that you’d see double-digit inflation rates, quickly. Now that might be preferable to the alternative, but maybe not.

  17. I too am unemployed. (My boyfriend just got a new job in Seattle and they just paid for us to skibble across the continent.)

    My current wishes are: I wish I had a balcony in which I could grow food. I was actually planning on this EVEN before Ye Olde Economic Collapse showed up on the horizon, because I’d been reading The Urban Homesteader (awesome book, btw). But alas, no balcony. Theoretically I can grow plants indoors (so says the Urban Homesteader) BUT we went from a 3 bedroom place in the Boston suburbs to a 2 bedroom in Seattle’s Capital Hill, and we are crammed to the gills already. I suppose you could ask me if I’d rather have books or food, and the answer is: I don’t know, let me think about that for a while.

    My debt is minimal, and could probably be paid off with a few weeks of contract work. (Which is what I would do if I didn’t have other bills to help out with.) The boyfriend’s job is with the US/Seattle office of a Chinese company that broke off from another US company some years back. He works in the video game industry which is thriving in China, so I am not too worried about his job going “poof”. I’m more worried about my ability to get a new job. :(

    And because I was raised Mormon (no longer am) part of me is screaming internally, “Where’s your year’s storage of food? C’mon, get with the program.” But I just moved, and with oil prices the way they are, even if I’d had a year’s supply of food in Boston, there’s no way I’d’ve moved it. We donated all our canned and dry goods to the food bank before we left.

  18. Is it as apocalyptical as all that? I know the markets are in free fall, that credit lines for small businesses are awfully hard to come by, and that unemployment is up, but it sounds more like the beginning of a decade long depression like the Japanese suffered in the 90’s then the beginning of the Great Depression. Perhaps those wiser and more educated in financial matters than I know better, but that’s my hunch.

    Either way, things don’t look good for me: I was on the verge of trying to sustain myself as a freelance copywriter, but I think I’m going to try for some more stability than that.

    Best of luck, everybody!

  19. I should also add that my credit card company called me today to remind me that I should make a payment tomorrow. Which seemed a little weird. I reassured them that I had payments set up online and checked to see if there had been some glitch in this last month’s payment as I had been in the aforementioned process of moving. (No info passed over the phone. This is paranoid me going, Huh, weird, my credit card company is calling me on the day that the stocks plunge 600 points or so. I wonder why?)

  20. “If we did that you’d see double-digit inflation rates, quickly. Now that might be preferable to the alternative, but maybe not.”

    Preferable to artificially maintaining asset prices in an absurd attempt to support a bubble?

    Probably.

    I’m not so sure about the inflation, however.

  21. John, I actually think there’s historical precedent, at least for the past few decades, of the GOP running up deficits while in office to prevent Dem social programs, such that all the Dems can do once the worm turns and they’re in office is balance the budget. Am I wrong about that?

  22. In general the politicians are making me barf in my mouth. Boehner (henceforth known as Boner) is claiming Pelosi’s final speech made a dozen or so Republicans jump ship at the last moment. Bullshit on both of them. Republicans jumped ship because they wanted to not because Pelosi opened her yap, which should have been closed except when something useful needed to be said.
    I hope this does usher in a new era of politics, because most of the politicians we have are spineless, on both sides of the aisle, including Bushco. And we the people have been voting in lying sycophants for quite some time and this is what happens when you keep that crap up election after election. Tell me what I want to hear and the truth be damned…gimmi house I can’t afford…ooh look a credit card it must be free money…I work hard I deserve it. Don’t get me started on wall street and the business men…throwing their chicken bones hoping to divine the future, managing to the quarter and trying to get theirs and retire before the bill comes due. A riot is an ugly ting unt itsa ‘bout time we have one.

  23. Oh, the inflation would absolutely happen. The Fed worries about inflation from raising interest rates a quarter or a half point. 5 or more points would be so extreme as to be ridiculous.

    It would, however, have the side effect of effectively shrinking the national debt, though. Which is how i’ve always assumed it was going to get ‘paid off’ in the end anyways.

  24. I can’t help but be a little terrified. I live pretty close to the limit of my means, I work at a sci-fi/fantasy-oriented bookstore that has experienced a significant downturn in sales over the last year or so and just might fail completely, and I don’t really have much that I can cut. I guess I can sell all of the records and books and comics I’ve bought over my last few years of relative prosperity and stave off the wolves at the door for a little while, but that’s the last thing in the world I want to do. I hope that everything will be OK in the end, but I can’t pretend I don’t see the new Great Depression right around the corner. Maybe I’m just Chicken Little, but I’m not optimistic.

  25. We’ve got all our long-term stuff in the stock market in very diversified index funds. So if the whole things crashes completely, I guess I’ll be sad. However, at 27, even under that worst case senario, there is plenty of time to start over. Also, being 27, I figure we’ve got at least 40 years for the market to recover. And I’m still adding to our retirement funds, because hey, it’s really really cheap right now.

    I bank with WAMU and have had lots of friends and relatives calling and asking if we lost all our money and other silly things like that. I barely noticed the change-over. All our accounts are there doing all the things they are supposed to be doing.

    I think we’ll be okay whatever comes. My dad owns a farm, worst comes to worst. I’ve lived in barns and tents before (traveling across Europe). We have zero debt of any kind (renters, own our cars) and enough in savings to pay our bills for 4-5 months should job-loss happen.

    I hadn’t checked our stocks today yet. I think, after reading this post and some news posts, I’ll just not look today.

  26. I had ~$5k in a Wachovia account; I probably lost a lot of that today. I own some oil stock, which is about the only stock I expect to do all right after today, and a bit of some other stock my great-aunt left me in her will (steel IIRC, I don’t keep track of it very closely) which should also not be too badly hurt.

    I’m in a relatively good position: I have a few tens of thousands in savings, no credit card debt, no student loans, no mortgage debt, no car debt, no debt of any kind. I live pretty frugally; even though I rent my apartment (as opposed to gaining equity in a mortgage), I’m still able to put 40-45% of my income into savings. Boom shaka laka. I’m in good health, have a secure (or at least non-precarious) job, live close to my family, and am young (25 yrs) enough to (a) not have too much of my net worth tied up in my IRA yet, and (b) have long enough to go on my IRA that I can afford to be sanguine about temporary setbacks.

    So my finances are more or less immunized to a big one-day shock like today’s. The major threat to me is the devaluation of the dollar.

  27. Skip wrote: “The Fed worries about inflation from raising interest rates a quarter or a half point. 5 or more points would be so extreme as to be ridiculous.”

    That’s the Fed Funds interbank lending rate.

    I’m talking about a retail savings account for consumers, which is significantly different. The amounts of money involved would be tiny compared to the daily volumes handled through Fed Funds trades.

  28. 1. I’ve put all my investment assets into precious metals and tax-exempt bonds. I’ve taken a bit of a hit, but nowhere near as much as I would have if I had stayed in stocks – some of the funds in my investment company have lost 40% this year.

    2. On the one hand, my job sucks. On the other hand, it pays decently and it’s in academia, so I have very little chance of getting laid off. Worst case scenario, I move back in with my parents in Ohio and finish up my degree there when I’m not busy tending the vegetable garden and/or working on a novel.

    3. I’m in school right now, which is not a bad place to be when the markets are going to hell. My loan debt will be manageable (yay going part-time!) Plus, I rent, and the next few years will be good pickings for houses for those who have solid income streams and 20% down payments.

    4. The vote on the bailout plan was Main Street doing unto Wall Street as Wall Street had done unto them. I actually thought of the scene in Zoe’s tale where Zoe was beating the tar out of her stupid friend in public to make everyone know she was boss and she was punishing him for his stupidity.

    5. No, we’re not in for total economic collapse. Smaller banks, credit unions, and firms that were wise enough not to get involved with this subprime crap are all doing just fine. Even if all these toxic assets that would be covered under the bailout get written down in value to zero, somehow the rest of the economy would pick up the pieces and keep on going.

    6. I wanted the bailout plan to include a gradual winding down of Fannie and Freddie and an end to GSEs and their implicit government guarantees, regulation of credit default swaps as insurance products, and the ability for regulators to impose stricter reserve capital requirements on banks, investment firms, and yes, even consumers (through setting minimum down payment and income requirements on loans) to prevent them from leveraging themselves out the ass like they did here. But what are the odds of Congress actually doing something that will prevent this crisis from recurring in the future?

    7. “Free Markets” require three things in order to be free: multiple buyers and multiple sellers, trading with perfect information (an asymptote, admittedly, but as close to perfect information as you can get) and doing so in good faith and fair dealing. This can happen without government. But it works more efficiently if there’s enough government to make sure there are enough market participants, that they all know what’s being bought and sold, and that they all have both the resources and the inclination to keep their promises. That’s where government broke down here.

  29. Funny, Rob and I were having this conversation last night, as in, should we move out of NYC and back to Portland OR where there’s plenty of water and we own a house with a yard.

    Aside from the fact that we live in NYC and both work in sectors of the entertainment industry, we’re in reasonably good shape.

  30. Anyone have a recipe for rat stew?

    As much as I loathe agreeing with anyone in the Bush (mis)administration, the simplicity of the ‘bailout’ plan seemed to make quite a bit of sense to me — swap a ton of cash for grossly devalued mortgage backed securities, stabilizing the money market funds that are so heavily invested in them and restoring liquidity to the credit market (which relies on money market funds for the actual capital behind the credit).

    Once everything settles down and sanity has returned to the market, start repackaging the ‘good’ mortgages from those securities to recoup (at least some of) the ‘bailout’ money.

    Where’s Ross Perot and his charts when you need him?

  31. While I could certainly be furloughed for extended periods of time I’m a single career civil servant with 18 years in and only a $250 a month car payment hanging over my head, so I’m not that worried.

    Other people in my family are not so lucky.

  32. MasterThief: “But what are the odds of Congress actually doing something that will prevent this crisis from recurring in the future?”

    I think better than 1:1 — too many people are in a panic right now and will demand they do something to fix it. Whether those regulations stay in place as long as, say, Glass-Steagall — who knows…

  33. Look, I don’t read post-apocalyptic fiction for the fun of it…oh, wait, yes I do. But I *do* read it, so I’m ready! :)

    I find it amusing that Libertarians and “Fiscal Conservatives” tend to want less regulation. What they don’t seem to realize is that regulation came about FOR A REASON. Less regulation leads to fiscal ‘anarchy,’ ie: what we are seeing now.

    An economic system driven by stocks in the way we do it in the U.S. is not a boon to the economy, but a leech. Corporations are now driven by the need to maximize profits for their shareholders, not to provide a quality product, provide jobs, or help society. If outsourcing helps them do that, that’s what they’ll do – or they’ll face a backlash from their investors. Companies have to be MORE than profitable – they have to keep increasing their profit margins every quarter. This is closer to a zero-sum game than not; that is not feasible. You could have a public company with a billion dollars profit every year, and the next year it still ‘only’ makes a billion dollars in profit; your profit hasn’t improved since last year, so you’re considered a failure, and your stock tanks. OMGWTFBBQ?!

    I feel sorry for Barack Obama. If he wins the Presidency, he’s got a hell of a lot more to worry about than ‘just’ the wars in Iraq and Afghanistan (and Pakistan and Iran if the current administration has its way before the end of their term).

    What’s pathetic about the GOP strategy of pushing the country near bankruptcy to ensure that Democrats can’t afford their social programs it that so much MORE money is being spent on their ridiculous wars and financial bailout schemes than the Democrats would ever dream of trying to spend on entitlement programs. The only President in the last 28 years to have a surplus was a Democrat. I’m not a big fan of Libertarian fiscal naievete, but it’s interesting that the _GOP_ considers them crazy. Of the two, I’d prefer a Libertarian over a Republican neocon or “Christianist” any day.

    As for my plans, I’m thinking of getting a weather-tight beat-up old van with an electric heater, a couple of solar panels and a small portable wind generator and a very energy efficient laptop, and go live down by the river. With a shotgun.

    A graphic designer friend of mine was asking my opinion about possible jobs he could do after the end of civilization, and all I could come up with for him was learn how to paint vans.

    Oh, I should make that van a diesel – that way I can use biodiesel. :)

    Basically, same as planning for a zombie apocalypse, only less entertaining.

  34. I feel very sorry for the people who are in trouble due all these problems, but sitting on the other side of the Atlantic (and yes this will also impact me – to a lesser degree) it is very difficult to understand that the largest economy in the world is based on credit.

    That is I know people in the US who would never be able to pay off their credit cards, let alone try to get ridge of their short term debt.

    An economy which is based on dept is not healthy – car loans, mortgages should be the only “long term” dept one should have. I cannot see why anyone would borrow for vacation, a new gadget, or something else which is not something which is a long term thing (household goods, etc. – not a sofa).

    The problem is not that some banks are going belly up, the problem is that way too many people have based their private economy on banks being able/willing to provide loans…. In the current money market this will not happen, and everything comes to a standstill.

    But as a European I cannot fathom that in the land of the free, no one actually can see that the problem isn’t the banks, it the people who take out short term loans which become long term (high rates) which is the main problem.

    Sorry for ranting……

  35. I’m not entirely sure what to think. I have a pretty secure, well-paying job. I do have a lot of student debt, but other than that not a whole lot. I’m paying off my remaining credit card debt (just on one student credit card, so it’s not a whole lot) sooner rather than later.

    I don’t really expect it to significantly hurt me personally. It’ll affect me, yes, but I should be fine. I do expect it to hurt all the people who’ve over-extended themselves financially for the past bunch of years.

  36. Oh, on the optimistic side (which I’m not necessarily), the HOR is now totally going to be more frightened of their constituents’ pitchforks after having seen a 777 point drop, so this week we’re likely to see some modifications to the bill and a re-vote with at least an additional 12 expendable Republicans voting for it, so it’ll pass.

    Will it work?

    Who knows, but maybe those overly-caffeinated Wall Street types that went into panic mode today will calm down a bit. Also, to give it some perspective, although it was a record point drop, it wasn’t not as high a percentage a drop as in the Great Depression or on Black Monday.

    As for: amusing nature of book accounting, especially “reserves against returns,”

    Hmmm, “amusing” is not the word that first comes to mind when describing book accounting.

  37. Well, on the one hand, I anticipate my daughter graduating in December. The last term has been paid for. Unfortunately, she had to take out private loans for which I’ve co-signed. Four and a half years ago, I realized that I could be potentially bankrupted over her education and felt it was worth the risk. Her major is in environmental studies with a minor in biology. She’s worked at a mini-mart through college (four years of continuous part-time employment probably looks good) and she had an internship last summer at the National Aviary so I think her job prospects are good. My husband and I have some money saved but probably no more than one-two months equivalent of our salaries. I have quite a bit more in various retirement accounts that I would consider fair game if desperate times call for it. That’s assuming that I could get at that money. While I work for an IT department in a small university, the latest VP of Finance and Operations is looking at outsourcers so, I can’t say I’ll be employed at the end of the year.

  38. Give me the pump the oil the gasoline and the whole compound, and I’ll spare your lives. Just walk away. I will give you safe passage in the Wasteland. Just walk away and there will be an end to the horror.

    – The Lord Humungus

  39. I am terrified, actually. I never used to worry about this stuff until I had a family and a mortgage and a car payment.

    This whole, “being an adult” thing, sucks moose.

  40. John, hate to disagree but this problem goes back a tad further than 8 years. This crisis is the result of 30 years of politicians pushing for deregulation.

    They pushed and pushed to do away with the regulations that were put in place after the great depression. Now we are on the brink of another great depression and it seems nobody is drawing the line between the missing regulations and the SNAFU that is the current US economy.

    Regulations are neccessary. Think of the economy as if it were a professional football game. The game would be fun to watch if there were no refs, but the blood would flow red on the field until there were no players left.

    Saddly I have no doubt that Obama and the democrats will manage to put our economy back together again and when they do, maybe even before the job is finished, the Republicans will once again start pushing for deregulation. And since the American public has the memory of fly they will probably get away with it.

  41. I’m retired. Most of my retirement funds are in the stock market. My Social Security and minimal pension are not quite enough to live on at my current consumption rate. I don’t have any debt though. I am in good health and I have fairly decent health insurance. I do free-lance work part-time but in a sector that is apt to take a huge hit in a real downturn. I have absolutely no idea whether we’ll muddle through and I’ll still be comfortable although with fewer luxuries or whether it’s dog-food-city for the rest of my life. I think it will be a year or so before the direction is clear. I pretty much thought that yesterday too so today is not that much of a change. Just adds to the panicky jammering on TV.

  42. I’m 62. I work for myself. I have a mortgage, a small amount of credit card debt, a 13 year old car, and I pay over $6000 a year in health insurance premiums, plus more for copays, dental care, and eye care. All my retirement funds are in the stock market. I live frugally because I don’t make much money. I have no kids to support me. I already knew that I was going to have to keep working until I no longer could, but I hoped I would at least have a house to live in and some money to live on when that time came. Now, I don’t know. How the f*ck do you think I feel?

  43. This whole, “being an adult” thing, sucks moose.

    You said it, Kate.

    We’re doing okay, mostly due to my financial paranoia. We’re both still employed, which is helpful. And while I’m not the financial whiz that Krissy is, the idea of losing our home was sufficiently frightening for me to take to saving like an addictive personality to crack when we bought our house 6 years ago.

    And since we have 20 years to go until we retire, we’re hunkering down for a bumpy ride, in the hopes that things will improve within a reasonable period of time.

  44. @17
    “It will probably be bad, but it’s only a few percent at this point, nothing like the 40%-in-a-week drop that they had in 1929.”

    Your lips, etc – Week isn’t over yet.

  45. I’m not too worried. The new wife and I have 0 debt, no car and rent. Both of us are gainfully employed by law firms and goodness knows, someone will always need a lawyer. Thankfully, just in case we’ve been putting money aside into savings so on the whole we’re all right.

    I don’t know, I look at this as the free market actually stabilizing itself and frankly its been a while coming. We as a country have gotten so used to easy credit with no consequences that now that the bill has come due, the interest is huge. Hopefully there will be some good to come out of this.

  46. I hate the pictures of traders, especially at CNN.

    You’d think they’d spent the day digging for remains on the pile at Ground Zero.

  47. I boggle at the idea that this represents anything like a market failure. Let’s trundle off to Wikipedia for a quick read of http://en.wikipedia.org/wiki/Community_Reinvestment_Act

    The mortgage market in the U.S. is completely dominated by these two quasi-governmental agencies. These agencies were directed by government officials over the past two administrations in particular to make bad loans. These agencies not only accepted high-risk applicants, they incented mortgage brokers to bring them high-risk applications. None of the involved parties seemed to be much concerned about the financial risk because they knew the government was going to bail them out if things went badly.

    And look … the government is bailing them out.

    Had this been a free market (I wish), these two agencies couldn’t and wouldn’t have written mortgages to people with no income to the extent that they’d have a product named after them: http://en.wikipedia.org/wiki/NINJA_loan#Ninja_loan. If this were just a problem of greedy fat-cat Wall St. types, then wouldn’t we see the hedge funds and other “vultures” also facing bankruptcy? They aren’t, and I opine that it’s because they knew that any risks they faced would be borne by themselves and so managed their risk accordingly. FNMA and FHLMC had no such expectations, and so acted as if there was no risk.

    This problem was manufactured, or at least severely exacerbated, by government “oversight” that didn’t oversee and “regulation” that didn’t regulate, and the idea that more such government “oversight” and “regulation” will magically fix it all just staggers me. If the compromise plan at least involved indicting Barney Frank I might lighten up a bit.

    Free markets? I think they would be a swell idea, and we should try them at some point instead of this privatized-profit-nationalized-loss scheme.

  48. I’m trying to buy a house so I don’t want to hear about any more “economic colapses”. I know that won’t make them go away; it’s just something I don’t want to hear about right now.

  49. Jon@29,

    Yes, of course they’re separate things, but they’re related. Savings accounts traditionally pay just slightly less than this rate, because so many things are tied to it.

    If you suddenly had bank savings accounts paying 8%, wall street would suck up every bit of that in, oh, probably thirty minutes or less. Last week investment firms were buying t-bills with a negative return.

  50. I didn’t realize there was a problem. I’m investing more into the market ’cause it’s getting silly cheap. I’ll probably lose some short term, but it is a paper-loss until I sell the stock/fund and I don’t usually do too much short term investing in the market. Your odds are better with Blackjack for short term investments, in most cases.

    I always expect this sort of panic at the end of a 2 term administration. I don’t understand it. But I am attempting to profit from it.

  51. This is what happens when large portions of the economy take significant chunks of their budgets off the books. Exactly how the derivative mess that has our credit markets freezing up is different from the Enron practice of spinning their losers off the books is beyond me. The markets have been overpriced vs. historical P/E even after the 2000 bubble busted. Count me as not in the Chicken Little camp. The REAL money, based on value, will still be there after this blows away. It’s all the money that existed as a cell in a spreadsheet resulting only from formula manipulation that’s going away. And it needs to for the market to work.

    As for me, I locked in a flat-rate mortgage a while ago, and don’t carry any other debt. So my largest expense (50%+ of my monthly spending) is payed based on 2005 dollars. I make more 2008 dollars. I’m good. I just wish I could buy out my mortgage from Wachovia for the price Citigroup is paying.

  52. Well, let’s see: I’m pretty poor. My husband and I just had what we consider a serious upswing in our financial health — I found a job as an independent contractor that’s steady, permanent, and allows me to set my own hours while still making good money. Of course, the caveat is that what we consider “good money” is $10-12 per hour; that’s what I make, two to four hours a day, while my husband makes just a little more than our state’s minimum wage, 35-40 hours per week.

    For us, that’s riches. We live in the poorest town in almost the poorest state in the country; it’s unheard of, among our cohort, to have an average combined income of more than $800 per month. We’re young. I have a college education, my husband does not. We have a three-year-old son.

    We’re living well, for how we live, but for how long? We just started being able to even think about savings, retirement, and insurance. We just got our first car, a car that is fully paid off and totally ours. (It is 11 years old, but damn it, it gets good mileage and it runs.) We have no debt to speak of — we rent, of course, and don’t qualify for credit cards — but we also have no cushion to speak of.

    Oh yeah, and the job I got that made our reasonably decent new possible? Well, it’s with a company that’s still sort of… teetering on the brink of solvency. What if that company goes under? What if the mom-and-pop grocery store that employs my husband goes under? What if our bank goes under? These are questions for which, for us, there is no contingency plan.

    Do I think we, as a country, are headed for total economic collapse? No. I think a lot of families like us are headed for (potential) economic collapse, though, and it terrifies me half to death. We already have a hard time buying food; I’ve started working an extra hour a day just to cover the increase in our regular grocery budget. I can’t imagine one or both of us becoming unemployed; I can’t imagine our bank folding… but these things could happen, and soon.

    Of course, I also can’t imagine finally being able to afford health insurance only to have it taxed out the wazoo. (I’m looking at you, McCain.) You might say that my financial views are becoming more political this year than they’ve ever been, and that this is a really inopportune time for such an awakening. I don’t know how this picture relates to the rest of the country — I only realized that $10/hour wasn’t untold riches when I moved to California for a while after college. I just can’t get my head around the entire situation.

  53. My husband and are are both employed, and although I’m an at-will employee, my husband isn’t, and I find it highly unlikely I’ll be let go, as we both work in academic.

    We just made our final car payment, carry no credit card debt, and when we got our mortgage it was based on my husband’s income alone, and he makes more than he did seven years ago. So our mortgage is probably about the same as our monthly food bill.

    We live well below our means, and if I stopped ordering so many books (sorry John) we’d have even more money going into savings.

    Don’t have as much in savings as I’d like, but then we just bought a new wood stove, and took the first vacation we’ve had in years and years.

    So I’m not concerned in the slightest.

    Plus, my grandmother, who lived through the S&L crisis (her S&L (which was masquerading as an FDIC bank–ugh)) went under) AND through the Great Depression, pretty much has the attitude of, “whatever happens, happens.”

    And she’s right. It’s just money. Her family lost almost everything in the Great Depression and came through it as a family, so I figure that no matter what happens, as long as we support each other, we’ll be OK too.

  54. and certainly does look like the death knell for a certain brand of economic theory that states that free markets are best until their own stupidity gets the principals of that market in trouble.

    I was considering posting a refutation of the above, with links to sites that prove this was not a failure of the free market but of a market forced to take stupid risks by goddamn power-mad socialist politicians.

    But on second thought, I’m sure that it wouldn’t make any difference. So go ahead, blame this all on Bush and the Republicans and Wall Street, and elect the socialist shithead Obama.

    And then watch as the economy does in fact melt down, and ruins your lives in the process.

    It’s said that democracies get the government they deserve. In this case, you certainly will.

  55. Ouch. And, wolfwalker, if you mean the commentary that suggests that a financial meltdown of this magnitude was caused by the government forcing the poor helpless banks to lend to nasty poor black people and latinos (Oh yes, it exists) well then… I think that says more about you and the people writing it than it does about anyone else.

    On the other hand, if you’re talking about sensible commentary that doesn’t purport to lay all blame for the current situation on low income homeowners, I’d be happy to read it.

  56. Oh, good god, someone STILL pushing that CRA shit. CRA does not require any kind of bad lending; it simply says that if you have a branch in an area, you have to treat credit worthy applicants the same there as everywhere else. The CRA in fact *mandates* safe and sound lending practices. And guess what? CRA loans have stood up *better* to the banks’ insane loosening of lending standards.

    God, these people are such creeps. Wall Street ran the economic bus into a ditch, and all they can do is leap out and howl “it’s the scary brown people!”

  57. @Mitchell : You might want to READ the articles you link to. They specifically disagree with your thesis.

    @wolfwalker : Always good to make a point by calling someone a shithead.

    I think the truth is a bit messy, and that making the next step will require us to put aside the blaming that we all want to do, and think carefully about the future.

    Half of the subprime mortgages were made by independent brokers on speculation. There was also a lot of bad debt bought and sold as ‘securities’, also on a form of speculation. The rules that still existed were ignored by the SEC. Seems pretty ‘free market’ friendly to me; however, both of these issues suffer from a major amount of asymmetric information and from ill-conceived intent (the ‘product’ for sale was not as specified). Economists would (and did) argue that the bailout would not fix these problems. Some of the debt to equity arguments do make more sense than a bailout, at least to me.

    Fannie and Freddie are strange entities. Did they fail because the government shouldn’t be involved in the mortgage market? Or did they fail due to the incompetence of their highly paid executives?

    In either case, we do have a significant problem with the markets now. As someone who has studied and published about economics, it is hard to convince me that the massive payouts in the financial sector somehow were the result of an incredibly efficient system. Unfortunately, the old sins and distortions of humankind probably struck again, and we will all be the poorer for it.

  58. On the plus side–our modest home will be paid off in 6 years, we have 2 8-year-old cars that run well and are paid for, and no other debt. Both of our jobs are reasonably recession-proof and DH’s is even depression-proof.

    On the minus side–we have two kids to send to college before we know it ( 4 & 7 years from now) and retirement is looming in under two decades and our (diversified) investments are loosing money at hemorrhagic speed.

    We are healthy and can survive, but at this point in my life I was hoping we would have a real retirement in the bag and the kids’ college fully funded. Oh well.

  59. I…don’t think I’m as worried as some folks are. A little, but I think if the doom hammer falls, we’re going to weather it OK. We’ve always been too broke to invest, so the Wall Street tumble hasn’t really hit us personally. (Only one of the four companies we work for is publicly held, and that one doesn’t seem to care about its stock prices, so…)

    We’ve weathered TWO bank failures just fine – NetBank last year, and WaMu last week – simply because we just don’t have much.

    We have very little credit card debt – about $1800, I think, and being paid off rapidly. We had sunk it into car repairs, a full tune up, new tires and such, because buying a new car seemed like a bad idea. I’m SO relieved that I dug my heels in and refused to budge when hubby started mewling for a new car. There’s nothing wrong with this one. It’s just not shiny and new.

    Really, the only debt of note is the mortgage. It’s manageable, we’re not upside down on it, it’s paid on time.

    I hold three part time jobs – one based in the United Kingdom, the other two based in the US, all online and all using different skillsets – and have a small ad generated income that has been getting larger over the past few months. The weak dollar has meant good things for my wages from the UK outfit. Because of what I do, it is unlikely I will lose any of my jobs. The entire internet would have to go completely offline.

    Hubby works in retail, and never, EVER has he been more grateful for his mad retail management skillz than he has been lately. He works for a company that operates strictly on a cash basis. If his company were to fold – unlikely, given their business practices – he wouldn’t have too much trouble finding another job, because retail is one of those things you can’t ship off to India.

    We’ve been moving towards a greener lifestyle for years, conserving energy, composting, gardening, cutting out processed foods, canning what we grow in our garden, repairing broken things until they can’t be repaired anymore. Hubby rides his bike to work two or three days a week in decent weather, and I work from home.

    Maybe I should be a lot more worried than I am. I don’t rightly know. What I do know is that my family is tough. We lived a very spare lifestyle for many years, it wouldn’t really faze us to be forced to go back to it.

  60. Tavella:

    Interestingly enough, I was just watching Barney Frank dismantle Eric Cantor on just this issue.

    It does take a special kind of, uh, “imagination” to assign the blame for the a financial meltdown in the Bush era on Carter-era legislation which existed for more than two decades without any substantive harm to the market. I suspect personally the more immediate cause of the meltdown was the recent neat truck of bundling mortgages together like securities, a situation that encourages lending to less than credit-worthy customers, since once you bundle up those sub-prime mortgages and sell them, they are officially someone else problem. The free market works! Unless, of course, you’re left holding the bag.

    So, yeah, Wolfwalker, it’s just as well you didn’t respond.

  61. In the short run, I’m probably okay as long as the government doesn’t create massive inflation. I’ve got enough to keep me comfortable in savings for several months, plus a separate fund in case of health problems. I don’t make all that much, but I squirrel away almost everything not spent on necessities. My retirement fund is an index fund in the stock market, but I’m fairly young and hadn’t put much into it, plus it’s got a few decades to bounce back before I need it. I have no debt, thankfully, nor any health issues. The one real worry that I have is that I’m a freelancer in a fairly niche field, and on short-term contracts. If they dry up, I may be out of luck in the long term.

  62. I think we’ll do ok. We’ve got a fair (by my standards) chunk in the bank, virtually no ongoing cc debt, my student loans, locked in at the lowest interest rate in history on the things, and ye olde standard expenses, including rent. The cars are both paid off (one was purchased with cash), and my job seems fairly safe at the moment (famous last words). Have I mentioned I love ellipses?

    I was really hoping to move into our own house soonish, but it doesn’t look like a great time to try and get a mortgage. Great time to get a cheap house, but…

  63. As recently as this past July, there were people in the Senate saying that Fanny/Freddie were “fundamentally sound” and that there was no need to panic. The WSJ, though not always right, has been saying for years that those companies were not fundamentally sound and were engaging in risky practices.

    Fannie and Freddie are strange entities. Did they fail because the government shouldn’t be involved in the mortgage market? Or did they fail due to the incompetence of their highly paid executives?

    I think the gov’t should be involved, but it would seem that there needs to be more effective oversight. I am sure that the executives can share some of the blame.

  64. John:

    I’m in your situation, to a little bit better, thankfully. My guess (wild assed type and worth every penny you paid) is that we’re in for a bad, but not catastrophic recession.

    The thing I noticed today is that since about 1980, when I was actively working on alternative fuels*, the US has consistently adopted short-sighted policies in a lot of things. Meanwhile, the evil (former) Commies both have operational manned space capabilities, unlike Sara Palin’s good guys. Congratulations to the horrible, awful, polluting, Olympic-grabbing, dam-building Chinese, by the way. :|

    These short term policies were mostly in the pursuit of short-term profit, either monetary or power. The US governments for the last 28 years have a lot to answer for (to historians, of course).

    *Oil prices went down and the contracts and research efforts were allowed to die out.

    Regards,
    Jack Tingle

  65. it would be nice if the conservatives could conjure a way to achieve the relatively minor objective of keeping a lid on a possible future Democratic administration’s initiatives without resorting the major disaster of imploding the global economy

    As usual, it’s both amusing and more than a little bloody to watch the economically clueless up to their elbows in all those mystifying entrails.

    John, I am second to no man in my complete and utter loathing of George Bush, but he truly had nothing whatsoever to do with the current economic meltdown. In fact, he did his damned best to stave it off with that very combination of big spending and tax cuts that many liberals have criticized in the past. If you want to pin it on one man, then you must pin it on Sir Alan Greenspan. The Democrat housing idiots made it worse, to be sure, but Greenspan and his suppressed interest rates are the primary culprit. For decades, politicians have attempted to eliminate the business cycle. None have ever succeeded. None ever will succeed. But due to the dollar’s unique position as global reserve currency and the rise of manufacturing in India and China, the US was able to inflate its currency and enjoy most of the benefits without being hammered by the costs. This was ludicrously interpreted as a new economic reality that put America outside the cyclical limits.

    However, as everyone has since learned and as all the critics of fiat money have said all along, this asset inflation was not sustainable even in the medium term. Everyone with a solid background in economics knew it; Greenspan himself complained about “irrational exuberance” back in 1996. He nevertheless refused to accept the inevitable contraction, pumped up the equity markets, then when those failed, pumped up the housing markets. As the congressman with whom I spoke today noted, the Paulson plan didn’t even PRETEND to fix this problem, mostly because it simply can’t even hope to. That’s why it was billed as a stabilization measure, not a fix.

    And stabilization for what purpose? To buy time for the international financial elite to extricate themselves from the mess they made, and nothing more. This appalling mess not the result of the “free market”, it’s precisely the opposite; it is the result of the government and the government-anointed monopoly known as the Federal Reserve foolishly attempting to ban economic gravity.

    If you want to know how bad it’s going to be, it’s not at all hard to work out a rough approximation. Just look at how good it has been since the last serious recession of 1982. Small boom, small bust. Big boom, big bust. The nation has had at least 12 years to see this coming, so it’s a bit late to cry about it now. Instead, remember that recessions, even depressions, are simply not the end of the world.

  66. Hey Jerry Critter, the Prez can’t do much without Congress. Both houses. So like Mr Scalzi pointed out, there is plenty of blame to go around. In fact I would add most of the American public to the list of people to blame. How many of the foreclosures are of people who bought more house than they could actually afford? VRM’s where they could JUST make the payment when the rates were low with no plan to deal with the eventuallity of higher rates. Then there are all those people with ALL of their credit cards maxed out. Or even worse are the people who took out a second to pay off their maxed out plastic and then went out and maxed em out again.
    It sort of reminds me of government spending. Spend all you have and then borrow more so they can get that project done now instead of waiting until they can afford it.

  67. Oh and I am not worried about total colapse. It could get rough. It already has for some who have over extended themselves. But long term I think we will be fine. Long term is five years plus. I am thinking two to three years.

  68. Let’s see:
    Credit card debt: $8,000 (heckuva wedding though)
    Mortgage: $84,000 ($790/month)
    HELOC: $25 out of $40K spent ($15 K space)

    Cars owned.

    Worst case, the zero % cards are transferred to the fixed rate Heloc (at Prime). I work in biotech and think high tech medical research is somewhat safe.

  69. I’m in pretty good shape. I work for a Dept of Public Health as a nurse in inpatient psychiatry. If our funds were cut (again!), I have more seniority than about 12 other nurses, so I’m fairly secure. I think we’d have to be in really desperate shape for society to allow my patients to roam the streets- we’re talking about the typical homeless drug-addled crazy person who occasionally goes and attacks random people or runs naked in traffic. When they do this, they come to me, we put bandaids on their illness and set them free after a while. It is a bad system, but if the person is coherent enough to find food and shelter we can’t keep them. Anyway, I think I’ll keep my job.

    Monetarily, I’ve been paying off big chunks of my student loans, still about 35k in debt but I could pay a lot less per month than I have been. Other than that I have no debt, my rent is only 1/10 of my monthly take home pay, I own my car outright and it only has 10k miles on it. My boyfriend and I could live for a month or so without going to the grocery store, we have a bit of emergency food put away. After Katrina, I realized that the 72 hours of supplies recommended was really inadequate in a large scale disaster. And since I work for the Dept of Public Health, I’m actually mandated to be a disaster worker, so I need my act together. I set things up so even if we have a major earthquake, I still can function and hopefully get to work. I do feel more secure knowing I have some food stored, in case of rioting in the streets with pitchforks and whatnot.

    I have 5k in savings, not much but I’m focusing on paying off all debt before saving a lot. My money was in WaMu, so far it still is there. No retirement savings yet, was going to do that this year but my friends have been LOSING money instead of earning money on their retirement accounts this year, so I’m holding off.

    So the boyfriend and I are in good shape, but I’m still worried about the economy. I really think things will get quite ugly before they get better.

  70. It’s a neat truck after all
    It’s a neat truck after all
    It’s a neat truck after all
    It’s a neat, neat truck.

    And now for my next truck, I will point out and amuse myself with another Scalzi typo.

  71. Mainly, I’d just better not lose my job. It’s my health insurance, and while I am pretty robust, I’ve seen sudden catastrophic health issues (car accident, cancer) strike both my parents, and that’s pretty much bankruptcy right there. I do have credit-card debt, but I could pay it off tomorrow if I were willing to have no more easily accessible savings. I am… loath to do that. If I get a hint of things becoming more dire, I’ll just pay it and buck up, but then I’ll have nothing I can access until I am 65, which will be a while… There’s my student loan as well, but that seems pretty much under control — good interest rate, etc.

    I moved home to help my mom out two years ago when she broke her hip and was hospitalized for about six months…and that’s seeming like a blessing, now. (And we don’t eat much…)

    I’m taking John’s attitude toward my 401(k). It’s gone down, but not remarkably so considering the news I’m hearing, and I can’t quite figure out WHY, and that SCARES me. (Maybe because some of my portfolio is overseas stuff? Or long term bond-type things? It’s only 30% “aggressive”). I will be pissed as all hell if I lose it, but I don’t think I’ll starve. Push comes to shove, I think my extended family will rally.

  72. You do not need to pay an 8% interest rate to encourage saving. Saving has already dramatically increased. Recipients of the recent rebate checks only spent between 10 and 20% of the money. Anyone who thinks stimulus checks are a good use of money (including Obama) should look up the definition of insanity. Current economic conditions encourage more saving all by themselves. Just like for every seller there must be a buyer, for every borrower there must be a lender. There are a lot fewer lenders, so it now costs a lot more to borrow, hence more people will save instead. There was some question about this in some camps as M3 was rising dramatically. This has now ended. The reason it was going up was that businesses and homeowners were tapping out their existing lines of credit before they disappeared, knowing they wouldn’t be able to get new ones in the future.

    You also had the interest rate/inflation connection exactly backwards. Higher interest rates means more saving and a smaller multiplier in the fractional reserve lending system, which leads to a smaller money supply and deflation. It also means there’s a much higher demand for dollars by foreign investors, since the return on holding dollars is higher.

    For all of you people blaming Fannie and Freddie for causing this mess, that is quite some revisionist history. They both got in trouble for shoddy accounting at the very beginning of the housing bubble, and were in fact fairly conservative in their lending while they cleaned house. It wasn’t until they emerged from these troubles and tried to fulfill their mandate while competing in an industry that had abandoned all reasonable standards that they got in real trouble. Then as the bubble started to implode, Congress urged them to take on more risks in an attempt to prop up the market, which was ultimately doomed to failure. Even then they didn’t go as far as Congress would have liked (though that didn’t save them from failure). Was this a colossal waste of money? Sure. Did it raise the cost of owning a home, in direct contradiction to their mandate? Yes (see aforementioned propping up of the market). Was it the cause of the crisis? No.

    The cause of the crisis was that credit was too cheap for too long. This encourages people to take the money and make bad investments with it. It allows people to use ridiculous amounts of leverage. This was the same thing that caused the savings and loan crisis and the same thing that caused the dot-com bust. Anyone who starts off by telling you that the root cause of the current crisis was the subprime mortgage industry only has a superficial understanding of the problem.

    The market is now fixing the problem. Credit is expensive. It should be. In the short term, it will probably over-correct and become too expensive, and that will cause a lot of people a lot of pain. $700bln worth of pain? I don’t know. Neither does the Treasury Department, who “just wanted to choose a really large number.”

    But the current bailout proposal isn’t designed to address the credit problem directly. I happened to catch Bernanke testifying before the Senate Banking Committee on Tuesday, and he made some remarks that were not part of his prepared text. The frankness of them astounded me. That is only a partial transcript, unfortunately, but it contains the key point.

    He starts off by talking about two prices for assets: the “fire sale price” they would earn if sold today, and the “hold to maturity” price. Obviously he believes that the latter is much higher, but freely admits there is a great deal of uncertainty in the market. We normally call that “risk”, and risky investments are supposed to carry a lower price to compensate. You could just as easily re-label the two prices “the current market price” and the “mark to fantasy price”.

    If you remember the Enron scandal, they got into a lot of trouble by using “mark to market” accounting, whereby they re-valued assets at current market prices and reported the change directly as earnings. This works so long as market prices go up, but market prices can also quickly go down. Many financial institutions do similar things. The rules are complicated and differ for retail banks and investment banks, which is why you saw Morgan Stanley and Goldman Sachs reclassify themselves as “bank holding companies” last week. Obviously these institutions want to keep using the “fantasy prices” the market used to be giving them when nobody knew any better, not the current going rate.

    So given all that, here is the key point. Bernanke says: “If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits. First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down.” What he is saying is, “If we artificially inflate the price of these assets, banks will not have to write down huge losses.” That would save their credit ratings, reduce their capital requirements, and allow them to keep lending money cheaply.

    That could actually work, in the short term. But if the Treasury Department is paying much more than the current market price, people will rush to unload these assets until they run out of money. After the $700bln runs out, what next? There is still lots of risk in these assets. No one else is going to be so foolish with their money as to pay more than the market price for them. And so we’re right back where we started, without solving the original problem, except now the taxpayer has $700bln fewer dollars and lots of assets whose value is “uncertain”.

    Bernanke claims “taxpayers should own assets at prices close to the hold-to-maturity values, which minimizes their risk.” This is patently false. To minimize the risk, one would buy the assets at market prices, not the fantasy “hold-to-maturity” price. The taxpayer could potentially make a lot of money doing so. When Warren Buffett came out in favor of the bailout, this is what he was talking about. Unfortunately, that’s not what Bernanke says they are doing. By buying above the market price, he offloads all of the risk that has depressed the prices of these assets onto the taxpayer. But it wouldn’t solve the “mark to market” problem all these financial institutions have. In the long term, I don’t think anything can. All you can do is paper over the problem for a while, and that’s what got us into this mess in the first place.

  73. I shall have to hope that it’s only the imaginary money that is in free fall. Right now the real money in my pocket is just fine. That all could change very quickly if people buy into the idea that pixels on a computer screen somewhere in New York city are the only thing that matters. After all, there isn’t suddenly billions of dollars missing in the world that needs to be replaced. It hasn’t been destroyed, it’s just being hidden away by sundry electronic fallacies that are designed to make people think that there is danger if we don’t pay the inflated fees of the financial bloodbank. The sooner we get back to an economy of real goods instead of phantoms and figments the better it will be for all of us.

  74. Hmmm.

    Cons:

    1. I have no financial safety net, as in, I have no one who can take me in if all goes to hell. If I don’t make it alone, I’m dead. Nothing new.

    2. Bi-polar does not go away with the power of positive thinking. Without medication that could lose me my job and make it real hard to get another one. That assumes me losing my job, which could happen.

    3. I live in an expensive place precisely because it gets me out of the reach of people who want to kill me. Falling out is not a good thing.

    Pros:

    1. My money is in a credit union. Other members are from Microsoft, Google, Amazon, and other hot-shot big tech companies. This is nice.

    2. My company uses RSUs, not stock options. It’s the difference between paying for stock (options), and getting stock free (RSU). It may be SUCKY stock, but at least I don’t have to pay $20 to get a share that falls to $10 the next day.

    3. I now thank the gods every day that I participated in a back-breaking effort along with hundreds of other people in the company to move our Europe operations actually over to Europe. This was paying us back dividends before, but I suspect it’ll pay off even better dividends, relatively speaking, in the coming months/years.

    4. I save 25% of my paycheck (half goes to the mortgage, 25% goes to living expenses). It is something of a big paycheck, but the mortgage is also big. I’m pretty used to stashing away cash, because of con #1.

    5. Car paid off ages ago. Yay. On the other hand, it currently likes to die at inconvenient times.

    6. My expensive community is also a very close one, which means that I can walk to everywhere necessary (like the library. Oh. And also the various stores and restaurants. But library. Important, yo) and save on gas.

    7. My commute to work is gas-free, although ferry ticket prices may go up. Not as much as the car-commutes of some of my co-workers will be, though.

    8. Enough yard to grow stuff for one person.

    9. Other expenses have already either been knocked off or will be soon. I’m thankful I never got involved with a cell phone subscription or satellite/cable TV. However, that ferry wireless access has to go, a paid email account can be nuked, I can cut back on my hosting options, and perhaps even get rid of my own private net access. (My co-op has free wireless, but I don’t like to step on other people when I’m downloading stuff.)

    10. I am too damn stubborn to die. I have always found a way through the darkest times of my life. Maybe it’s just hubris and some people will laugh at me because I’m determined to get the better of Fate, but as far as I’m concerned, that’s my job.

  75. We are as financially stable as you can be and still have two people who work for a living. Fairly secure jobs, relatively speaking (and, in a pinch, we’ll both do whatever kinds of jobs it takes to bring in an income — we’re not job-proud).

    Our only debt is a low-interest mortgage with 9 years remaining. No credit card debt. Paid-off cars. And we’ve both watched the instability with increasing concern…so we started shifting some things about a bit ago. Metals. Inflation-indexed bonds. Hedging against stagflation.

    In a case of true financial collapse? Who knows? There are wild turkeys out back…

  76. Seems like your congress has smote its nose to spite its face. So thanks USA. You’ve not just shot yourselves in the foot, the ricochet is going to take us all out…. maybe.

    [wacky conspiracy theory]
    Repubs know Obama has election in the bag – hand Obama poisoned chalice.
    [/wacky conspiracy theory]

  77. Somewhere, my Mennonite (or maybe it’s Pentacostal) cousins are saying, “We told you so.” They will not notice a “total economic collapse”; they’ll go milk the cows and grow stuff and be happy for the drop in traffic. They’re *my* ultimate bail-out solution, if they’ll take me in. I expect that’s where a lot of the country is going to be: hoping their cousins who live on un-mortgaged farms will take them in.

  78. Reading the above comments, it looks as if my wife and I are probably in a better position to face an uncertain future than most people. I’m employed by a company that should be able to weather rough times, and my assessment is that the layoff rate in my part of the company would probably have to approach 40% before I would be at risk, even if age discrimination comes into play. If I did go out the door, between Social Security and the pension I would start collecting – which is supposedly fully funded – my net income would not change much.

    Our house is paid for, as are both cars, and we have no other major financial obligations other than property taxes. We have about 7 years worth of current income in conservative liquid assets such as savings accounts, money-market investments, etc. (In view of my age, I switched from a mix of stocks and bonds to 100% money-market in October of last year, as the economy did not look “fundamentally sound” to me.)

    We also have approximately 10-12 additional years worth of current income in non-liquid assets such as real-estate – all of of which has probably already seen almost all of the drop that it is likely to see – and some of which generates income. As the Weimar Republic demonstrated, these factors are not complete protection, but they do give me some peace of mind.

    In my mind, our biggest cause for concern about the future is the possible need to provide significant financial help to our kids. Even though they are both extremely competent performers in jobs that are probably reasonably well positioned to weather hard times, they are in the position of raising families on average incomes – which may create problems for them if things get really bad and the jobs go away.

    What bothers me the most is probably just the subconscious worry that is strictly emotional and cannot be dispelled logically. My parents came of age during the Great Depression, and I grew up hearing about what things were like then – it was not pretty! (Think of John’s “Being Poor” essay being applicable to a fairly high percentage of the population.)

    Even more effective at conveying a feel for life in such times were the many habits that it gave them. FREX, as a child, if I no longer needed the use of an electric light and failed to turn it off immediately, my parents would promptly let me know how unacceptable my extragance was to them. It was strictly verbal communication, but to this day I automatically turn off any light bulb that is not being used – and do so without conscious thought. I have no desire for my children and grandchildren to go through anything remotely resembling what my parents experienced.

    With best wishes,
    – Tom -

  79. Pros:

    the market was lower a week ago Friday than it is this evening.

    Own my car (still gotta pay for the ins.)

    Have some savings

    only (?) 18 years left on the 30yr mortgage

    Cons:

    Laid-off a few months back (construction industry, AZ) and not looking at an upswing anytime soon (No, I hated republican spit-down economic theory and anti union rhetoric before Reagan made it popular)

    ex-Mormon wife seriously talking about years supply of food/water (water?)

    If things go real bad my reading is going to suffer big time (Nooooo0000)

    For what it’s worth, I read the bailout bill when it first went up on the web. They needed a different bill. I agree we need a bill of some sort but I would have voted against THIS one.

    The so-called oversight board was composed of senior executive branch appointees with no usable teeth to their ‘oversight’. Their first report as to Paulson’s actions was due in January (even if truthful). Paulson would have sucked out all $700B and cranked it over to another $700B long before that. No matter what he did all Paulson would have to say would be “I thougt it was the right thing to do,oops” and nobody could do anything about it. Bad Bill.

  80. Bacon Warning:

    From economist Tyler Cowen’s blog:

    “….the government teased a hungry market and then jerked the bacon away.”

    Somehow, that needed to make it to the Whatever….

  81. Found this by way of Andrew Sullivan over at The Daily Dish:

    From Stalled Deal at the blog of Robert Reich (our 22nd Secretary of Labor):

    Prediction: A scaled-down bill will be enacted by the end of the week. It will provide the Treasury with a first installment of $150 billion. Treasury can use it to back Wall Street’s bad debts with lend no-interest loans of up to two years, until the housing market rebounds. Or to invest in Wall Street houses directly, in exchange for stocks and stock warrants. There will be strict oversight. Congressional leaders will promise further installments, but with conditions calling for limits on salaries and relief to distressed homeowners.

  82. Sold the Condo at a small loss last winter-check
    Paid off the car last winter-check
    Saved up 6 months worth of living expenses-che/um wait

    Some vet bills for my poor kitty knocked some of that last one out, but with no cc debt that should be changing shortly. I am also paranoid and bought gold to hold. Hopefully no one will make it illegal again and try to take it from me and pay ‘face value’ for it. I have 30 year treasuries too. Deflation increases the value until we have inflation. Then it’s time to sell. It’s all a matter of timing. Yay 401K! My stocks are down, but the market was over valued anyway, stocks are cheaper to buy now.

    Props to my Democratic rep for voting against this extortion bill (MOAB? TARP?) from the financial elite. I wrote to him in disgust of this bill and he took the time to write back last week. Although I am from the other side of the aisle, he has my gratitude and my vote in the fall.

    I contrast that to the partisan showmanship that the leadership of parties showed over the past week. They disgust me. It was all show to entertain you and me.

    As a note on free markets, how much has the mortgage interest tax deduction and the exemption from capital gains on any gain up to $250,000 (or $500,000 if you are married) contributed to this mess? These manipulations of laws and rules were just as bad as any other legislation passed in the last 40 years or so.

  83. Pros: Car fully paid for (or rather, I owe half the cost of the car to my parents, no interest, no payment due until my finances are more stable. Thank you to parents.)
    I have a *little* bit of savings.
    Reasonable rent.
    No college student loans.
    Health insurance for the next year and a half thanks to COBRA.

    Cons: Student loans from grad school coming due in December.
    Car insurance + gas just got much more expensive
    Job situation currently through temp agency, though there is the possibility of a TV industry job (my chosen industry) in November, which would be great.

    We’ll see what happens…

  84. Hmmm… I rent, car is paid for, and I have no debts. It’s a soft money job but should be reasonably secure – my boss is pretty good about finding ways to keep us all paid.

    I’m 30+ years from retirement – the retirement advisor said that at this point in time I should keep putting in as much money as possible, because I’m “buying low.” That sounds sensible enough, so I hope he’s right. Financial jargon beyond personal finances tends to make me glaze over, so I have no real way of knowing one way or another.

    On the other hand, I only make slightly more than living expenses, and only have three months’ worth of living expenses saved. If I lose the job, I’d also lose the health insurance. That would be bad, but I’m fairly confident I could find another job quickly – clerical work or food service if nothing else.

    Overall I’m not too worried. I don’t think any of the financial institutions that have my money are in on the collapse, but am not sure how to check. Is there a list somewhere?

    To someone above who wondered whether to toss the savings into the debt: it does sound really scary to do that, doesn’t it? But compare the interest you’re making on the savings to the interest you’re paying on the debt. Which is greater? How much are you losing out in the long run?

  85. OK, I might as well restate what I wrote in my LiveJournal last week, as I think it all still applies:

    The mainstream media’s coverage of the “financial meltdown” is about as credible as its coverage of Iraq leading up to the war. We need this bailout about as much as we needed an invasion, and there’s a “credit crisis” in the same sense there were weapons of mass destruction.

    How did we get into this mess? Well, it wasn’t the bogeymen of “greed” and “deregulation” that did it. The answer is much simpler if you connect the dots. Under the Bush administration, the federal government has spent at record levels, both on domestic programs (e.g., the new Medicare prescription drug benefit) and, of course, the Iraq war. It has financed all of this spending with new debt, which the Federal Reserve has abetted by keeping interest rates artificially low and flooding the financial markets with easy credit.

    When credit is that cheap, of course borrowers and lenders are going to go crazy and end up making and taking out loans that have a high probability of going bad (e.g., the housing bubble). Being shocked about this is like being shocked there’s gambling in Casablanca.

    It’s no wonder President Bush isn’t blaming anyone in Washington for this mess. Ultimately, he and the Fed are to blame. But it’s much easier for Bush to blame “foreign lenders” for lending us all of that money to finance all of that debt he racked up.

    Unfortunately, neither Obama nor McCain understand this. Both are signing off on a bailout in some way, shape, or form, even if it’s not the one the secretary of the treasury originally proposed.

    A bailout is exactly the wrong thing to do. As painful as it will be in the short run, the economy and the country would be better off to let this thing run its course, allow new investors to come in and snap up assets at bargain prices, and allow capital to flow from bad investments into (hopefully) much better ones. Apart from the risk and expense to taxpayers, a bailout also makes it likely that we’ll only postpone the inevitable by propping up bad investments even longer. We could easily find ourselves in a decade-long recession like the one Japan experienced in the 1990s. Personally, I’d rather have a deep but short recession now than a shallower but longer recession over the next 10 years.

  86. John wrote

    I suspect personally the more immediate cause of the meltdown was the recent neat truck of bundling mortgages together like securities, a situation that encourages lending to less than credit-worthy customers, since once you bundle up those sub-prime mortgages and sell them, they are officially someone else problem. The free market works! Unless, of course, you’re left holding the bag.

    Yup. It was a game of musical chairs with way too few chairs left when the music stopped.

    If blame is to be assigned, start with Phil and Wendy Gramm. They were the power couple (he in the Senate as Chairman of the Senate Committee on Banking, Housing, and Urban Affairs., she as head of the Commodity Futures Trading Commission) who ensured that the over-the-counter markets in mortgage backed securities, collateralized debt obligations, and various sorts of similar aggregate-debt-then-slice-and-dice-it concoctions would not be regulated. Incidentally, Phil Gramm is now McCain’s main economic advisor.

    As far as being prepared for total economic meltdown we’re in pretty good shape. Most of the retirement money (we’re both past 65) moved to cash equivalents over the last few years, paid-off house and enough land to grow our own food (or part of it) if necessary, and two big dogs to protect the homestead and eat us out of house and home. :)

  87. From the persepctive of the UK, I’m having flashbacks to the ealy 1980’s when Maggie Thatcher dismantled the economy.

    Yes, I know many people think she was the best thing since sliced bread. But I remember all my friends being unemployed (for years), riot police being used as strike breakers (I was living in Sheffield at the time) and everyone being poor (including me – and yes, that did mean skipping meals).

    My brother-in-law’s jaw was broken by a police truncheon, rioting down the road, D notices, snap raids on pubs, learning that officers in uniform but without numbers are NOT out to help with community policing etc, etc. characterised Britain in the early 80’s and I have a horrble feeling we may be in for another round of it. Especially if the Old Etonian Club get back into power.

  88. In case anyone is interested in understanding why one of the more economically astute members of Congress immediately rejected the plan, I’ve posted an interview with an anti-bailout congressman from the Financial Services Committee at VP.

    There’s the usual political talk, but the salient points are:

    1) the Paulson plan was overwhelmingly opposed by constituents of both the left and the right.
    2) the proposed $700 billion wouldn’t recapitalize the credit markets. Investment banks don’t loan to the small companies that generate economic wealth, they gamble with derivatives.
    3) That $700 billion would vanish offshore as fast as it was handed over to the bankers. Whereas the last time there were repatriation incentives, $300 billion came in of its own accord.

    Americans have been printing money in lieu of saving it for 20 years. Even Keynes said that wouldn’t work in the long run; the long run is now here.

  89. Hate to say it Andy W but the old Etonian club ARE in power – they like to use the term socialists but they do nothing for the poorer people of Britain, only look after themselves and those of the middle to upper classes. I don’t see any difference between Labour and Conservatives nowadays!

    From my own personal perspective then, what this UK government likes to call ‘the credit crunch’ is biting me from all angles. I used to work in the financial sector until I got too sick to work about 10 years ago. I had to sell my house as I could no longer use the stairs and broke even pretty much on my mortgage, so not a real problem there – my mother took me in. I lost my job but for a couple of years had sickness insurance, so again I was much better off than most people in my position, at least until the insurance ran out.

    Unfortunately I had a huge credit card debt, which my much lower income from the insurance barely made the minimum payments on, so I went bankrupt. In the UK, so many people of recent years have gone bankrupt that most of the stigma is no longer there but I still felt like the lowest of the low for a while there, but you know what? I survived it. I’m still here!

    To finish the tale, my mother then got cancer and I then became her primary carer, as well as still trying to cope with my own health problems. Luckily for both of us, she had a good pension because carers over here get trodden on with hob-nailed boots by the state. Anyway, we got by right up until she died last Christmas.

    Today, I am finding things very heavy going. However much I like to moan about it, we have fairly decent state
    benefits over here and my rent and houehold bills get paid. I am left with very little for food and general household stuff but I am getting by – just! What is missing, and I suspect this is true for anyone on a low income, is the things that make like a little more interesting. I live in a small village of 100 houses and no shops or public transport, so I need a car. Mine is 13 years old and due for it’s MOT (aaahhh!), so I don’t know how much longer I will be able to run it for. I cannot afford sattelite tv and am thinking of ditching the box altogether to save the license fee. I used to love to buy books – I read a huge amount – but now have to limit it to one a month and use the public libraries. I don’t drink or smoke or have the energy to go out so I don’t spend there. Basically, life is quite boring but I am surviving.

    Now I do not know enough about the US system of welfare to state categorically that the same would be true if I lived over there but I hope so for all your sakes. I forsee a future for us all where the luxuries of the past may be a fond memory for a while, but we will get through it and the sun will shine again (unless you live here in the UK of course and then it’s grey, grey, grey!).

  90. @100 – Nah – what we have is a choice between Stalin (and that’s what his own cabinet office call Gordon!) and the Old Etonians, which for us plebs pretty much look like the same thing, although the truncheon is wielded by a different ideology.

    I do hope your situation improves – I’ve just come out of a year’s illness and had some idea of the hell involved (I’m “lucky”, self-employed in a sector that improves during recessions so things are actually looking up whilst the markets go to heck).

    The real killer with social services in UK during the 80’s was that they got overwhelmed and payments got so backed up that at one point we had no money coming in for 3 months. I can foresee the defects in welfare systems worldwide being thrown into sharp relief and a general social change with this upset.

  91. No, I don’t think it will come to Total Economic Collapse. It’s going to get worse before better. I am thinking green technologies will fuel (did I just write that? “fuel”) the new cycle of economic growth and this will happen in 7 to 10 years time to see its effect. (Business/ economic cycles). How am I set up for Total Economic Collapse? Emotionally? Fiscally? From experience, personal total economic collapse can happen to anyone, no matter how prepared. I’m a hoarder of things. I’m not worried about food and shelter. Having had experienced a time when I worried about having either, I know I’ll figure something out or figure out where the “cheese” went, and survive. “Just when you think you’ve hit rock bottom, someone throws you a shovel.” “My house having burnt down, I can now see the stars.” You find yourself doing things you never thought you could do or would do when bad things happen. And you have experiences (not all bad) and meet people you never would have met had things not gone bad. It’s not a comfortable place to be. You become more creative. I’d rather not have to go there again, but I know I would survive. Please, no jumping out of windows anyone!!!!!!

  92. We’re kind of half and half. Upsides are that we have no debt at all, and since we’re Canadian health care isn’t an issue. We’re starting to consider a more rural-based lifestyle which would put us in great shape if we needed to become more self-sufficient as I’ve got most of the skills that we’d need for that, and we’re both smart enough to learn the rest.

    We do have some significant downsides that scare the crap out of me though. I have autistic triplets, and I have a feeling that the next 50 years or so are not going to be easy for people who are not able to be self-sufficient. While their health care is covered and I can do basic therapy and education, I envision that there are going to be serious cutbacks in education money and time being spent on special needs education in the next while (in Canada as well), and that’s going to impact my children severely- not to mention that if society does go downhill financially over the next while I can also envision major cuts in funding for special needs adults. That would be livable for us for quite a while for 2 of my children, but the 3rd needs more than 1-1 staff 24/7.
    We also have a medically fragile person in the house who requires a special diet, and I believe that’s going to become a lot more difficult to provide. My husband also tele-commutes to NYC in a media-related industry, and needless to say there aren’t very many happy companies in Manhattan right now, which is a huge worry.

    So in some ways we’re good, in some ways we’re terrifyingly bad. It’s going to be interesting.

  93. Well, let’s see. I have no job, no interviews scheduled, and no money in the bank, and I don’t trust the state of Arizona to come through with my unemployment claim on the debit card they never sent me. Plus someone has been casing our house, claiming to be the new owner.

    Yeah. I’m worried.

  94. I’m just glad we *do* have barrels of rice and beans (and wheat, honey, salt, etc.) in the basement. We have no weapons, however. If need be, we’ll share what we have with neighbors for as long as it lasts.

  95. We’re pretty well set. I’m unlikely to be laid off since I’m pretty firmly entrenched in the systems I manage… I haven’t “written myself in” or anything, if I leave, they won’t explode… but on the other hand, if I do, whoever comes in to pick up the reins will have several months of figuring out exactly wtf is going on. And my wife is a teacher. Yeah, not likely that she’s going to be laid off either.

    We have no credit card debt, one car paid off, the other paid off in a couple of months (yay pay raise). House mortgage, but that’s budgeted. Some savings. Good health, good health care plan from my wife’s job.

    We don’t have a lot of “disposable income” but I sure wish we did… looks like now would be a great time to do some investing.

    Speaking of which, if you were to invest, what would you invest in?

  96. “the bailout plan was largely scuttled by conservative Republicans ” … I suppose my only question would be how did those Evil Republicans(tm) could make 40% of the Democratic congress vote “nay”. Those KKKarl Rove mind control waves must be set to extra powerful.

    The bill was terrible, but it needed to fail. Spending a trillion+ to make bad investments appear to be “good” doesn’t even pass the laugh-test.

    Oh, and the 7% the Dow dropped yesterday, not nearly as bad the 22% it dropped back in 1987. In fact, a 7% drop doesn’t even put it in the top 10 drops of all time. Everyone admits the market runs in cycles and we’ve had a mostly up for the last two decades so everyone should have expected some type of correction. Does it suck? Yea. Is it the End of the World? No.

  97. I may well be doing personal total economic collapse in a couple of months if I don’t get a job or find a nice big fat book or design contract, so it’s a bit of a moot point with me.

  98. John, I am very happy to hear that you and Krissy have been saving money. Question though, what are you planning to do with those big fat royalty checks that are coming in? If it’s not “pay off the house” you need to give that serious consideration.

    Look at it this way. If your house was paid for, and you didn’t have these checks coming in, would you take out a mortgage on your house in order to have that cash and then do whatever it is you plan on doing with it, even investing it?

    It’s the same thing.

    And please don’t anyone say, “But then he’ll lose the mortgage interest deduction.” Right, let’s think about that for a minute. Assuming you pay $20,000 in interest next year, and you’re in a 35% tax bracket, is it really smart to pay the bank $20,000 in interest so you don’t have to pay the IRS $7,000 in taxes?

  99. My own personal check on the situation is coming right up. We moved three months ago (two new jobs, both stable, although I may have to worry about tenure in a few years..) and sold the previous house – so far, so good. But we’re building a place, and will need to get the mortgage finalised in the next month or so. Now, we should be excellent risks – perfect credit, 30% dowpayment, etc. So if *we* have trouble getting a sensible mortgage – then I will start to worry. Otherwise, meh: not starving, and retirement is 25+ years away. Maybe college tuition will come down :-).

    [And as many others have said: offering to buy at market value, right now, w/ taxpayer money: no problem. Giving *anything* above market value to twits who gambled and lost: nope.]

  100. Fortunately, my wife and I can still pay rent if one of us looses a job, and has to go on unemployment. So all in all, we’ll survive. Worst case scenario is that we move out of the city and live rent free at a summer home owned by my family.

    We’re safe. Hope all of you are too. I’m skipping taking this time to talk politics. Just be OK, everyone. Take care of your friends aren’t if you can.

  101. From 1999

    In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

    The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

    Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

  102. Chris Gerribon @ 45:

    That’s good to know. I think it’s a deposit account, since I’m SURE it’s not Wachovia stock. It’s some sort of…fund? I guess? MMA? I know it’s tied to some kind of wall street business, since it took a hit right after 9-11 and had slowly been climbing back to its original $5k value over the last several years, only passing that mark last month IIRC.

    I don’t really know much about it, honestly. *-_-* It’s something my parents set up when I was like 2 years old and signed over to me when I graduated, and I never really think about it, since it’s the least-valuable and most-stable of my assets (it’s never really deviated much more than about +/-$20 from one quarterly statement to the next).

  103. I’m glad much of our savings is in the house rather than in the stock market just now…

    We have no debt other than the mortgage just now, but we really don’t have as much savings as we’d like (and we’re tempted to put some of that back in the stock market).

    Jim’s job looks reasonably secure. I’ve been underemployed for a while, and the hours for my part-time job have been going down as fewer people travel. I’ve been sending out resumes for a while, but there’s very little to apply for. Luckily, we’re good at living with less when we have to.

    I think greed and deregulation are at the heart of this crisis. I hope Obama is elected because we clearly need a different mindset in government to help get over this mess.

    Sadly, American voters have shockingly short memories.

  104. Nargel@91: I laughed at the ex-Mormon wife line. Because it’s true. I’m no longer Mormon either, but I had 20+ years of being told that I should have food storage for times of hardship, so I still feel kinda nekkid without it. (Mostly because I can see why the principle is a good practical notion MOST of the time. There’s times where people get food storage and don’t rotate the food in and out and then it’s all bad when they do need it, or they don’t store it properly and it gets wet or moldy. Or they don’t apply balance to the thing and end up with 100 cans of tomato soup, no electricity and no can-opener.)

  105. Given that my entire financial life had to be reset to zero about 5 years ago (a layoff can do that to you), I honestly don’t know if I’m good or bad at this point.

    Finances were never my strong suit, anyway. I’ll work until I die. I will probably never be able to afford to retire. Sort of a grim realization to have at 37, but I guess I’m okay with that. At least I didn’t lose anything else in the last 5 years, and maybe that’s what’s more important.

  106. Vox@76: I think you ascribe more power to the Fed than they actually have. The Fed does not “mandate” a fixed interest rate. They proscribe a target rate and then work within the market to achieve that rate. The inter-day rate actually varies quite a bit (and recently has varied a bit more). When it gets too high, the Fed makes loans at a lower rate to bring it down. When it is too low, they borrow money to bring it up. All basic supply and demand stuff. However, the Fed cannot be on the wrong side of the market’s natural equilibrium rate for too long. At least certainly not on the low side: they’d run out of money.

    The Fed has desperately been trying to pump money into the markets with a low rate to replace all of the credit that has vanished and prevent deflation. You may have noticed that yesterday they just increased the dollar-swap line limits to $620bln. But notice such staggering sums are only coming into play now, as they’re trying to pump back all the liquidity that has drained out of the markets.They didn’t inflate those markets all by themselves in the first place. They can’t do it now.

  107. While this administration did allow wall street to increase the capitol ratio to ridiculous amounts the previous administration pushed for Fannie Mae and other mortgage lenders to decrease credit requirements on home purchases. Both of these things along with quite a bit of main street idiots taking on bad loans helped put us in the current economic state. What can we learn from this? That people and politicians are all stupid, regardless of background or political party.

  108. To all the free market zealots blaming Fannie, Freddie and the CRA:

    It’s the derivatives, stupid.

    The banks have created, amongst themselves, in their completely unregulated shadow market, over 500 Trillion dollars in derivatives. They packaged mortgage loans, auto loans, commercial real estate loans, etc, into insanely complicated financial instruments: derivatives.

    (That unregulated derivatives market exists thanks to Phil Gramm and the Republican controlled congress: see The Commodity Futures Modernization Act of 2000, and the provisions added to it by Gramm. One was the Enron loophole, that allowed Enron to manipulate the energy futures market, the other was to deregulate derivatives. Gee, thanks Phil. Btw, John McCain’s chief financial adviser. You know, Mr. It’s-a-mental-recession, and Mr. America-is-a-Nation-of-Whiners. That Phil Gramm.

    Also, Gramm is the man who brought us the Gramm-Leach-Bliley Act in 1999, which dismantled Glass-Steagal, the last of the Great Depression era protections, that kept banks, investment banks, and insurance separate, to cut down on risk. That also bears hugely in this disaster.)

    Anyway, back to derivatives. To put that huge 500 Trillion dollars worth of derivatives in perspective, the world’s GDP, the ENTIRE WORLD’s GDP, is only about 60 trillion. The entire world real estate market is only worth about 100 trillion.

    Also, in 2004, the SEC allowed certain investment banks to leverage up to absurd levels. From being held to a safe ratio of 12:1 debt to reserves, some banks have leveraged up 30:1 and even 40:1. Lehman was leveraged at 30:1 when it went down.

    From “The Black Box Economy” in the Boston Globe:
    http://tinyurl.com/yr37hs

    “But today, increasingly, a new generation of derivatives doesn’t trade on markets at all. These so-called over-the-counter derivatives are highly customized agreements struck in private between two parties. No one else necessarily knows about such investments because they exist off the books, and don’t show up in the reports or balance sheets of the parties who signed them.

    As the derivatives business has grown more complex, it has also ballooned in scale. Broadly speaking, Das – author of a leading textbook on derivatives and complex securities – estimates that investors worldwide hold more than $500 trillion worth of derivatives. This number now dwarfs the global GDP, which tops out around $60 trillion.

    Essentially unregulated and all but invisible, over-the-counter derivatives comprise a huge web of bets, touching every sector of the world economy, that entangles a massive amount of money. If they start to look shaky – or if investors need to start selling them to cover other losses – that value could vanish, with catastrophic results to the owner and unpredictable effects on financial markets.

    For instance, some financial instruments are built of two or more different types of assets, linking together sectors of the economy that aren’t supposed to move in tandem. In the name of transferring risk – and in the interest of creating an appealing new product to sell to aggressive investors seeking higher returns – a bank could create a CDO, for instance, that packaged subprime mortgages together with corporate bonds. An economist would expect those to move independently, but thanks to a large – and unseen – investment in such a linked package, problems with one could drive down the other. A bad apple can ruin an entire barrel of fruit.”

    Which is what’s happening right now. A relatively small number of bad mortgages are bringing the whole house of cards down.

    More from “The Black Box Economy”:

    “Again, it’s not as though anyone necessarily knows the composition of these structured securities. Nor do they know who has invested in them, thanks to the fact that they have not, until recently, counted as conventional assets subject to the normal rules of accounting. And because they don’t trade on open markets, their values are essentially guesses, calculated by computer algorithms.

    Das disparages much of this as the product of bankers creating “complexity for the sake of complexity,” trying to wow their clients by inventing more sophisticated-seeming investments. “Financial innovation is a magical catch phrase,” he explains. “It’s very sophisticated and chi-chi.”

    “Investment bankers want to make them more complex, so that they won’t be copied, and so that their clients won’t understand them,” he says. “When they ask whether they’re paying the right amount, they won’t know.”

    But when reality comes home to roost, things can get ugly pretty quickly: If an investor is forced to sell a CDO, the onetime price realized on the open market may bear no relationship to the theoretical value generated by a computer formula. That means that everyone holding CDOs can no longer sleep well at night: the same thing can happen to them.

    These risks are magnified, as they were during the stock bubble of the 1920s, by the fact that many of these assets are owned by investors who borrowed money to make the investments in the first place. When a market shock like the subprime crisis hits, it can send tremors through the system with incredible speed.”
    –end excerpt from Black Box Economy.

    As early as 2002 Warren Buffett was warning about the ballooning derivatives market, and said that it had the potential to bring down the World’s financial markets. He was soundly laughed at by the Wall Street boys. Old Uncle Warren! So old fashioned! So out of it!

    Not so funny now, is it?

    And it’s got fuck-all to do with the CRA.

  109. Re: #101, by Vox:

    “There’s the usual political talk, but the salient points are:

    1) the Paulson plan was overwhelmingly opposed by constituents of both the left and the right.
    2) the proposed $700 billion wouldn’t recapitalize the credit markets. Investment banks don’t loan to the small companies that generate economic wealth, they gamble with derivatives.
    3) That $700 billion would vanish offshore as fast as it was handed over to the bankers. Whereas the last time there were repatriation incentives, $300 billion came in of its own accord.”

    I hate to admit it, but he’s right. From the NYT, the ‘restraints’ were that Paulson could spend the first $250B at will, the next $100B could be spent at Bush’s will, and the final $350B was spendable unless Congress blocked it with a 2/3 vote (similar to overriding a presidential vetor), which is pretty close to ‘at the will of the President’.

    In short, no restraints save the laws of the USA (which Paulson’s original version exempted him from). That is better than the original version, but not for practical purposes – the Bush administration’s record is one of sneering at the law and almost always succeeding. And that’s *before* a very large batch of presidential pardons which will come out in January.

    When one looks at the seven years of this administration, giving them $700B on the way out is pretty much just giving them a $700B gift with no strings attached.

    As for the market, well, h*ll yeah it went down. Wall Street was counting on a $700B injection directly into its profit margins, no productive work involved – pure, unadulturated profits. That’s probably equivalent to a few trillion dollars of regular business revenue.

  110. Oh, you mean that Gramm bill that President Clinton signed into law.

    So, where were the Democrats on regulating Fannie and Freddie in 2001, 2003, 2005 and 2006?

    I know where the Bush administration stood, more regulation was needed. And McCain came out for more regulation.

    But, funny, the people getting campaign money from Fannie and Freddie, didn’t want to increase the amount of oversight.

    Home prices started rising faster then inflation in 1995. An artificially inflated buyers market was the cause of that. Legislation caused the buyers market to inflate.

    Plenty of blame to go around, but look at what actually happened, and not just the rhetoric of those trying to cover their butt on either side.

  111. I hate blogs. I never find an interesting thread until it’s as dead as a doornail. That however, never deters me from posting.

    What we’re seeing now, if one can stay out of the weeds, is a sort of perfect consequence to a perfect political storm. Interest rates were held down to lower levels than needed post 9/11 to ensure that the related recession was brief. This drove a huge boom in spending on housing. Wall Street figured out how to make big money on this by coming up with all sorts of exotic ways of bundling mortgage debt to be sold as investments. Along the way, some politicians began to worry that no one understood how all of this worked and on several occasions proposed legislation that would bring things under closer scrutiny. None of the legislation succeeded because devout conservatives didn’t want investment banks’ profits to take a hit and devout liberals didn’t want folks that really couldn’t afford to buy a home to not be able to buy a home. The politicians in the middle didn’t stand a chance. After all, who wants to be a spoilsport in the midst of an orgy (think I nicked that from a Richard Dreyfus movie, the title of which escapes me)? In any case, here we are and in spite of earlier posts in this thread to the contrary, there truly is no such thing as a free lunch. We’ll be paying this tab for quite a while.

    You want someone to blame? Pin it on fat cat conservatives and do gooder liberal politicians, both of whom are too stupid to see beyond their beloved dogma. A list of each shouldn’t be too hard to come up with.

  112. This is an example of why I like the Random Link Button …. 4 years later here are my thoughts.

    1. Unfortunately economic calamity has become a feature of this administration. Not laying all the blame on a single individual, rather the complete dysfunction of this lot of politicians we have elected.

    2. Obama did manage his pet project in the first term. The Affordable Care Act, but it has used up most of his political capital. I don’t see him getting many pet projects in the second term.

    3. Things didn’t get as bad as I thought at the time, but the lows sure are lasting a lot longer than expected and I don’t see an end. This seems to be the new norm. Limping along neither improving nor declining.

Comments are closed.