"Why do people talk about crisis? There is no crisis at all!" That's what my girlfriend comments every time she goes to the mall. There are people buying stuff, just like yesterday, a week ago or a year ago. These times I used to cite different statistics, but she dismiss them as "there were unemployment always" or "it's not in the constitution that GDP can only grow, it's still higher than it was in 1990 and we weren't starving back then" or simply "who cares about those losers who lost their jobs?"
Finally I start to see that she is right. It's not crisis, it's business as usual. After all, there is still money used and not food stamps, there are still cops on the street, electricity in the plug, movies in the theater, food in the stores, people in the mall.
Still, there are headlines everywhere, that the markets have "collapsed" and the world is not the same and all kind of doomsday commentary. There is more or less consensus that the free market idea have "failed" and we must make up something "better".
Well, at first let's define "failed". What was the job that these people wanted "free market" to do? Mostly "progressing everyone". Well, free market failed to do it, without doubt. But anyone who ever opened an economics book could have figured that out decades ago. Free market never meant to create equality or even equal progress.
What happened in the 2008-? "crisis"? It turned out that ... (dramatic drumming) ... that if you can't repay your loan than you'll end up broke. And also that if you give loan to people who can't repay it, you won't make profit or even lose your investment. That's really shocking, isn't it?
What could poor free market do? How on Earth could it save these "victims"? Only by being not free, by forcing them to not take and not give subprime loans. So the conclusion is that people should be not free, or they end up broke because of their own stupidity.
Free market's strongpoint is exactly to get rid of the idiots, and reward those who are skilled. The free market did exactly what it supposed to do: left the idiots with the subprime loans and the idiots who gave subprime loans broken/bankrupt. The situation where such people lose everything is the proper outcome of any kind of fair system. When a bunch of drooling, firedancing, 1000 DPS morons wipe, that's not a bug, and not bad design. That's just them being failures.
By the "crisis", the free market proved exactly that it's working: getting rid of morons. It's discarded and replaced by communism exactly because social people don't want to get rid of the morons.
PS: my doomsday prophecies are not contradicting this post. The "unskilled will lose their job in masses" is not a problem, it's part of the progression of mankind. We don't need morons. The heralded doom will come from the social's reluctance to accept this natural outcome and instead, trying to nerf the world like they nerfed WoW. Too bad that the world cannot be nerfed.
PS2: Don't comment "with banks bankrupt the average guys would lose their deposits, that's a failure". Indeed, but not of the system. Who told you to put your money into a bank that openly loan it out to unemployed punks? Who supposed to check the bank's business plans before giving them money? It was your money, therefore your sole responsibility to care for it. If you put your money into FailBanks, you failed.
Finally I start to see that she is right. It's not crisis, it's business as usual. After all, there is still money used and not food stamps, there are still cops on the street, electricity in the plug, movies in the theater, food in the stores, people in the mall.
Still, there are headlines everywhere, that the markets have "collapsed" and the world is not the same and all kind of doomsday commentary. There is more or less consensus that the free market idea have "failed" and we must make up something "better".
Well, at first let's define "failed". What was the job that these people wanted "free market" to do? Mostly "progressing everyone". Well, free market failed to do it, without doubt. But anyone who ever opened an economics book could have figured that out decades ago. Free market never meant to create equality or even equal progress.
What happened in the 2008-? "crisis"? It turned out that ... (dramatic drumming) ... that if you can't repay your loan than you'll end up broke. And also that if you give loan to people who can't repay it, you won't make profit or even lose your investment. That's really shocking, isn't it?
What could poor free market do? How on Earth could it save these "victims"? Only by being not free, by forcing them to not take and not give subprime loans. So the conclusion is that people should be not free, or they end up broke because of their own stupidity.
Free market's strongpoint is exactly to get rid of the idiots, and reward those who are skilled. The free market did exactly what it supposed to do: left the idiots with the subprime loans and the idiots who gave subprime loans broken/bankrupt. The situation where such people lose everything is the proper outcome of any kind of fair system. When a bunch of drooling, firedancing, 1000 DPS morons wipe, that's not a bug, and not bad design. That's just them being failures.
By the "crisis", the free market proved exactly that it's working: getting rid of morons. It's discarded and replaced by communism exactly because social people don't want to get rid of the morons.
PS: my doomsday prophecies are not contradicting this post. The "unskilled will lose their job in masses" is not a problem, it's part of the progression of mankind. We don't need morons. The heralded doom will come from the social's reluctance to accept this natural outcome and instead, trying to nerf the world like they nerfed WoW. Too bad that the world cannot be nerfed.
PS2: Don't comment "with banks bankrupt the average guys would lose their deposits, that's a failure". Indeed, but not of the system. Who told you to put your money into a bank that openly loan it out to unemployed punks? Who supposed to check the bank's business plans before giving them money? It was your money, therefore your sole responsibility to care for it. If you put your money into FailBanks, you failed.
62 comments:
I couldn't agree more.
I dont agree Gevlon often, but this i do. I just wish more people could somehow "get it". I'm furious when ppl are ranting about recent happenings saying "goverment should stop this from happening, its their fault, not mine. I just took the loan they gave me....blah blah"
Serves them right. I hope their financial problems stop them from making any offsping. Maybe the future is better without m&s breeding....
Do you really believe that the housing market is contained in a nice shiny bubble, and only the people that made or got bad loans were affected?
Tell me, the guy with A+ credit that always pays his bills on time , but cant take that better paying job because he cant sell his house because its now worth $30,000 less than he owes, is he a moron or a slacker? The owner of the local store that had to shut her doors because the customers that frequented her shop all lost their jobs, moron or slacker?
The guy that works in the lumber industry that is no longer employed because new homes are not being built.. moron or slacker?
When you and your girlfriend grow up a bit and realize the world doesnt really revolve around your personal experiences.. try writing this post again.
Well, the only issue is that the govenments have bailed out those institutions that supported the idiots. That means that there is a cost to the tax payer, the sensible fella who makes cash. A the moment, in the uk it stands at £17,400 per person (which makes a massive assumption that all people who should pay, will be able to pay). That's a significant national debt to be recouped through taxation. The us bailouts were much higher, the deficit was historically immence, the bill will be much more.
Well - if he can afford to lose 30K is the new job so well paying? How stupid must you be to not save 30-40k $ if you have a A+ credit ?
And actually all americans are unhealthily occupied with their houses value, their pathetic 401(k) and the jooobs. Nothing can beat a bunch of rednecks shouting joooooobs like a b movie zombie shouting braaains.
For a country that pretends to be capitalist you request way way too much things from the others.
So I guess the smart ones are the sleazy businessmen who saw they were making horrible deals, realized that if they made these deals and got out they'd profit the most? Perhaps you ought to rethink who the leeches are in this situation?
Sorry Gevlon, but I think that the victims in this situation are those that had no way to foresee the fall out. You honestly expect the bank to allow me to oversee every loan they make, or their hiring policies, or their securities? Come now goblin, you know that you cannot expect that.
Don't get me wrong, I know full well that you would have been peddling those loans knowing they were going to fail if you could have, and we all know you would have retired about 2weeks before it got ugly. But even you should know that lying and decieving aren't good long term plans.
From what I know, the subprime loans were packaged into portofolios and sold onto the market like any other stock thus redistributing the debt throughtout the whole world, which only led to global losses. For everyone who bought them and afterwards for everyone who depended on those who bought them.
So, I kinda doubt that those who gave out the loans went bankrupt, or at least they are not the only ones. Hell, you can argue they were all morons, but I believe those traders/bankers who orchestered the whole deal (giving loans and selling them to others) are now pretty safe, some even made money (see Goldman Sacks).
So where does that leave this post?
@ Anonymous,
Understandably the situations you outlined are unfortunate. How can anybody foresee future problems no matter how intelligent they are? However, that is not the problem being discussed. Is it fair? no. But as you know there are no guarantees, so why complain when things don't go your way? I may build a house only to have a tornado blow it over a week later, very unfortunate, but what amount of blame could I lay on others to make the situation right? Could I blame it on the tornado tracking service? Could I petition an increase in storm awareness? Even if I did succeed and persuade others to follow my campaign, would we ever truly be free of disasters? Deals go wrong every day, its part of everyday life. When you invest your money, no matter in what you put it in(house, business, etc...) you run a risk of it not going according to plan. Nothing can change that fact in a free market economy. Bad deals happen everyday, even in a flourishing market, they just happen less often. So yes others are are affected who may appear to be completely blameless but this discussion is not about that, I believe it's about the apparent disregard of personal responsibility, and the consistent perpetuation of a problem that would not be as monstrous as it currently is if not for the perpetrators themselves.
just a note - the first warnings for the subprime meltdown were published at financialsense.com around the beginning of 2005. So how could have anyone predicted it ? With ease. It requires a very little amount of brain to be able to actually discover an unsustainable model. And yes - the precise timing of the crash is a bit harder to pin down. But the fact that there will be crash was obvious. So smart people stayed out. The really smart made money and exited the market early
I can only agree with this post!
And to all of you who feel sorry for yourself or for others about losing job or money ‘because of the “crisis”’:
People getting fired ‘as a result of the “crisis”’ shouldn’t be blamed on bad market mechanics or unfair treatment by the government, financial institutions, or anyone else but themselves. Basically, if you get fired it’s your own fault. I know it’s a hard way to put it, but you chose your own education (or not to get one) and thereby you chose your own job opportunities. You chose your job and you chose how well you perform.
If you get fired because of your own low performance – guess who you have to blame.
If you get fired because of low performance of your company – you chose your job, you chose how to perform – guess who you have to blame.
PS. I’ve deliberately ‘marked’ the phrases like ‘because of the crisis’, because I hear this very often, and I truly believe that when people use this as explanation for their own poor situation, it’s due to losers mentality;
Winners have plans. Losers have explanations.
Just as you depends on morons to make gold in wow, others depend on them in real life. If they go bankrupt who is going to buy your stuff? Will it be your fault for depending on a market full of morons? Can you actually blame them? they are morons, you should have expect the possibility that they will eventually screw something up and go under. Is it your own fault?
"The free market did exactly what it supposed to do: left the idiots with the subprime loans and the idiots who gave subprime loans broken/bankrupt."
The free market did nothing of that sort. It rewarded the greedy morons who wrapped up stinking loans in shiny new wrappings as CDOs with horrendous year end payments. On the other end the hard working (and not so hard working) citizens were left with almost defaulting banks.
In order to prevent a breakdown of the whole financial sector governments worldwide decided to bail out the banks with the taxpayers money. Effectively making the masses pay for the errors of a few wealthy persons.
The citizens were not able to evaluate the risk their banks were taking because it was cleverly hidden in financial products not even bankers did understand. It is ridicoulus to claim that the people were wrong in bringing their money to a bank.
And people can't be blamed for taking negative amortization loans too?
That is the problem - ordinary hard working people took loans that they did not understand and were way above their ability to pay - when a bank offers you a contract - consult with an economist and lawyer YOU PAY and ask if its worthed. If you dont do that - you are a moron. That is the best advice you can get - never sign anything unless you understand it completely. Even the wow ToS.
@ Densu:
First of: I don’t depend on morons to make gold in wow. I depend on my own ability to make good and profitable deals with whoever want’s to trade with me.
Example: I hate farming, but earn almost all my money on crafting. Therefore I have to buy practically all my mats. Why do I do this instead of farming them myself? 1) Because I hate farming. 2) Because I make more gold per hour posting stuff I crafted than I would if I ran around farming herbs, ores, etc. Therefore I rely on good deals on mats. –When prices goes down I buy mats. When prices goes up, I sell mats/crafted items.
And this is where I get to the point: I don’t need to buy cheap mats from morons, or sell my crafted items to them. I buy stuff from whoever is wise enough to undercut his competitor to make himself the cheapest supplier on the AH. Therefore I need to watch trends in market and buy/sell my stuff at the right time. That way, I buy my mats cheap from the wise and wealthy goblins and sell my crafted items cheap to everyone who is wise enough to buy from the cheapest supplier.
If I find myself having trouble with this strategy I always have a second plan – which in this example could be farming my own mats, crafting alternative items to supply other demands or questing to make gold.
- There’s always an alternative to being a loser. You just got to have a plan.
Gevlon I agree that there is no crisis at the moment, but I believe that there was and that we are copping with the effects from it. So no business as usual.
First the crisis.
The crisis was when banks didn't loan money to each other or anybody else, because the risk was to high. Some banks went bankrupt and all the other banks dumped their skelton in that chaos.
Now for the business as usual.
Yes the free market is still working the same way as before, but there has been a readjustment in risk assessment. Meaning that business/persons that were financially healthy before are not necessary now and might not get loans or credit. Without which functioning is impossible for most. And me in situation before crisis getting not the same result as in same situation after crisis when applying for a loan is not business as usual
The businesses that won't get a loan now might be fail-businesses, but some shouldn't be without the crisis. The time in which banks didn't loan to anybody and the time needed to prove that your business is eligible for a loan under the new risk conditions capital reserves where/are drained. I believe service companies with only people are hit harder by this then product making companies, due to no base income.
I agree this was all caused by how the free market works and idiots taking to much risk but the effects are not just weeding out the "moron" businesses/people, but also the very skilled ones.
And to ps2, all banks where loaning to the unemployed punks. And not all directly, so you wouldn't find it in the business plan. Through refinancing loans for banks that do it openly other banks shared the risk of those loans.
I have to disagree with you for quite a simple reason:
what you call a 'free market' was never free.
The US banks were forced to hand out sub-prime loans by the US government (some fixed % of loans given had to be in the 'sub-prime' group for a bank to be able to give loans at all).
So the problem, the so-called 'crysis' is not an effect of free market actions, just the opposite... And the solution, as everyone suggest should be more government regulations?
Please - we've been there and done that, and I wouldn't like to repeat the whole thing.
Salutations from mid-eastern Europe.
Three quick points:
- It is a financial crisis. You failing to recognize that just mean that your contact with the financial world is limited ; however it can be seen by anyone in finance (but who cares about that expect themselves) and companies that require loans to develop through investment.
- You (and your girlffriend in your original quote, and a lot of people here) equate unemployed with loser, that's just plain wrong (in the "not true" sense, not the moral one). That was already a bit wrong before this crisis just because people are less fluid than today's market: when the market change, people should redeploy, but it takes time to acquire new skills and that's when you're unemployed. With this crisis, big companies have to change their plans (because banks cannot afford the huge loans that would be repaid but that they just cannot pull out of their failed credibility), then they fire skilled people more than usual.
- Finally, the aim of an financial system is to provide money to people that need it. Free market is (magically) supposed to be the most efficient (it has been proved otherwise, just check recent economics Nobel prize) people have recognized that for a long time (more than one century), but other people still *believe* that it is so.
The actual system is bound to have crisis like this in a more and more frequent and severe fashion (check Marx, Engels et al. *research* before they propose communism as an alternative: this is held accurate by all economists).
Those crisis are failures of the system. It was known already but the current (nearly past, it seems) financial crisis just brought it again to mass media attention...
Société Générale tells clients how to prepare for 'global collapse'
http://www.telegraph.co.uk/finance/economics/6599281/Societe-Generale-tells-clients-how-to-prepare-for-global-collapse.html
<..>Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan.<..>
This post was a bit simplified but the general idea is one I agree with. The financial crisis was precipitated by two things:
1- The idea that if people cannot afford to buy a home, we can solve that problem by forcing lenders to lend them money anyway. When the predictable defaults begin to happen, then you...
2- Create financial entities that will buy up the defaults and guarantee that the lenders are not stuck with them.
But #2 is just another version of #1, and both ignore a basic economic reality-- THE MONEY HAS TO COME FROM SOMEWHERE. It doesn't come from some endless well of money (the government could certainly print money endlessly, but that doesn't solve the problem, it just makes it much worse). And so at some point you will run out of money.
But just to make things even worse, financial houses created a market for those bad loans and started to leverage themselves far beyond their capability to recover from. The potential for profits meant that these otherwise intelligent people did very very stupid things, such as risking amounts of money that would lead to the bankruptcy of their companies.
And what did the US government do when the bottom fell out? Promised to provide more money to bail these idiots out. In other words, the little guy is allowed to fail for his stupidity, but the big guy, whose actions are far more damaging to the country as a whole, gets rescued... with taxpayer money.
Who pays in the end? I do, because I still have a job and an income level where I pay taxes. I am asked to pay for Joe Stupid who bought a house he could not afford, and for CEO Joe Moron who bankrupted his company by making really stupid bets. They may be the failures, but I am the sucker.
This is what happens when government intervenes in the markets. They screw everything up even worse than the M&S can.
The banks gave bad loans only because Bill Clinton forced them to, so it was not the market that failed, it was politicians that made it fail by interfering with it. If the marked had been free there would be no crisis, and still people scream for more interferences in the market (socialism).
The "crisis" can be blamed entirely on Bill Clinton for forcing banks to give loans to ninjas (No Income, No Job no Assets). and on George W. Bush, for not changing that law when the consequenses of it became obvious to everyone.
100% agree, Gevlon.
But a little correction.
We are not in the MIDDLE of a crisis. We're at the beginning.
Our so calles "boom" right now is what Ludwig von Mises called the Crack-Up-Boom.
It's the escape in material assets before the Hyperinflation rises.
The FED is buying US Treasury Bonds these times. That's nothing else than money printing.
The problem here is, that the majority of US Debts is holden by foreign countries.
Once they are losing their confidence in the leading currency the Dollar sale out begins.
With the Dollar downfall the Euro struggles too.
Welcome to the Hyperinflation.
There was only one Professor who claimed that there is gonna be a crisis soon and no-one believed him.
I really like reading your posts. You are a smart guy, but sometimes you have no fucking clue and you rather should write about different topics.
Just explain me why we in Germany should suffer from the failure in the us? Why should people suffer although they had enough money to pay their rent/house whatsoever but lost their job and can't find a new one because the whole industry collapsed. The big concerns got a lot of money from the state but the medium-sized suplliers didn't get any help and had to close their firm.
People don't buy stuff because they're unsure of having an income ... and people lose their income because people don't buy stuff, which in turn leads to people not buying stuff, because all the news of people losing their jobs is making them unsure of having an income ...
Its more a crisis of trust, then anything else, caused by greed, and the people responsible will never be caught while others take their fall ... aparantly being a goblin IRL works :-D
Anon said: "The "crisis" can be blamed entirely on Bill Clinton for forcing banks to give loans to ninjas (No Income, No Job no Assets)."
@Anon: Let's see the numbers to back up your statement.
I've heard this argument from Ben Stein. While I do not know what the tipping point that pushed the economy into a 'crisis' I would like to see you, or Ben Stein, publish the numbers that show - without any doubt - that at least 50% of all mortgage defaults were from borrowers who only would have received a loan as a direct result of Clinton's policies.
/tap
It would be great if we could just say that people made their own bed by acting stupidly, and it's not a crisis if they have to sleep in it. The free market will teach them a lesson about making good decisions, and the rest of us can go about our business.
Except economics doesn't work like that, not even a little bit. If stupid people go broke trying to repay back their ridiculously huge mortgage, they aren't spending their money on other things, so other businesses are losing out on that income. If FailBank goes under, or even stops loaning out as much money, because they made dumb loans, then the credit supply tightens up, making it harder for even smart, hard-working people (and businesses) to get credit to do things like buy a house or grow their business. Even people and businesses who made good decisions are affected by economic problems of others.
Now the "crisis" is definitely overblown in the media, but to suggest it isn't a problem as long as you personally make good decisions doesn't make sense given how our system is set up.
I know not fully explaining my viewpoint is considered M&S. While crisis may not be the correct term, there is(was and is now slowly ending) certainly a recession.
My only example, as it pertains to my profession, is civil projects. Civil projects like; new roads, office buildings, power plants, the stuff you find here http://en.wikipedia.org/wiki/Civil_engineering.
These projects have seen a decline, less infrastructure was being created/upgraded in all countries. Projects are starting to reappear slowly, first in larger/economically strong countries, and now also in smaller third world type countries.
"It turned out that ... (dramatic drumming) ... that if you can't repay your loan than you'll end up broke. And also that if you give loan to people who can't repay it, you won't make profit or even lose your investment. That's really shocking, isn't it?"
This is so wrong. This only happened for normal people. The big people got the government to pay their debt. Many banks gave money to people that couldn't afford it. Many banks got money from the govt and made a profit from it.
The crisis is that the normal people lost big. Stupid people at top are in panic and laying off at a record pace and not replacing jobs. Real unemployment also known as underemployment is now almost 20%.
So while it may look like everything is fine look at your companies' revenue statements. Its probably down.
I'm getting tired of this. Gelvon you need to realize that we don't have a free market and those at the top can take stupid risks and get bailed out. While normals have to pay for their stupidity.
Please call the real M&S morons and lay off the normal people.
I wish it was like that.
The Free market also seems very quick to bailout the Slackers & Morons who made the bad loans in the first place.
Every captain of industry was all for "the Free market" until their business was threaten. Then their mantra change to the Government needs to intervene to save us.
Repeat after me: The Plural of Anecdote is NOT Statistics.
While you and your girlfriend may have jobs, statistically speaking many more people are out of work than before.
Also the crisis is because the banks and institutions that failed aren't isolated facets of the economy. If you read history the bank failures were a giant part of the Great Depression. Things are interconnected, when big enough institutions fail, their debris can take out sections of the economy and weaken others, perhaps enough to cause them to collapse.
To use the WoW analogy, those 1000DPS slackers were not just in a raid by themselves, but scattered throughout everyone's raids. So when they trip up and stand in the fire, everyone's raid wipes, not just raids full of M&S. Proper regulation would allow them to die while not jeopardizing the raid by letting a chain lightning to wipe the raid.
This would be true, if only the idiots got laid off. Turns out, because of the political environment at a lot of places, a lot of M&S get through and hard-working, able bodied people get laid off.
Then you have more people applying for positions than before, and good people are competing against other good people, so someone who is a smart/hard worker won't get the job.
Saying that only idiots get laid off and stay unemployed is ignorant.
The semiconductor industry was down about 80-90%. This is an industry where almost everyone is a PhD. Do you really think all the people who got cut in this field were idiots? Do you really think they could just get a job somewhere else with a specialized PhD?
What angers me is we now have to pay for the rest of my life for sll the "help" everyone but myself is getting. Oh so I might of got a "recession check" but in all honesty is that worth the extra 100 grand I have to pay back in the next 50 years? Give me the choice and I wouldn't have taken the money...
If you are smart enough you can lend job as anything. Come on - if you have Phd to know exactly how much atoms the SoI transistors are thick and have figured out the most advanced things in lithography you should be able to learn how to administer network or program in about 6 hours - take or leave few minutes. Php and java take another 17 minutes top. So you are qualified for almost anything IT related. And IT is hiring big time now.
If the "market" worked, why...
1. were Goldman and Morgan Stanley allowed to convert from private/investment banks to bank holding companies virtually overnight?
2. did FDIC protection cover money market accounts?
3. did the US government assume control of AIG and honor all of AIG's obligations fully? (Paying off to Citi, BoA, Goldman, etal.)
4. didn't AIG go the way of Bear and Lehmann?
5. was TARP passed?
There has been incredible intervention into the "market" by the government and my guess is that many M/S were spared bankruptcy and unemployment because of these measures.
These same measures probably prevented a more dire catastrophe. So here is a question, should the government *NOT* take the above 5 actions? Should the market have been allowed to "work" unfettered of government interference?
This pernicious idea that the financial crisis was precipitated by banks being *forced* to lend to sub-prime borrowers is a pile of hogwash that has been debunked a thousand times over.
The community reinvestment act only applied to a set of banking institutions that weathered the storm far better than the rest of the financial universe. The set of loans involved under that act had much lower default rates than the sub-prime universe as a whole.
Most of the problems in subprime came not from poor people getting a leg up, but from investors who overstretched. No goverment was forcing anybody to loan to these guys.
Fannie and Freddie were late to the subprime market. In general the worst examples of liar loans had nothing whatsoever to do with any bank which had any particular extra obligations about who they had to loan to.
Secondly, the subprime crisis was going steady for almost a full 2 years before the economy tipped into a bad recession (the US recession is dated from Dec. 2007, but the first quarter of significant negative GDP growth is Q32008). But somehow the economy was able to absorb all that with nothing more than a mild recession (there was debate whether we were even in a recession during late 2007/early 2008 -- the Dec. 2007 date is not called by NBER until the summer of 2008).
What brought the system to its knees in late 2008 was *not* the subprime problem directly, but the absolutely insane number of *bets* that had been made on it, combined with a monetary squeeze. The notional value of all the derivatives on mortgage contracts was many time larger than the size of the entire mortgage market. So the problem is that we built this web whereby joe schmo defaulting on his mortgage did not merely lose 100k for Joe's bank, but caused gains and losses of a few million on other securities related to his mortgage that neither joe, nor his bank had anything to do with.
So we have more and more of these huge notional derivates transfers piling up, and then in late 2008 as people wake up to the potential for issues, money tightens *drastically*, and the fed either doesn't see it or doesn't care and does absolutely nothing for months. Suddenly, instead of low inflation expectations, the market has expectations of *deflation*, which has hideously perverse effects on debt valuations, and creates a vicious cycle which threatens to take out not just people with particularly precarious and imprudent debt positions, but any significant debt position at all.
That's why you get the stock market crash in October2008- March2009. And the market comes back in 2009 because we appear to have just barely averted the great depression like deflation/debt spiral.
Gevlon, you need to ask yourself -- what set of facts would cause you to change your assumption that unemployed == moron/slacker, that the verdict of the market is always 100% just and there is no luck at all, no matter whether we're in a recession or a boom. That 6% of people who are unemployed now are morons, but early last year they were smart and productive, and 1-2 years from now when they are back to work, they will be smart again.
It makes no sense. There are forces in the overall economy that matter.
Gevlon you are just EVIL.
BRB, suscribing to the communist party.
anyone who thinks that the US economy was unfettered or truly a free market doesn't appreciate the extent that regulation a) existed well before our current economic woes and b) was more than a little responsible for inducing said woes. not to say that a textbook free market wouldn't have it's own problems, but blaming free markets for today's economic 'crisis' is either ignorance or stupidity. neither is a good excuse.
you might be able to make a case that a lack of 'oversight' of the regulations was to blame, but whose fault was that? the same people trying to spend their way out of it (and to re-election).
The real failure is intrest. America and the Uk owe more money in intrest alone that EVER existed!
Example. If $10mil existed in the economy in total, then intrest would eventually bring the figure to above £10mil. Where does the money intrest is charge get printed?
In the form of new lons. Thus bankrupcy is a natural part of the process.
Anyone who thinks that "all the people who lose their jobs because of the credit crisis have no-one but themselves to blame" clearly have no understanding of the ecomony.
Roles are made redundant, not the individual, and whilst organisations will often look to redeploy good members of staff elsewhere, it is not always possible.
That is no reflection of the individual in question. If you are a farmer and your farm burns down, you are likely to become an ex-farmer. Doesn't mean you were bad at it. Same with accounantants, same with bankers. To tar everyone with the same brush makes you look silly.
I imagine the majority of the people making these comments about redundancy work in industries where they will always be a need for them and have never experienced a recession (flipping burgers?) because in the real world, it is not just the poor workers who are made redundant.
Did you loan that last guy in Ironforge the 15k gold he needed to get his motorcycle mount? No, you probably didn't. Why do we loan people 3-5x their annual salary to buy a house they can't afford?
You can really tell who is actually in the investment/banking field by the comments. I showed this blog to a friend in the field. We both had a good laugh, very entertaining.
Luckily im so broke that every dollar that goes into the bank is gone by the end of the same month. So I... win?
@Daniel
"If you are smart enough you can lend job as anything... So you are qualified for almost anything IT related. And IT is hiring big time now."
This is incorrect, unfortunately. I take it you haven't actually been applying for IT jobs? I work in IT and have been applying for the last six months (fortunately I have a job already, I'm just looking for another one). It goes a little like this :
Them: "Do you have professional experience in *specific language that can be learned overnight*, for 3 years or more in a large project?"
Me: "Well, no, but learning a new language is trivial."
Them: "Oh nevermind, we have a more qualified candidate."
Saying that someone can get a job in IT right now just because they're intelligent enough to easily learn what is needed to do the laughably easy work out there is patently incorrect. Hiring managers and recruiters in IT are paid to look for who has the biggest "professional experience" numbers and I guarantee they do not give a shit about an advanced degree if you have zero experience. I graduated from a top-50 school with a degree in computer science and have spent the last 3 years learning and using bleeding-edge technology on a daily basis. What chance does a guy with a non-related degree have?
Have you not heard the stories about unemployed MDs and former business owners and PhD's standing in line for entry-level clerical jobs? Or hiring staff refusing to hire "overqualified" personnel because they're worried the person will leave the first chance they get (an idiotic viewpoint - while true that they will leave, highly skilled people still add value for the time they work for you)? They aren't anecdotal, they are the base reality of the situation.
As for the 'hiring like mad,' close examination will show that the hiring goes in delayed spurts along with the stock market. Stocks go up, everyone is hiring. As soon as someone in finance notifies the big bosses that despite the market going up, nobody is buying their products, hiring stops. This repeats over and over again, because it still hasn't gotten through that the current market has no basis in reality (High Frequency Trading and direct infusions from JP Morgan on direction from the Federal Reserve are what move the market up ATM, not any actual recovery). The ratio of contract vs permanent positions is off the chart, too - part of the reason why it's so hard to find a job without the *exact* experience requested.
It's also really hilarious how many people here think that the piddling amount of forced sub-prime loans caused the fallout. It may just be me, but I always figured the major financial institutions leveraging themselves at upwards of 50x might have had something to do with it - at this point you only need to lose 2% on your investment to become insolvent. As another commenter noted, there have been extensive and thorough warnings since 2005 from several sources about exactly what was going to happen and why, and it was ignored over and over again. The people warning of a bubble and subsequent crash were laughed off of Fox and MSNBC by the financial "experts" who now claim that "no one could have seen it coming." Yes, no one could have seen it coming - except for you know, anyone with a basic understanding of what was occurring, who possessed even a modicum of common freaking sense. Don't let your fund manager or your financial advisor fool you - the majority of economists are short-sighted fools who follow broken "laws of economics" that are based on sixth-grade algebra. They couldn't see it coming because in the finance industry, you are meant to simply mimic what everyone else is doing, because if you're following the herd and the herd gets burned, everyone says "oh no one could have seen that coming," whereas if you break from the pack and get burned, you lose your job.
Take a wild guess which economists are being listened to right now. Here's a hint - it isn't the ones who saw it coming in 2005.
As an aside, why is it that a bank can say "I have $1,000 in assets, so I can spend $50,000 (this is what I refer to when I say 'leveraging', in this case 50x)" and then not be held accountable when creditors come asking for more than $1,000 from them? I believe that if I tried to purchase $50,000 of things and not be held liable for more than $1,000 when my purchases dropped in value, people would come to take away my material belongings, and I might be charged with fraud. When a bank does it, they get a bailout to cover the gap.
[sarcasm]Gee golly, do the rules change when you have enough money to buy congressmen?[/sarcasm]
Sub-note 2:
Many of the people who claim that they "did not see it coming" are lying to you. What they mean is "I knew it was going to blow up in our faces sooner or later, but it was more profitable to take part in the orgy than to stay out on principle." Even at the consumer level, for the last 5 or 6 years the mantra has been that "real estate never goes down in value" and that you were stupid if you weren't in the process of buying a new home - er, pardon me, I didn't mean home I meant "investment property." The people responsible for the meltdown weren't evil, they were doing what was most profitable - obeying the free market. They're lying to us all now about "couldn't have seen it coming" because they don't want a mob with pitchforks and torches at their front door just because they did what was most profitable.
You can't claim that the free market solves everything and then bitch when it backfires, and yet that's exactly what is happening.
Not everyone who has financial problems is irresponsible.
Companies with financial problems lay people off. Sometimes those people struggle in an extremely thin job market trying to find something. They run their savings dry and then wind up in debt while trying to pick up the pieces. Sometimes they'll take a job that pays half as much as they made before. They wind up with debt.
Being laid off is when someone is let go even if they've done nothing wrong because their company can't afford to pay them anymore.
The problem is that you are only seeing part of the issue.
The crisis is due to wholescale FRAUD commited via legal means.
People never put their money into failbanks. All banks failed - the only survivors are those who got bailed out with"welfare"
I never bought into the whole my house is an investment vehicle thing... I bought my house 'cause I wanted a place that I can live without being at the mercy of random landlords, I bought my house so that my family can have a hearth to tie to, I bought my house so that I can get more of my hard earned income back from taxes, and I did not buy my house in hope of making money off of the ever inflating market (it ain't inflating no more).
It's rather interesting to see how people convinced themselves that the market can infinitely increase in value without the baseline also rising in step.
If this were just a case of people defaulting on loans you would be right. Unfortunately this is the failure of stupid. People created financial instruments so complex and fluid it is impossible to account for their risk and value under current economic models.
As an investor, the people selling me the instrument can't tell me anything about the investment except buy this and get rich and I am supposed to look after my money so I buy it. Unfortunately the instrument in question is dependent on a broken business model (every night I borrow millions of dollars to pay back the loans I took out yesterday to cover the bills I had to pay today.) Would you like to explain how this works? Because it looks like a recipe for disaster to me.
Add to this that private equity firms (the same guys who were the villain in the 80s film "Wall Street) not the same con, the same guys, borrow a crap ton of money, use that money to buy a company, gut anything that will allow long term growth and then pay back their debt with short term profits and flip the company to the next private equity firm.
Any ideas on how the market is supposed to survive that? You can't innovate because people don't care about innovation, only profit. When the current well dries up they abandon it and buy another.
There is no free market. They system is broken because there is no free market. The government in the US and around the world went from being a defender of the market to a defender of businesses. A huge difference, which your analysis completely ignores.
Quote from a New York trader involved in this mess up to his neck (quoted on Market Place, a business focused program on NPR)
"Of course we know this is bad, but it is so big the government will have to bail us out, heads we win, tails they lose, great isn't it?"
You require a vast amount of data and education before you speak to this problem.
@Ian - the comment about warnings since 2005 was also mine.
But still - on IT - if you are looking for an fortune 500 job - yeah it will be hard. But there are always startups, small companies, contracting work and freelancers - its enough to get by even if the money aren't that great.
The problem is that when people change jobs they don't want a job, they want more money then my previous job and no decrease in the standard of living.
Btw - here is a golden rule of mine - never apply for a job in any company that has HR department. It serves me really well in the 14 years of experience I have at the industry. I prefer really small companies where I can communicate directly with my boss.
Gevlon, you are literally suggesting mass worldwide starvation in the name of "survival of the fittest"... do you honestly think this wouldn't negatively affect YOUR life?
I am a long time reader of this blog and though I reckon I overall agree with Goblinism, I had some eyebrow lifting while reading this last post:
Objection number one: Banks made horrible investment choices yet they get taxpayers money to cope their losses and be able to lend again. The message sent is clear: if you do awesome investments, you keep all profit. If you do horrible business, Father Gob will pay all and let you carry on doing as ever. Banks on the verge of bankruptcy are already behaving the very same way they used to before the crisis. No lesson is learnt unless it costs you your own money.Which it didn't.
Objection 2: Having your hard earnt cash in Failbank doesn't make you a moron if it wasn't such a failure considering all the information you had at the time when you made your deposits (namely the fact most banks got tripe A ratings despite the fact they were overburdened with "toxic" assets). If top notch economists didn't see it coming, let alone the typical housewife or average bluecollar. That was a hell of an example of asymetric information regarding financial markets, and some evilness that allowed rating companies to rate their own customers (which leaves results way far from desired...how the heck are you gonna be independent when you get paid for NOT being honest? Or worse...rate your own financial products outright!).
Objetion three: in some countries (if not all, I'm talking just from my own's point of view) banks sold extremely complex (and risky) products to small entrepreneurs and tiny investors without telling them what they were purchasing. Some derivatives were sold as fixed interest deposits with anualy coupons, instead of market-linked swaps and option contracts like they should. They had hope the boom would never end, so they thought they'd get away with such lies. Some banks went even further: when said products went up thanks to a rise on the market, they cashed in the difference between contracted interest rates and actual revenues in their favor. When it started being the other way around, they terminated contracts, and asked for collaterals to cover "expenses" and "net losses" on a product that was never adquired as nothing else but "widow paper". It worked for banks till it stopped working.
This so called crisis reminds me some really old money hypes in the past, since this one is far from being a new thing: every so often world economy turns upside down (since Tullipmania back in the 17th century in The Netherlands, with the advent of modern stock exchange markets as we know them).
People that don't read history books are doomed to make the same mistakes over and over again. And it's not that everyone is stupid. Some people do tons of money every single time one crack pops. The key to success is leaving the sinking ship first.
If you think this is far from the truth, read the newspapers: 99% of high ranking managers and CEOs of bankruptcy or near it companies got away with armored contract terminations, millions in short term option and stocks sales, and golden retirements. How many will go to jail for what they did? I doubt any will...
Very good post. It's a touchy topic, I suppose if certain things touch you it feels more like a crisis. Say you lost your job, it's tough finding another one in a lot of places now. Finding a good one can be quite hard in some locations. However for those who haven't it's business as usual.
@Daniel,
Are you currently in the job market? Are you aware that even these start up companies are receiving HUNDREDS of applications when they post entry level jobs of any sort?
I was recently interviewed for a position in the service center of an auto dealer (because they were the ones to call me back, after sending out mountains of resumes, and making tons of phone calls)... the man doing the interviews was painfully honest. He had 125 applicants for the job that paid $8.50/hour and nearly a third of them had Masters degrees.
Before we go using a broad brush to paint over everyone getting the short end of the stick, you might want to consider REALITY a little more clearly.
I lost my job because of events so far away from my own life that there was no way I could see it coming or do anything about it. (No, I don't have loans, was not involved in any kind of loan fall out.)
Somewhere up the line a Doctor made bad choices - who knows what happened in the chain of events before it reached him. The doctor goes out of business. Well, now, my company loses a client. We lose a large portion of our income, which means less to pay employees with. (this happened with several clients, obviously)
Why was *I* fired instead of someone else? I was a newer hire. It had nothing to do with my job performance (which was reviewed highly), it had nothing to do with my education (which was higher than many in the company). It had everything to do with "We have to fire X number of people, how do we do it?"
It's commonly called "last hired, first fired."
So, while I agree there was a lot of stupidity and lack of foresight leading up to this "crisis"... you cannot broadly say that everyone who lost a job is at fault or had ULTIMATE CONTROL over what happened to them.
If you really believe that, you don't understand much of how the world really works, and I can tell you've NEVER been a 'victim of circumstance'. (Note, being a 'victim' doesn't mean you sit around and whine and cry about it - it means something happened to you that wasn't your choice, and was something you couldn't stop.)
" Well - if he can afford to lose 30K is the new job so well paying? "
Well in my case I'm guessing it lost around $200k (I haven't had a real appraisal done, but I think that is what the county decided when it lowered my property taxes). This isn't a case of me foolishly picking an overly costly house either, I picked a pretty inexpensive house for the bay area, in fact amazingly inexpensive.
It is unlikely I'll find a job with a $200k raise, so I'm going to be staying put. Fortunately for me the bay area is currently where the majority of good jobs in my profession are, and also fortunately I like my current house, and have no real need to buy a "better" one.
As it turns out renting would have been far better for me, but it didn't look that way six years ago. Also it is very hard to find rental properties that let me have lots of dogs (which I acquired in VA when I had 4 acres, for pretty dern cheap). So while I can look back and see a better choice, I can't look back and say there was a better choice with the information I had at the time.
Hopefully by the time I want to move out prices will have recovered enough that I'll be able to.
@Gnome: "This pernicious idea that the financial crisis was precipitated by banks being *forced* to lend to sub-prime borrowers is a pile of hogwash that has been debunked a thousand times over."
You are right, I shouldn't have used the word 'precipitated' where I did. Those actions simply created the foundation for what would create the bubble (financial houses making extremely risky investments and leveraging themselves to outrageous degrees).
To those saying that the crisis caught 'experts' off-guard, there were some people (Peter Schiff comes to mind) who were warning that the bottom was going to fall out of the real estate market and that it would lead to a bad economic downturn. Until 2008, those people were mocked for their views.
And people accepted it, because we never want to hear that kind of warning, even when it's better to do so.
Gevlon,
Unemployment is a problem even for the unemployed, and the consequences do not scale linearly as unemployment increases; they accelerate.
If I lose my job, hopefully I have savings and friends to get you through the rough time until I find another job. If, however, my friends are also unemployed and finding a job takes longer than expected, I may be in a difficult situation. People in difficult situations tend to make decisions that aren't always good for those around you. Maybe I need money and you have some. Maybe my friends need some money too. That's not a situation you want to be in!
This may not be the case in the current economic situation (at least in my area, employment has been stable), but the general rule you are proposing is, in my estimation, not true.
Look, Gev, as much as I enjoy it when you spout completely self-centered, unsupported, incorrect, and foolish rants--can we at least keep them to World of Warcraft? I feel like you're kinda fishing for comments by talking about the real world recession and stuff. I want to go to a money making blog to learn about making money. I don't want to know why you and your girlfriend don't believe that there's a recession. I don't particularly care that you haven't lost your job, or that you don't know anyone that isn't paying $450,000 for a house currently worth $320,000.
And I'm just going to touch on these points real quick:
1) The argument that "unemployment has always been around" is silly. If twice as many people died of some disease this year as two years ago, doctors don't say "well, hepatitis has always been around" they say "what the hell is happening? jesus christ this is a crisis!"
2) Saying that the gdp is higher than it was in 1990 doesn't account for the significant increase in population over the past twenty years, nor the insane increase in defense spending. Not everyone has defense jobs. Look at California's education... people are rioting because the statewide university system is increasing tuition costs by 32%--and remember: if California became an independent country, it would be the 8th strongest economy in the world.
I admit that having to bail out wall street and banks is ridiculous, but that's because I believe it's even more ridiculous that our country depends so heavily on them. Though I enjoy capitalism, it has a nasty tendency to spawn the greed that so ruined our economy. If we, as a country, moved in a more socialist direction, this likely would not have happened to such an extreme degree, because people wouldn't lean on banks and loans so much. No loans and banks and debts in world of warcraft = no financial crises in world of warcraft...
...except the one where the WoW economy bloggers refuse to talk about the wow economy, instead talking about 1000dps "M&S". Another guess what: I don't care about thousands of 1000 dps M&S. I care about making thousands of gold.
So many opinions, so no one will notice if I sprout mine.
Saving money with banks is risky. Yes its a very, very small risk but it still exists.
Buying a house is risky. House prices do not always go up. If you take the risk that a decline in house prices is going to financially ruin you you made a bad decision (or at least a risky one). If the value of your house is less than what you paid this is only an issue if you are forced to sell. House prices will not be permanently depressed by this 'crisis'.
The main crisis here, to continue an over use of this word, were a crisis of trust re:interbank lending (as someone pointed out above), a crisis of the mass media (but they lurch from crisis to crisis thankfully as they a great souce of wealth) and a crisis of capitalism (the banks should have been allowed to fail).
From an investment point of view, as Daniel pointed out, there were warning signs at least 12 months before this became an issue on Wall Street.
Finally I don't follow how losing your job automatically makes you a M&S. Can you elaborate?
Gobble gobble.
Tell the five year old girl sleeping in the street she deserves to be there because her daddy was a moron. Seriously, bad financial decisions impact on more than just the stooge who made them.
I agree that the responsibility falls on the people who invested their money in FailBanks. But you have to trust in people and in companies to make your life work.
Sure, you can gather info on the bank you're investing in. But what if that info is not readily available? What if it's secret, or what if the board/CEO is untrustworthy? How can you know these things?
Even if you CAN know these things, who will bother? If I'm going to analyse banks, then why shouldn't I analyse the food I buy from the stores? After all, they could be poisonous. Or some malignant moron at the farm might label out-of-date meat as okay.
Going further, should I inspect my car's engine? Should I open it up and then put it back together just to see if there's no faults in it? Or how about computer processors. Why shouldn't I check if they're faulty or not when I buy them?
Gevlon, I agree that in the end you're responsible for your own shit. But the companies are responsible too, since I'M hiring THEM to not fuck up. Putting all the blame on the people is ludicrous...
Anti-socials don't blog.
Did you ever happen to come across the idea that the word crisis was invented as an opposition to the term "business as usual"? Now what do you think saying the crisis is business as usual qualifies as? Utter moronism? Do your really believe bilions of dollars all over the world go down the drain because some dudes from Alabama cant pay their loans? Utter moronism? Want some more? Have you ever thought about why unemployment keeps rising all over the world? Are we producing more morons overall despite better schooling, the internet and stuff or maybe its another case of you being a moron? What do you think?
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