From Bubble to Depression?

The Wall Street Journal ^ | April 6, 2009 | Steven Gjerstad and Vernon L. Smith

[Puzzleman]

-- snip --

But what sparks bubbles? Why does one large asset bubble -- like our dot-com bubble -- do no damage to the financial system while another one leads to its collapse? Key characteristics of housing markets -- momentum trading, liquidity, price-tier movements, and high-margin purchases -- combine to provide a fairly complete, simple description of the housing bubble collapse, and how it engulfed the financial system and then the wider economy...

[Puzzleman]

A very important article that argues persuasively that monetary policy won't get us out of this economic mess. Geithner's got to do his job.

[rabscuttle385]

*Ping!*

[samtheman]

Geithner's got to do his job.

Which job is that? The planned and pre-meditated tearing down of capitalism?

I think he's doing that job quite well.

[ClearCase_guy]

He’s the best in the business!!

[raybbr]

...but the largest one in U.S. history started in 1997, probably sparked by rising household income that began in 1992 combined with the elimination in 1997 of taxes on residential capital gains up to $500,000.

Can kiss that goodbye.

[stylin_geek]

bookmarked.

[LibLieSlayer]

Pssssssst... do not tell anyone... but we are and have been in a depression... one that will far outlast hussein’s reign.

LLS

[dennisw]

A very important article that argues persuasively that monetary policy won't get us out of this economic mess. Geithner's got to do his job.

Geithner got us into this mess by making the derivatives a lot easier to write
If it weren't for credit default swaps and derivatives this whole mortgage mess would be a lot more containable

Don't ever fall for what Geithner says. He is wired into Wall Street at the highest level

Timothy Geithner, President Barack Obama's embattled Treasury Secretary, ignored warning signs of the impending banking and economic crisis because he, as head of the Federal Reserve Bank of New York, was too close to the industry he was supposed to regulate.

Others saw it coming and the warning signs were there but Geithner missed the signs and ignored the warnings of others.

The collapse of the housing market sent out early warnings but they were lost in Geithner's moves to streamline the banking system to allow Wall Street to make money faster and bypass safeguards that would spot problems.

As the house of cards began to fall apart, those still getting rich honored Geithner and the Fed as a "Dream Team" of financial wizards. In reality, the wizards accelerated America's plunge into a national economic nightmare.

Then incoming President Obama picked Geithner as the man to get this nation out of the economic chaos he helped create.

Reports The Washington Post:

In September 2005, Timothy Geithner made one of his most visible moves as a supervisor of the U.S. banking system. He summoned the nation's top financial firms and their regulators to streamline an antiquated system that threatened Wall Street's boom.

Billions of dollars worth of financial instruments known as credit derivatives were being traded daily, as banks and investors worldwide tried to protect against losses on increasingly complex and risky financial bets. But the buying and selling of these exotic instruments was stuck in a pencil-and-paper era. Geithner, then head of the Federal Reserve Bank of New York, pressed 14 major financial firms to build an electronic network that would cut backlogs and make the market easier to monitor.

Geithner's summit, held at the New York Fed's fortress-like headquarters near Wall Street, was a success. By fall 2006, the new system had all but eliminated the logjam, helping derivatives trade more efficiently. One financial industry newsletter honored Geithner as part of a "Dream Team" for his leadership of the effort.

Yet as Geithner and the New York Fed worked to solve narrow mechanical issues in the derivatives market, they missed clear signs of a catastrophe in the making. When the housing market collapsed, derivatives stoked the fires that ignited inside some of the biggest banking companies. The firms' failure to assess an array of risks they were taking has emerged as a key element in the multitrillion-dollar meltdown of the global financial system.

Although Geithner repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued. That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound, according to interviews and a review of documents by The Washington Post and the nonprofit journalism organization ProPublica.

A confidential review ordered by Geithner in 2006 found that banking companies could not properly assess their exposure to a severe economic downturn and were relying on the "intuition" of banking executives rather than hard quantitative analysis, according to interviews with Fed officials and a little-noticed audit by the Government Accountability Office. The Fed did not use key enforcement tools until later, after the credit crisis erupted, according to its records and interviews

 

[dennisw]

Doom and gloom ping list. Economics and geo-political economics.
Freep-mail me if you want on/off
Free Republic Keyword= doomgloom

[palmer]

Geithner got us into this mess by making the derivatives a lot easier to write If it weren't for credit default swaps and derivatives this whole mortgage mess would be a lot more containable

Yep. Good article, thanks for the ping.

[RayChuang88]

There's one way to avoid a depression: change our tax laws so it encourages savings and investment.

Whether by drastically simplifying the tax code, going to a 4-6% no-deductions flat tax, or going to a consumption tax like FairTax, encouraging savings and investment means ending the incentive to participate in the underground economy or using tax loopholes to legally offshore personal and corporate wealth (I've read that the amount offshored could be as high as US$17 TRILLION!).

Without the incentive to evade or reduce taxes when certain financial decisions are made, it means we can recapture most of that US$3 trillion in the underground economy and bring back most of that US$17 TRILLION sitting in offshore financial centers. This means a GIGANTIC liquidity boost to our financial system, a boost so big that the stock market will promptly zoom through the roof, help recapitalize distressed companies like AIG, Citicorp and the Big Three automakers, defuse the financial time bomb that is Medicare and Social Security and even start to pay down the national debt!

[dennisw]

Thanks
Geithner fails upward every time and gets promoted to ever higher positions

Here he totally messed up the Indonesian economy when he was the US Treasury point man on an IMF rescue-—>>

http://www.smh.com.au/opinion/obamas-economic-saviour-savaged-as-keating-lets-rip-20090306-8rk7.html?page=-1

In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner’s record in handling the Asian crisis: “Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.”

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.
(excerpt)

[dennisw]

A fair tax plus getting rid of the Federal Reserve would free us from oppressive shackles. A fair tax should be a sales tax that you get $20,000 rebated back to you when you present your valid SS number. This would make illegal aliens and other wise guys pay up. It would obviously be a consumption tax so more investment would flow into production and exports than buying inane things like your second 42” LCD TV

This Wall Street/Bankster generated crisis and massive theft from taxpayers took place while the Fed stood idly by because the Fed was in on it. Get rid of the Fed and set up an honest central bank or don’t have one at all

[silverleaf]

Figure out what type of economic action best benefits Goldman Sachs and you will figure out what the US government intends to try to do

[CPOSharky]

But what sparks bubbles? Why does one large asset bubble -- like our dot-com bubble -- do no damage to the financial system while another one leads to its collapse?

One is a natural bubble that the market was allowed to "fix."

The other is a goverment regulation induced bubble that the government is "fixing" with ulterior motives.

[algernonpj]

I have started reading about the fair tax and find it interesting for the reasons you post here.

Illegals would not get the rebate, and would not escape taxes. I also like that the actual cost of government would be completely transparent - no corporate taxes, etc hidden in the price of goods.

[djsherin]

***The causes of the Great Depression need more study, but the claims that losses on stock-market speculation and a monetary contraction caused the decline of the banking system both seem inadequate.***

Austrian theory.

[djsherin]

***One is a natural bubble that the market was allowed to “fix.”***

I don’t see what’s natural about a central bank with a monopoly on money that distorts interest rates by inflation which leads to bubbles i.e. the “boom” (which is inevitably followed by the “bust”).

[unkus]

BTTT

[Camel Joe]

” Geithner’s got to do his job”

I hope he stays the hell out of it, returns the money to the taxpayers and we all suffer a bit till this blows over. Otherwise we are going to be mired in a real depression for the next decade or so. I don't even even believe that WWII ended the last depression, it was FDR assuming room temperature and the end of the New Deal that saved us. In fact that is the only thing I liked about Truman, he didn't pursue the policies of his predecessor.