The 2008 Economic Crisis

[Brandan Kraft]

"The crisis of the abuses of banking is arrived. The banks have pronounced their own sentence of death. Between two and three hundred millions of dollars of their promissory notes are in the hands of the people, for solid produce and property sold, and they formally declare they will not pay them. This is an act of bankruptcy, of course, and will be so pronounced by any court before which it shall be brought. But cui bono? The laws can only uncover their insolvency, by opening to its suitors their empty vaults. Thus by the dupery of our citizens, and tame acquiescence of our legislators, the nation is plundered of two or three hundred millions of dollars, treble the amount of debt contracted in the Revolutionary war, and which, instead of redeeming our liberty, has been expended on sumptuous houses, carriages, and dinners. A fearful tax! if equalized on all; but overwhelming and convulsive by its partial fall.

Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper, as we were formerly by the old Continental paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burthen all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs. Prudent men must be on their guard in this game of Robin's alive, and take care that the spark does not extinguish in their hands. I am an enemy to all banks discounting bills or notes for anything but coin. But our whole country is so fascinated by this Jack-lantern wealth, that they will not stop short of its total and fatal explosion."

~~Thomas Jefferson to Dr. Thomas Cooper, 1814

I fear we're heading for a major recession - how bad will it be?

[Brandan Kraft]

11 reasons Bernanke's recession lasts till 2011

[Bob Martin]

Good Post.
Most of the Armenians I talk to, predict millions of people coming to Christ in the next decade. Interestingly, these same people don't believe that we are in financial trouble as a nation. Probably because their "prophets" are calling for peace.
A good financial read on the coming doom is: "Empire of Debt" by Bill Bonner and Addison Wiggin. They predict this to begin by 2011 and end by 2025. My personal observation is that we are a couple of years ahead of schedule, at least on the beginning date. No christian should be in debt!

[Robert R. Higby]

Good post from Jefferson, the situation sounds just like today! As it does with so many quotes from the wisdom of the past.

I answered "like the 80's" because that is the cycle of economics we are in; the current situation is parallel to the Fed monetarism that occurred during the Ford and Carter administrations. What is going on now is far worse though; the 'bang' to be gained from a monetarist policy is going to be far less significant and more short lived than it was in the late 70's. This is because the situation with the Federal debt is infinitely worse than it was then.

The next deep recession is probably a maximum of about 2 years away.

Here is the cycle:

1. The Fed, fearing a recession and also that the government won't be able to pay its bills, unleashes the availability of money in spite of inflationary pressures. The current policy started in 2002 but has escalated severely in the last 6 months.

2. The dollar is devalued against foreign currencies, causing a flood of speculative investing against it. This (nothing else) is what has resulted in 102 dollar oil, gold of 975 dollars an ounce, the commodity price explosion, and current inflation. The government has deliberately under-reported the true inflation index for years by taking things out that will make it high.

3. For a time, economic activity continues as if things look pretty good. Buying and selling continues at a healthy pace. To counter-balance the inflation, people start to get raises again at their jobs. Salaries go up. However, the increased income merely protects temporarily against some of the price increases.

4. Then stagflation sets in. The inflation gets out of control and forces interest rates up just to keep pace with the falling dollar. Economic growth is halted. Companies and businesses tighten up the purse strings on hiring. But the inflation still does not stop.

5. To stop the inflation, the Fed is forced to reverse course on monetary policy and severely raise interest rates--in spite of the consequences this will bring to the economy. As a result, years of recession set in. Forget about buying a home unless you can pay for most or all of it in cash. You may or may not keep your job, depending on how much your employment is tied to the economic cycle.

What is different this time is the severe Federal debt, which of course will deepen many times faster during the coming recession. Bankruptcy (default) will come by the middle of the next decade. There are differing views on how this will impact the long-term economy. Some think the private economy cannot survive at all without the hooks of government; I do not hold that view. In the very long term, bankruptcy is the best thing that can happen to our Federal government. It will finally cause a situation where the debt ceiling can no longer be raised. The politicians will finally be forced to make the tough decisions on spending because they will no longer be able to borrow money.

[Brandan Kraft]

I voted "Bad like the one in the 70s."

[Brandan Kraft]

http://www.sunjournal.com/story/2542...ar_to_the_70s/

The 1970s are remembered for an inflation spiral that triggered sky-high interest rates that dwarf today's levels. The days of Richard Nixon, Gerald Ford and Jimmy Carter also saw gasoline costs surge, like today, but back then the costs consumed a higher proportion of total household spending, Allsbrook said.

That doesn't mean today's economic picture looks rosy. Last week, a report showed consumer prices have risen 4.3 percent in the past 12 months, the highest rate in 16 years.

"I do expect growth will disappoint and inflation will move higher than today's levels," Allsbrook said.

The direction of today's economy, hobbled by the subprime mortgage fiasco that produced billions in losses for banks and triggered a wave of home foreclosures, has become the focus of an intense debate over whether a recession has already begun.
The 1970s are remembered for an inflation spiral that triggered sky-high interest rates that dwarf today's levels. The days of Richard Nixon, Gerald Ford and Jimmy Carter also saw gasoline costs surge, like today, but back then the costs consumed a higher proportion of total household spending, Allsbrook said.

That doesn't mean today's economic picture looks rosy. Last week, a report showed consumer prices have risen 4.3 percent in the past 12 months, the highest rate in 16 years.

"I do expect growth will disappoint and inflation will move higher than today's levels," Allsbrook said.

The direction of today's economy, hobbled by the subprime mortgage fiasco that produced billions in losses for banks and triggered a wave of home foreclosures, has become the focus of an intense debate over whether a recession has already begun.

While the 1970s are remembered as tough economic times, interest rates and inflation really peaked in the early 1980s.

In January 1980, gold hit $850 an ounce - equal to nearly $2,200 in today's dollars. In October 1981, the Federal Funds rate, a key short-term interest rate, stood at more than 15 percent, following an aggressive campaign of rate hikes by the central bank under Chairman Paul Volker. That same month, 30-year conventional mortgages averaged 18.5 percent.

Today, gold has staged a long rally, trading last week at nearly $950 an ounce, and crude oil has traded at a record $101 a barrel. The Fed Funds rate, however, is 3 percent, and plain-vanilla mortgages go for just 6 percent.

When he was a Fed governor for three years beginning in 1975, a big issue was rising energy costs, just like today, Jackson said. Energy prices have risen nearly 20 percent in the past year, the Consumer Price Index report said last week.

"We had enjoyed very low energy costs for a long time, then things shot up dramatically," he said. "Our economy allows these things to work themselves out on their own. Sure some people are hurting, but that is the nature of a free enterprise system. The difference this time are the challenges produced by a long history of easy access to credit."

I guess the 70s led to the 80s - so really, we're looking at a 70s / 80s style recession. If however the government starts TAXING its citizens to death (we are at saturation point in my opinion), we could see a return to a 30s style recession which I don't believe today's people would be able to handle with much class (illegal immigration, increase in minority populations, etc...) - which would lead to a nightmare scenario in my opinion.

[Dans la Musique]

I put "Worse than anything IVE observed in the 20th century." Since I have not observed anything that really affects me and am just now being introduced to the marketplace, I really have no idea. I was at school during the 9/11 recession, but I dont remember it being that big of a deal. But Ive noticed that the majority of voters here said worse than anything in the 20th century so Id like to hear what others have to say.

Ive heard alot of conservatives like Ron Paul, and Glenn Beck's guests etc that relate this kind of economic "crack", I.E.- Pumping the money supply up and lowering interest rates for the perceived stability of the economy, compared to what other superpowers have done in the past and what brought them to an end.

[Brandan Kraft]

http://www.telegraph.co.uk/money/mai.../ccview103.xml

Here comes the Fat Lady!

The verdict is in. The Fed's emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.

The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.

...

"We are becoming increasingly concerned that the authorities in the world do not get it," said Bernard Connolly, global strategist at Banque AIG.

"The extent of de-leveraging involves a wholesale destruction of credit. The risk is that the 'shadow banking system' completely collapses," he said.

For the first time since this Greek tragedy began, I am now really frightened.

[Brandan Kraft]

The ultimate sell signal: Part II
Commentary: Why does the FDIC need more bank examiners?

The Federal Deposit Insurance Corp. is planning to beef up its division of resolutions and receiverships, which handles failed banks, by 40% this year. The division currently has 233 employees. Considering that only three banks failed last year, why do they need more examiners?


For now, the FDIC is looking to bring back 25 retired employees with experience in the bank closures of the 1980s and 1990s. No, it's not just a reunion of hard-nosed accountants who closed banks and savings and loans in notorious Friday night raids and liquidated their assets.

This is a real search for tough, experienced "lone rangers," who set upon a bank or thrift institution on a Friday to take over as much of the assets as possible and open the following Monday with full assurances for insured depositors and firm answers for uninsured depositors. The latter group will get 100% on their insured deposits, probably 50% on the uninsured portion and "well, we can talk about it, and we'll send you some more later."....

[Brandan Kraft]

Advance Notice of a Portion of a Meeting under Expedited Procedures

It is anticipated that a portion of the closed meeting of the Board of Governors of the Federal Reserve System at 11:30 a.m. on Monday, March 3, 2008, will be held under expedited procedures, as set forth in section 26lb.7 of the Board's Rules Regarding Public Observation of Meetings, at the Board's offices at 20th Street and C Streets, N.W., Washington, D.C. The following items of official Board business are tentatively scheduled to be considered at that meeting.


Meeting date: March 3, 2008

Matters to be Considered:
1. Review and determination by the Board of Governors of the advance and discount rates to be charged by Federal Reserve Banks.

Dated: February 28, 2008

[Robert R. Higby]

By "the 70's" I thought you meant the 1973-75 recession after the Arab oil embargo.

Paul Volker the anti-monetarist was not appointed by Carter until 1979. The severe 21% interest rates, as I recall, did not come until early 1980 after Volker applied the monetary brakes. Before then the rates were floating up with inflation but the monetarist policy had not ceased. The severe recession did not start until sometime in 1980 and continued thru 1983. It was many times worse than the early 70's or early 90's recession; unemployment in some cities rose to 25% and the price of homes in some cities fell 40-50% below their former value.

The post 9-1-1 'recession' did not really meet the definition of a true recession at all; it was merely a slow period.

Yes, I've got a feeling that things are going to start hurting more very soon. However, the monetarist policy will continue for a while. The next issue is when the Fed rates will have to start 'floating up' with inflation; this is far different than an all out anti-monetarist war on inflation by raising rates to severe levels.

[Robert R. Higby]

A link explaining the history a little more accurately than I did:

http://www.bookrags.com/biography/paul-volcker/

It was actually not until late 1980 that interest rates reached the 21% level. As in most cycles, the peak of the inflation rate was pre-recession and interest rates peaked about a year later as the economy was sliding into deep recession.

[Brandan Kraft]

By "the 70's" I thought you meant the 1973-75 recession after the Arab oil embargo.

I combined the 70s & 80s into one choice now....

[Brandan Kraft]

2. The dollar is devalued against foreign currencies, causing a flood of speculative investing against it. This (nothing else) is what has resulted in 102 dollar oil, gold of 975 dollars an ounce, the commodity price explosion, and current inflation. The government has deliberately under-reported the true inflation index for years by taking things out that will make it high.

Agree completely. The price of oil is directly related the the falling dollar.

3. For a time, economic activity continues as if things look pretty good. Buying and selling continues at a healthy pace. To counter-balance the inflation, people start to get raises again at their jobs. Salaries go up. However, the increased income merely protects temporarily against some of the price increases.

I think that is why Bernanke is propping up the home market. He cannot afford a complete housing collapse that causes banks to go bankrupt. If he can keep it afloat EVEN at the cost of inflation, it is worth it!

4. Then stagflation sets in. The inflation gets out of control and forces interest rates up just to keep pace with the falling dollar. Economic growth is halted. Companies and businesses tighten up the purse strings on hiring. But the inflation still does not stop.

I read an article today that suggested DEFLATION is about to set in.

http://www.elliottwave.com/features/default.aspx?cat=mw

A higher than expected jump in Producer Prices and commodity blow-offs in some markets such as wheat and corn sparked economists’ talk of inflation worries, but a lesser-known and more powerful countervailing force indicates to us that deflation will carry the day. This is the emerging thriftiness discussed here in recent issues. The mentality is coming on so strong that it’s making all the papers. The Christian Science Monitor dubs it “the new prudence.” The New York Times says, “Some believe a fundamental change in behavior and mindset is taking place.” Wednesday’s issue of USA Today quotes a host of different financial writers, trend spotters and business consultants who are noticing a “seminal” change in shared spending patterns. All say that the movement is not just a response to higher prices but a new effort to achieve status by not spending. “For years we had the opposite,” said financial writer Ellie Kay. “It was all about keeping up with the Joneses. Now, the Joneses are starting to cut back.”

Deflation is just as dangerous to an economy as stagflation in my opinion. I don't know which is worse!

5. To stop the inflation, the Fed is forced to reverse course on monetary policy and severely raise interest rates--in spite of the consequences this will bring to the economy. As a result, years of recession set in. Forget about buying a home unless you can pay for most or all of it in cash. You may or may not keep your job, depending on how much your employment is tied to the economic cycle.

Exactly, because nobody will be giving credit out after the housing and bank collapse!

What is different this time is the severe Federal debt, which of course will deepen many times faster during the coming recession.

Bingo! The politicians will not be able to raise the tax rates much more - people will revolt. They at first will attempt to change the retirement age to 70-75.

Bankruptcy (default) will come by the middle of the next decade. There are differing views on how this will impact the long-term economy. Some think the private economy cannot survive at all without the hooks of government; I do not hold that view. In the very long term, bankruptcy is the best thing that can happen to our Federal government. It will finally cause a situation where the debt ceiling can no longer be raised. The politicians will finally be forced to make the tough decisions on spending because they will no longer be able to borrow money.

Amen! When the federal government goes bankrupt, our social security and medicare taxes will go away!

It is going to be interesting in my opinion - look for the banks to start failing and the sub-prime housing market start to alter the prime housing market in a major way. <sarcasm>At least we may have a president (Juan McCain) who has experience working with banks!</sarcasm>

[Brandan Kraft]

BTW, I am opposed to a bailout by the government. However, I believe reducing interest rates allowing banks to catch up might be of help. However in the end it may do little good and the housing / bank collapse is inevitable.

[Brandan Kraft]

Another thing to keep in mind... With the falling dollar - we may see foreign countries move manufacturing BACK to the USA. The europeans are at risk of seeing their big manufactures move their factories to the U.S. (car manufacturers, etc...)

[Brandan Kraft]

[Brandan Kraft]

[Brandan Kraft]

How the Fed is trying to get out of SS!

The Danger in 'Senior' Inflation

For Aging Americans, Rising Prices Will Take an Even Bigger Toll

Worried about inflation? It may be an even bigger danger than most of us realize.

That's because the American population is aging. The Baby Boomer generation is heading into retirement. And inflation for older Americans is considerably higher than it is for the rest of the population.

This is an underappreciated topic. There isn't much research on it. People usually talk about the average inflation figure, the Consumer Price Index.

But common sense, as well as official statistics, tells the story.

Look, first, at the products where inflation in recent times has been lowest, such as high-tech gear, and clothes.

In both areas, prices are actually falling, and have been for years. Last year's computers are on sale. Even the hottest product in recent memory, the iPhone, has had its price slashed. Through January, reports the Bureau of Labor Statistics, information-technology prices fell around 6.2% on average, and apparel by 0.2%.

But these are mostly products bought by younger Americans.

Meanwhile, according to BLS data, the cost of food in the supermarket is rising by 5.7% a year. Home energy is up 5.5%. Gasoline is up 34%.

It costs 8.9% more to fly than it did a year ago. Medical services are rising by 5.7% a year, hospital services by 8.5%, home health-care and nursing-home fees by 4.5%. Funerals are up 4.8%.

Overall, this "senior" inflation is running well ahead of the official CPI, even though that just scared investors by rising at a 4.4% annual rate. The latest producer-price data, out Tuesday, added to concerns.

Falling house prices, while deflationary, actually hurt seniors as well. Many of those heading into retirement are, effectively, net sellers of real estate. Empty nesters often hope to cash out of their big family homes and move to something smaller, pocketing the difference. Via reverse mortgages, many also may want to tap into their homes' values in the years ahead.

If "senior" inflation continues to run well ahead of general inflation, it could raise two extra problems, even for those who are a long way from retirement.

The first is that tens of millions of Americans may be in even worse shape financially than they realize. We already have a savings crisis in this country. The national savings rate is on the floor, and millions of Americans are financially unprepared for retirement. Yet most of their personal retirement calculations factor in "standard" CPI estimates. Raise those numbers by a percentage point or two per year, and what looks like a savings "shortfall" by the time you reach 65 will stretch into a yawning chasm.

The second risk is that as the population ages, so this "senior" inflation figure will become closer and closer to the norm. And that would add further impetus to rising official inflation.

[Robert R. Higby]

More monetarism:

http://money.cnn.com/2008/03/07/news...ion=2008030709

The whole notion that the government can do anything significant to offset the damages of the foolhardy mortgage lending and borrowing practices of 2002-2006 is the greatest expression of absolute blithering politician's idiocy I have seen in a very long time. For 5 years banks were lending money to buy homes in speculative markets rising 25&#37; a year, at 40 year re-payment rates that were double or more their rental value. Buyers were foolish enough to believe the deceiving realtors that the hot housing markets could never go anywhere but up in value--even at prices with a buy-to-rent ratio of more than 2-1. So they acquired, with the assistance of banks who were more than eager to lend the money, 40 year mortgages at ballooning rates (even 'reverse' mortgages) with an initial monthly payment rate of 65% of gross income!

The defaults we have seen so far are only the beginning. There are profitable companies in California and Florida springing up all over helping people to go 'seamlessly' through the default process and walk away from homes that in many cases have already fallen 20-40% in value. We have a very long way to go yet; the government doesn't have enough borrowed money to do anything other than equal a single expulsion of urine in a lake in magnitude of productive counteraction.

Just a studied opinion.