The U.S. country, as we know it, is going to change.
Obviously, we've heard a lot about what's happened with the stock market. One of the oldest institutions in Wall Street, Lehman Bros., has gone bankrupt. Merrill Lynch also followed suit with a buy out of 50 billion by Bank Of America well over what Merrill Lynch actually costs in the markets (25 billion at the time). Now the federal government (U.S. citizens) has given a "bridge" loan to AIG, meaning we loan them $85 billion and over a 24 month time period they raise the capital to pay us back.
So what happened to kill these institutions? Dylan Ratigan of CNBC says "Excess leveraging (borrowing), limited lending standards [became] aggressive and the federal rating agencies sought higher capital for these insurance agencies bringing them to a lower rating level resulting in [their demise]." (Closing Bell: September 15, 200 cool
But what exactly does this mean? It means the market infrastructure needs a huge overhaul. We have an archaic regulatory system that needs to be changed. There needs to be a balance between market regulation and discipline. Paul McCulley, the head of Pimco's Short-Term Desk, says this about Monday's incident:
Paul McCulley
Whole system is going through de-leveraging and de-leveraging induces deflation and asset prices [which] destroys net worth. AIG is a symptom of it as well as the other players. Not everyone can de-leverage at the same time because the act of doing so drives down prices and destroys net worth. It's the paradox of de-leveraging. Street Signs: September 15, 2008
Even Greenspan had this to say about it (you may have heard of this quote making its rounds around the internet and news reports):
Alan Greenspan
This is a once in a half-century, probably once in a century, type of event.
And when asked if it is the worst he's ever seen in his career he answers:
Alan Greenspan
Oh, by far. There's no question that this is in the process of outstripping anything I've seen--and it still is not resolved and it still has a way to go.
Of course the number one question that has been on everyone's minds as of this year is:
Is this the coming of the Second Great Depression?
Now I hate juxtaposing catastrophic events in our history to that which is currently happening today. How can we know if these two events will be related? How can anyone possibly imagine moving out of their homes and living in "Hoovervilles" or standing in line to gain food and clothes? Or not having some of the necessary items we've come to expect or take for granted? I don't know how any of us can really understand the effects a Great Depression would have unless their living in those conditions now.
As of yet no one really knows when or if this will happen. Larry King had the financial adviser Suze Orman on the show to discuss the event. When asked the question, "Would this have rivaled the Great Depression?" she agrees that "Yes, it would Larry." Now if you know Suze Orman, she's not one to say things lightly. She didn't even hesitate to answer it, in fact.
What brought this journal entry on is an article I read recently by Robert Samuelson. Now I'm not sure about his biasness or not. Yet I found one of his older articles of March 26, 2008 in stark contrast to his most recent article of September 17, 2008.
Hold the Hysteria
Robert Samuelson
Regarding the economy, it's hard not to notice this stark contrast: The "real economy" of spending, production and jobs -- though weakening -- is hardly in a state of collapse; but much of today's semi-hysterical commentary suggests that it is.
The Great Depression doesn't settle the issue. True, massive bank failures converted an ordinary recession into a calamity; but it's also true that government policy -- excessive rigidity by the Federal Reserve -- actually aggravated the banking collapse. Still, economic conditions in the 1930s (average unemployment: 18 percent) were so different from today's that casual references to "depression" amount to fear-mongering. If catastrophe strikes, it will probably result from something we don't now know or we haven't yet imagined.
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The Great Depression doesn't settle the issue. True, massive bank failures converted an ordinary recession into a calamity; but it's also true that government policy -- excessive rigidity by the Federal Reserve -- actually aggravated the banking collapse. Still, economic conditions in the 1930s (average unemployment: 18 percent) were so different from today's that casual references to "depression" amount to fear-mongering. If catastrophe strikes, it will probably result from something we don't now know or we haven't yet imagined.
Whether he believes this is the dawn of another Depression is still unclear. However, his story has changed a little over the last 6 months:
Wall Street's Unraveled
Robert Samuelson
Wall Street as we know it is kaput. It is not just that Merrill Lynch agreed to be purchased by Bank of America or that the legendary investment bank Lehman Brothers filed for bankruptcy or that the insurance giant AIG is floundering. It is not even that these events followed the failure of the investment bank Bear Stearns or the government's takeover of Fannie Mae and Freddie Mac, the largest mortgage lenders. What's really happened is that Wall Street's business model has collapsed.
Finally, investment banks rely heavily on borrowed money, called "leverage" in financial lingo. Lehman was typical. In late 2007, it held almost $700 billion in stocks, bonds and other securities. Meanwhile, its shareholders' investment (equity) was about $23 billion. All the rest was supported by borrowings. The "leverage ratio" was 30 to 1.
Leverage can create huge windfalls. Suppose you buy a stock for $100. It goes to $110. You made 10 percent, a decent return. Now suppose you borrowed $90 of the $100. If the price rises to $101, you've made 10 percent on your $10 investment. (Technically, the price has to exceed $101 slightly to cover interest payments.) If it goes to $110, you've doubled your money. Wow.
Once assembled, these components created a manic machine for gambling. Traders and money managers had huge incentives to do whatever would increase short-term profits. Dubious mortgages were packaged into bonds, sold and traded. Investment houses had huge incentives to increase leverage. While the boom continued, government remained aloof. Congress resisted tougher regulation for Fannie and Freddie and permitted them to run leverage ratios that, by plausible calculations, exceeded 60 to 1.
It wasn't that Wall Street's leaders deceived customers or lenders into taking risks that were known to be hazardous. Instead, they concluded that risks were low or nonexistent. They fooled themselves, because the short-term rewards blinded them to the long-term dangers.
How Wall Street restructures itself is as yet unclear.
[Explanation of how it collapsed]
Finally, investment banks rely heavily on borrowed money, called "leverage" in financial lingo. Lehman was typical. In late 2007, it held almost $700 billion in stocks, bonds and other securities. Meanwhile, its shareholders' investment (equity) was about $23 billion. All the rest was supported by borrowings. The "leverage ratio" was 30 to 1.
Leverage can create huge windfalls. Suppose you buy a stock for $100. It goes to $110. You made 10 percent, a decent return. Now suppose you borrowed $90 of the $100. If the price rises to $101, you've made 10 percent on your $10 investment. (Technically, the price has to exceed $101 slightly to cover interest payments.) If it goes to $110, you've doubled your money. Wow.
Once assembled, these components created a manic machine for gambling. Traders and money managers had huge incentives to do whatever would increase short-term profits. Dubious mortgages were packaged into bonds, sold and traded. Investment houses had huge incentives to increase leverage. While the boom continued, government remained aloof. Congress resisted tougher regulation for Fannie and Freddie and permitted them to run leverage ratios that, by plausible calculations, exceeded 60 to 1.
It wasn't that Wall Street's leaders deceived customers or lenders into taking risks that were known to be hazardous. Instead, they concluded that risks were low or nonexistent. They fooled themselves, because the short-term rewards blinded them to the long-term dangers.
How Wall Street restructures itself is as yet unclear.
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I really don't know where this economy is going since my degree is in History and not economics. Now I have a lot of information on how and why the Great Depression happened but, to tell you the truth, I haven't researched it thoroughly lately while I was in my last semester of college (I had pretty easy classes). I do know how it came to be and what made it worse but I'd rather get more information to add to a new journal entry. This way I can do a little more researching before I talk anymore between the similarities between then and now or if it is completely different.
I really, really hope I'm wrong about this one, along with the analysts. God help us.
Community Member
Despite all the news about it, I think I'm still somewhat confused by what's going on concerning this gonk ! I somewhat hope it will just be a recession and not turn into another Great Depression, but it's hard to predict these things.
*Crosses fingers for luck sad !*