When is a recession actually a depression?

[altivo]

So the shit has finally hit the fan, and as usual, the innocent will suffer while the guilty get away with their ill-gotten gains. Yesterday Greenspan finally admitted that there might be an actual recession going on. Of course, he has adamantly refused to use that word through several genuine recessions, so I claim that when he actually admits to it, chances are we face a full-blown depression.

The stock markets are in free fall again, and commodities such as gold, corn, and crude oil are on the rise as the day traders move their assets from stocks to "real goods" (which are only, of course, phantom goods.) The conservative government that is opposed to regulation and "big government" has committed another 85 billion of our dollars to a bailout of a mismanaged corporation (AIG) which in turn failed because so many regulations were removed from financial dealings that companies can do any short term stupid tricks they want. So going for "smaller government with less regulation" seems only to lead to larger government where the government actually buys up all the companies that couldn't manage themselves without the regulations designed to protect them and their investors. Supposedly the AIG deal is only a loan, which must be paid back in two years at 8.5% interest or thereabouts. I say there's a snowball's chance in hell that it gets paid back. The company will dissolve itself, either in bankruptcy or through other means, without ever paying back the loan or the interest.

The interbank lending rates are skyrocketing today. This is because banks are no longer willing to lend to one another because they can't trust each other or count on being repaid. Makes sense to me. Yesterday the Federal Reserve (sensibly for a miraculous change) did NOT cut rates again to try to put a bandaid on the ongoing disaster. Making it even easier to borrow money when the economy is collapsing due to defaulted debts really doesn't make sense, yet investors triggered another drop in the market when they received that news.

Somehow I can't find it in my heart to feel very sorry for people who borrowed half a million dollars or more to buy oversized, overpriced, suburban houses and now can't make their balloon payment or refinance the loan. I said it was stupid when they started doing it, and now they are reaping the consequences. Unfortunately, those of us who have acted sensibly, lived within our means, and may even have no debts are still going to suffer for this as we watch banks collapse even further, and our tax money is poured down rat holes to try to shore up the rotten timbering of an unregulated economy driven by greed and imaginary values. The cost of real goods like fuel and food are going to go even higher more quickly, I'd say. Those of us with actual savings in insured bank accounts, CDs or government securities may start to earn a higher rate on them, provided our banks don't go belly up in the stress, but we are likely to see our pension funds collapse, perhaps into oblivion.

And of course, the politicians and corporate executives who are really responsible for this unnecessary collapse have already made off with their ill-gotten gains and will never suffer a thing for it.

I couldn't help laughing all the way through the business report on the radio, even though it's depressing (literally) news. I've been predicting all this ever since the Reagan administration insisted on deregulating everything under the sun. No one believed me, but I was right just the same.

Signed,
Kassandra 'Tivo

Oh... Also, the overinflated pump price of gasoline in my area collapsed today, dropping 20 cents per gallon even as crude oil prices are rising (after it stubbornly rose the last two weeks while crude oil prices were dropping.)

Comments

[bariki.livejournal.com]

Er, the price of oil has actually fallen to a three-month low, with West Texas closing in London at $92.92 a barrel. Brent crude was even lower at $89.94 a barrel.

Deregulation and innovation in financial products is not in itself a bad thing. Deregulation and the opening of global markets ushered in an era of unimaginable wealth for hundreds of millions of people. International trade in goods and services depends upon open, liquid and flexible financial markets that allow for the failure of mismanaged firms. Yes, AIG was horribly exposed to the toxic assets of the subprime mortgage fiasco, and it should pay a hefty price for its fecklessness.. but it won't.

Open markets, deregulation and globalisation offer more to the world than any other system. Tying the hands of financiers and traders will not stop another Meltdown Monday in the future - indeed, deregulation was meant to prevent this sort of thing by spreading risk across a broader base of lenders. Oops. Returning to the Gold Standard, restricting international financial transactions or preventing innovation in banking will make the world more fragmented, less dynamic and poorer as a result. Market economics has its flaws, but it's better than all the alternatives.

[shadow-stallion.livejournal.com]

It is back up today in the mid 90's though the market does not close for another hour or two.

And while you may favour deregultion, I can safely say that the deregulation of the electricity market in Texas has done nothing but lead to some of highest prices in the nation.

[altivo.livejournal.com]

Yes, and deregulation in California resulted in people going without electricity entirely a few years ago.

[bariki.livejournal.com]

Ah, the market's shut here now. :P Even so, oil at ~$95 is a hell of a lot better than oil at $140 (early July).

America's approach to deregulation of utilities is quite odd. In Florida, we had only one power company to choose from: you either had them, or had no power. In the UK, there are dozens of firms to choose from, and up until 2 years ago, prices had fallen across the board. Rising costs for oil and gas have in turn pushed up the cost of electricity around the world, so that may have contributed to the high prices that you are experiencing.

I do favour free markets, yes. However, botched deregulation (with a slant to one firm, or one industry) can be worse than even the most constricting red tape.

[altivo.livejournal.com]

I simply disagree. Note that I did not advocate going all the way back to the gold standard, though. What has in effect happened since the 1980s is a return to the ability to trade "on margin" with money that the trader doesn't really have. The practice called "naked" short-selling is a classic example. When it goes bad, everyone is hurt. When it goes as planned, the trader makes money illicitly and isn't caught.

Regulation should have prevented the sub-prime mortgage lending fiasco, and in fact would have before the privatization of Fannie and Freddy, and the deregulation mania of the Reagan years.

I say that the "wealth" you claim is largely hot air, and not real wealth. It is bound to collapse as soon as the right woodpecker comes along and pokes it.

[altivo.livejournal.com]

Oh, and the low price of oil has risen by $6 from the figure you quote, as of the latest numbers available to me. The commentators attribute this, as I did, to short term traders quickly shifting assets from the stock market to commodities.

[shadow-stallion.livejournal.com]

Greenspan...*snorts* The very sight of him makes me want to retch. Why is the world still listening to this twit?

Also, I find it amusing (though I know it really is not funny) that gas prices skyrocketed to over $5 a gallon in some parts of the country while we just saw a $0.20 increase here in the DFW area. I still haven't figured that one out.

[altivo.livejournal.com]

Greed and deregulation, as usual. I understand some stations in Michigan were ordered to lower their prices after they went up to $7.10/gal as the hurricane hit Galveston.

[atomicat.livejournal.com]

"Somehow I can't find it in my heart to feel very sorry for people who borrowed half a million dollars or more to buy oversized, overpriced, suburban houses and now can't make their balloon payment or refinance the loan."

My goodness, someone else said it! Every time I've voiced this opinion the reaction I got was as if I'd farted at the dinner table.

[altivo.livejournal.com]

*snicker*

The last time I made such a strong comment about economics and finance, I believe it was in your journal, where I was immediately pounced upon by some idiot who called me "selfish" because I objected to greedy profiteering.

[hellmutt.livejournal.com]

Word.

And I get weird looks for putting off getting a mortgage, loan, imaginary money of any stripe as long as I possibly can...

[schnee.livejournal.com]

Hear, hear.

[altivo.livejournal.com]

Come to America and vote for me!

(Not really. I'd have to be crazy to stand for public office here.)

[marzolan.livejournal.com]

*agrees with absolutely everything said*

[altivo.livejournal.com]

*grins* I knew you were a tiger of discernment and judgement. Wait a minute. Aren't you too young to really even remember Ronald Reagan's administration?

[doco.livejournal.com]

I find it very amusing that this thing is still somewhat restricted to places with an overinflated housing bubble - namely, the US, Britain and, to a lesser extent, Spain - yet it has become strong enough to shut up a certain Mr Ackermann, who announced profusely that the government should chip in and help the poor investment bankers who misjudged things, now he's become very very quiet and seeks to expand Deutsche Bank's portfolio into the savings and current account business, as investment banking suddenly doesn't seem that cool anymore. :P

[altivo.livejournal.com]

Investment banking, as I see it, consists of making money off other people's capital, which is a sort of parasitism even when that capital was in turn acquired by parasitizing actual workers who produced real goods or services.

In other words, in my lowerarchy of hell, the investment bankers are only slightly better than the lawyers, who get frozen in the eternal ice of the ninth circle.

[lobowolf.livejournal.com]

I love it..when times are good and people are making plenty of $$$$, wealth conservatives scream "Get the government out of private business and deregulate everything!"

But suddenly, when times are bad, they all have their tin cups out and now they're screaming "You're the government, it's your job to help us!!!!'

Live by the sword, die by the sword.

The only complication is that "living by the sword" and making profit only involves the rich, but "dying by the sword" takes everyone (including those of us at the bottom) down with them.

[altivo.livejournal.com]

Nah, it never involves only the rich. When times are good they are parasitizing the rest of us even more. It's just a little less obvious because it happens on the sly and we are often just barely comfortable but enough so to keep us from noticing a lot of it.

[heavens-steed.livejournal.com]

My parents have lived and paid on their house for around 25 years and it's only been within the last few that they've had problems paying on it, so I think you're being incredibly cold-hearted and unfair with your treatment of home owners who are in trouble. Not all of them are suffering just because they made irresponsible decisions. Sometimes people are hit with unexpected hard times. I very nearly got kicked out of my own house and it could possibly still happen, so for you to speak about this subject with such lofty apathy towards the suffering really strikes a nerve in me.

Unfortunately my dear, you are factually mistaken to blame the Republicans for all of this.

http://article.nationalreview.com/?q=NDA4YTY1N2ZhMDhmNjIwNTk4OTI2MDYxZWU4NDg1Y2Q=
*****
On May 23, 2006, as a jury in Houston deliberated the case against top Enron executives Kenneth Lay and Jeffrey Skilling, a little-known regulatory agency in Washington, the Office of Federal Housing Enterprise Oversight (OFHEO), released a study with the dryly bureaucratic title “Report of the Special Examination of Fannie Mae.”
...
From 1998 to 2004, the years covered by the OFHEO investigation, it was headed by former Clinton budget director Franklin Raines, whose top management team included former Clinton Justice Department official Jamie Gorelick, sometimes mentioned as a future attorney general in a Democratic administration. During that period, the report says, Raines and his team grossly overstated Fannie Mae’s earnings — to the tune of $10.6 billion — for the purpose of paying themselves big bonuses. “By deliberately and intentionally manipulating accounting to hit earnings targets,” the report says, “senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders.”
*****

The main reason why gas and energy prices are so high is because of the Democrats who have consistently prevented us from exploring and utilizing our own energy resources and utilizing other forms of energy such as nuclear power (which several European nations are successfully using) so that we remain dependent on foreign oil and the demands of our enemies. Is it any wonder why our energy prices began to rise almost exponentially just within the past two years since the Democrats took control of the House? Is it any wonder why they have a 9 per cent approval rating? We know this is true because as soon as there was talk about drilling offshore, gas prices started to drop again. The vast majority of the American people want us to drill but Nancy Pelowsy and the rest of her gang refuse to listen to them.

And if anyone wants to parrot the old insipid Democratic escapism "We can't drill our way out of this" that's not what anyone is suggesting. Drilling is only a temporary solution but it will help enable us to bridge the gap to new energy sources which we desperately need.

Oh, and I suppose since I don't agree with you, that probably means I have no discernment or judgment like Marz does.

[altivo.livejournal.com]

Sorry, but this isn't about partisan politics.

And I said nothing about your parents. I don't imagine your house is a half million dollar overpriced new suburban balloon if they've been paying on it for 25 years, nor is the mortgage one of those ARM idiocies, which weren't even invented back then.

[cabcat.livejournal.com]

Ye who have over reached shall fall under the bank's wraith.
Looks like time for me to buy into American maybe I can get myself a corporation and turn it Australian ;)

[altivo.livejournal.com]

Forget the corporations. They have nothing to sell now, having sent all their processes and production offshore. If you have money, buy some politicians. They're all up for sale it seems. Or go for the "auctions" where the government literally gives away natural resources for ridiculous prices like two dollars an acre.

[deffox]

Why does it look like the clock on regulation needs to be turned back 30 years?

While I haven't really watched financial issues until several years ago, it's interesting reading about. It'd be more interesting if I wasn't losing money like everyone else with investments.

It seems to be a long line of reducing oversight and regulation starting with Carter. Reagan seemed to start by trying to help S&Ls recover from Carter, and causing more mess than it solved. Then Clinton's emphasis on excessive liquidity, and finally even more regs being relaxed under little Bush. Greenspan certainly smells of the worst types of diarrhea.

I don't hear any actual solutions to prevent the current turmoil from repeating. They certainly aren't going to disband Fannie Mae or require banks to hold ownership of at least 51% of loans they make. No effort (in the US) to reign in short selling, or any margin based investments. While we're at it they could restrict futures trading to only the parties that take final delivery of the goods.

As to the interbank lending rate, why would banks take any risk when the feds are making so much safe money available for their reserve requirement. The fed is 'injecting' money into the system by buying bonds backed by sub-prime loans. I'm glad they at least didn't lower the federal rate.

[altivo.livejournal.com]

I trace most of it to the Reagan Administration's "smaller government" nonsense. Eliminate all the safeties and controls so that corporations can make more money faster and they do just that, by ripping off the whole world as fast as they can.

Actually, it appears that the SEC has explicitly issued a ban on what is called "naked short-selling" starting today. Of course, I don't think they have much of any way to detect the culprits.

You're right that the current administration refuses to do anything to get in the way of "business" even if the businesses in question are just a bunch of pirates and crooks.