So unless you've been living under a rock lately, you probably know that the US economy is in big trouble. If we're going to be able to discuss this, we need to start with a review of the events of recent weeks. In case you're completely oblivious, the root of the problem is subprime mortgages. Subprime mortgages are a special class of mortgage with more risk associated than an ordinary mortgage, where the customer in a certain percent of such loans is expected to default on the loan. However, these end up getting packaged with normal "prime" mortgages, and large banks and investment firms bought the packages without realizing that part of the packages were subprime. Then the housing market sank, a large proportion of the clients defaulted on the loans, and big trouble was had by all. So, the significant events:
:: First, Freddie Mac and Fanny Mae, two of the largest loan investment firms, were about to fail, and were bought up by the US government. This single move raised the national debt from $11 trillion to $16 trillion. In addition, there's a very real danger that foreign countries will stop purchasing US debt.
:: Next, Lehman Brothers, another large investment first, filed for Chapter 11 bankruptcy after several mergers/sales fell through
:: Most recently, 80% of AIG was bought by the US government as a conservatorship, costing US taxpayers $85 billion.
Thoughts? Where are we headed? Is there any chance of the economy recovering?
Of course theres a chance for us to recover, and we will. The question is not whether we can or will, but how much more pain we all will have to endure before it gets better. Personally I think its going to get a lot worse before it gets any better. Right now we have high inflation and we're also going through a recession. To fix one could cause the other to get worse. If we're going to fix anything we're going to have to go through even more pain before we get better. Thats just my two cents.
[EDIT]
Also, AIG shouldn't even be in this mess actually. They weren't in this type of industry before until their greed for that particular market took over.
swivelgames wrote:
we're also going through a recession.
No, we're not, nor have we been. The last recession the US saw was 1990-1991. The economy flirted with recession status in 2000-2001, but GDP did increase, so it wasn't a recession. GDP is still rising, and as such the US is *NOT* in a recession.
As for the current "crisis", tough. Banks took on risky loans and lost, they shouldn't be bailed out for making crappy business decisions.
I agree completely. The banks were absolutely stupid getting themselves into this mess. They're paying the price right now and they shouldn't be cut any slack in my opinion.
As for the recession, I miss read.
We also run in to a problem where the US Dollar is barely worth toilet paper. There is nothing backing the dollar but a bit of faith, and maybe a roll or two of duct tape.
One way I have heard from some is to place the USD back in the hands of the Dept of Treasury, and back it by gold once again, like the Euro is, and that would assist us. It would, of course, not cure all our problems, but it would be a start in the right direction.
tifreak8x wrote:
One way I have heard from some is to place the USD back in the hands of the Dept of Treasury, and back it by gold once again, like the Euro is, and that would assist us. It would, of course, not cure all our problems, but it would be a start in the right direction.
The Dept of Treasury still controls the dollar, and it is still backed by gold. Fort Knox and the Federal Reserve Bank in New York have over 9,000 tons of gold combined.
@Swivel: Don't feel bad, the media seems to love to say that we are in a recession when we aren't even close to one. The economy hasn't even stagnated, it is still very much growing quarter by quarter.
Kllrnohj wrote:
The Dept of Treasury still controls the dollar, [...] Fort Knox and the Federal Reserve Bank in New York have over 9,000 tons of gold combined.
This is very true. The Government has never really had control over the dollar (literally speaking), but the dollar doesn't say anything about being backed by Gold on it. You can buy certificates backed by a certain amount of gold from the treasury. I'm not completely convinced the dollar is backed by gold 100% anymore either.
What really pisses me off is the fact that the media tries to relate coplete unrelated things to the sub prime mortgage issues. Like tough times in ex-factory towns, the factory moved to where it could do business cheaper it has nothing to do with banks buying up sub prime loans and yet they were talking about them like they were the same thing. In fact in the case I saw most recently the factory left the town over 5 years ago, long before the mortgage crisis.
I work for a small business and we're hurting because no one wants to spend money they think they don't have. the funny thing is they can trace back and their worst years are always election years. My boss is so tired of hearing recession that he is ready to flip. IMHO the word "recession" is becoming worse than "Global Warming" when it comes to fear mongering.
The congress really hasn't helped either, they think they can fix the issue by borrowing more money from other nations to hand out to people, the whole economic stimulus package was borrowed form other nations increasing our national debt hurting us more than it helped. How is an increase in Debt going to help it just lowers the value of the dollar even more. This also effect oil prices because oil is priced in USD when the value of the dollar falls the amount of oil you can by with it decreases leading to an increase in the price of oil. the stimulus package was useless IMO because most people didn't even get enough money to buy a tank of gas. My Mom got a whole $32 bucks from it. We borrowed money for that! WTF!
swivelgames wrote:
doesn't say anything about being backed by Gold on it. You can buy certificates backed by a certain amount of gold from the treasury. I'm not completely convinced the dollar is backed by gold 100% anymore either.
Depends on what you mean by "back by gold". There isn't any major currency that I know of that is truly backed by gold (in that the same amount of money corresponds to a fixed amount of gold). You can't exactly take the Euro into a bank and ask for gold instead. Money doesn't need to be "backed by gold" anymore - there really isn't a point to that. The modern form of money no longer has anything to do with gold, nor does it need to.
@TheStorm: Go take English 101 and follow it up with Economics 101. National debt is the money the government owes private investors (bonds and such). It has absolutely nothing to do with money owed to other countries. The borrowed money came from the nation and went back into the nation, it involved zero other countries, and as such had zero affect on the value of the dollar.
Speaking of the value of the dollar, its purchasing power has really not dropped more than is normal due to inflation.
http://upload.wikimedia.org/wikipedia/commons/3/34/US_Consumer_Price_Index_Graph.svg
As you can see, the % change in CPI has been holding fairly steady over the past 20 years.
For those in the dark on CPI:
Quote:
The CPI is most often used to make comparisons partly because it is the series with which people are most familiar. This series tries to compare the cost of things the average household buys such as food, housing, transportation, medical services, etc. For earlier years, it is the most useful series for comparing the cost of consumer goods and services. It can be interpreted as how much money you would need today to buy an item in the year in question if its price had changed the same percentage as the average price change.
Kllrnohj wrote:
tifreak8x wrote:
One way I have heard from some is to place the USD back in the hands of the Dept of Treasury, and back it by gold once again, like the Euro is, and that would assist us. It would, of course, not cure all our problems, but it would be a start in the right direction.
The Dept of Treasury still controls the dollar, and it is still backed by gold. Fort Knox and the Federal Reserve Bank in New York have over 9,000 tons of gold combined.
@Swivel: Don't feel bad, the media seems to love to say that we are in a recession when we aren't even close to one. The economy hasn't even stagnated, it is still very much growing quarter by quarter.
Well here in France, we have another type of trouble: inflation.
Even though the € is getting a higher value each day (or almost), the inflation is still much stronger...
Personally I don't think the government should've stepped in at all. If they were to help anyone I think it should've been many of the smaller companies. Now, of course it would have a huge impact of the economy if these two companies went down, but there were other companies out there with less debt and could've been as well off. $5 Trillion dollars is too much to pull out of your pocket to try and help two companies that obviously failed at their own jobs (financial services?).
swivelgames wrote:
Personally I don't think the government should've stepped in at all. If they were to help anyone I think it should've been many of the smaller companies. Now, of course it would have a huge impact of the economy if these two companies went down, but there were other companies out there with less debt and could've been as well off. $5 Trillion dollars is too much to pull out of your pocket to try and help two companies that obviously failed at their own jobs (financial services?).
No no no. Helping the smaller companies is stupid. It goes completely against the free market economy we have. The *only* reason for the government stepping it at all is to save a company that controls so much that if it went under it would bring down the economy with it. Smaller companies can fail without taking anything significant down with them, and so can most major companies.
Again, go take an economics 101 class, please.
Eh, I understand now that I think about it. The bigger the company, the more the debt, the harder the fall.
*fail*
swivelgames wrote:
Eh, I understand now that I think about it. The bigger the company, the more the debt, the harder the fall.
*fail*
no, you fail to see the big picture. the bigger the company, the bigger the fall, => the more scared investors are, which leads to other companies falling. In the case of banks, the bigger the company, the more dependent we are on them, which makes their fall so much more crippling.
@Kllrnohj: USD is not backed by gold. Frankly, neither has any inherent value. The value of all modern currencies is simply derived from the trust "investors" have in the issuing governments.
swivelgames wrote:
Eh, I understand now that I think about it. The bigger the company, the more the debt, the harder the fall.
*fail*
Still failing 
rthprog wrote:
no, you fail to see the big picture. the bigger the company, the bigger the fall, => the more scared investors are, which leads to other companies falling. In the case of banks, the bigger the company, the more dependent we are on them, which makes their fall so much more crippling.
And in the case of a bank, the more money people personally lose as that bank goes under. FDC only insures up to $100,000
Quote:
@Kllrnohj: USD is not backed by gold. Frankly, neither has any inherent value. The value of all modern currencies is simply derived from the trust "investors" have in the issuing governments.
Yes, Kerm already pointed that out Gold's value isn't set by the government, as it isn't issued Its value comes from its rarity and its aesthetics, and more or less is inherent. Similar to diamonds and other desirable elements
Kllrnohj wrote:
And in the case of a bank, the more money people personally lose as that bank goes under. FDC only insures up to $100,000
Not completely correct FDIC insures $100,000 per depositor, per insured bank. The $100,000 amount does not apply to owners of certain retirement accounts, which are insured up to $250,000.
soooo.... many individuals CAN have more than $100,000 insured... its just that such an event has been so unlikely that few people even considered it until now
rthprog wrote:
Kllrnohj wrote:
And in the case of a bank, the more money people personally lose as that bank goes under. FDC only insures up to $100,000
Not completely correct FDIC insures $100,000 per depositor, per insured bank. The $100,000 amount does not apply to owners of certain retirement accounts, which are insured up to $250,000.
soooo.... many individuals CAN have more than $100,000 insured... its just that such an event has been so unlikely that few people even considered it until now
back to the original conversation
Kllrnohj wrote:
As for the current "crisis", tough. Banks took on risky loans and lost, they shouldn't be bailed out for making crappy business decisions.
1.) another bank/financial institution fails
2.) some people lose their life savings, and the media repeatedly interviews those people
3.) investors get REALLY worried, and start pulling money out
4.) go back to #1
5.) Eventually, surviving banks/investors will be too timid to invest in anyone/anything... and thus you have fewer start-ups, fewer people to buy stuff, and thus a failing economy.
6.)Of course, eventually, the market WILL recover. However, those who will benefit will likely be foreign investors, and the process would take many painful years anyways...
thats why we needed goverenment intervention... to quell investor fears, assure the public that something is being done about it, and thus stop the next domino from falling...
rthprog wrote:
back to the original conversation
1.) another bank/financial institution fails
2.) some people lose their life savings, and the media repeatedly interviews those people
3.) investors get REALLY worried, and start pulling money out
4.) go back to #1
5.) Eventually, surviving banks/investors will be too timid to invest in anyone/anything... and thus you have fewer start-ups, fewer people to buy stuff, and thus a failing economy.
6.)Of course, eventually, the market WILL recover. However, those who will benefit will likely be foreign investors, and the process would take many painful years anyways...
thats why we needed goverenment intervention... to quell investor fears, assure the public that something is being done about it, and thus stop the next domino from falling...
Depends. Of course, one or two banks could collapse and the rest could get more investors since there are now fewer places to invest. Or people could just get scared of large banks that take on high risk loans be driven into the arms of smaller banks. Granted, these aren't very likely (your scenario is definitely a probable one), but it could happen. People now listen to the media far more than they used to, so if the media's economic "experts" continually recommend people to invest, things could turn out very different than they have in the past
Government intervention should be limited to the very extreme cases where if that one company falls, it will *directly* take out other companies and cause a collapse, which, thankfully, is all that has been done at the moment.
