The bailouts, in perspective
March 2nd, 2009
I hesitated to post this last week because it is not directly related to the majority of content on this blog but I decided the financial situation has enough to do with politics to post (mainly because of all the political posturing and blame going around). The story, Taxpayer Beware: Bank Bailout Will Hurt takes a more balanced and nuanced approach to this very complex issue. In essence, there is plenty of blame to go around. Or, as Jay Farrar might say, “You can hang the blame on the wall, there’d be a frame around us all.” For a more in depth explanation of the current financial situation, listen to the most recent This American Life episode, Bad Bank, by the same reporters. They promise “The collapse of the banking system explained, in just 59 minutes”, and they deliver.
For some entertainment, you can watch the video below of all the talking heads telling Peter Schiff how wrong he was about the housing market, credit market, stocks, and the recession.
Update: Added video of Peter Schiff.
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March 7th, 2009 at 8:20 pm
I listened and yes, they do a nice job explaining how a bank works and how we got into this mess by a combination of lack of due diligence and restraint on the part of lenders and lack of discipline and wisdom on the part of borrowers. Still, you can’t help but wonder how these obscure financial “instruments” (terrible term: a CDO or a MBS is not a pair of needle-nose pliers) got created in the first place. It’s the same twisted accounting logic that rationalized the creation of shell companies such as the ones that doomed Enron. What I mean to say is, there was duplicity on the part of financial companies to create something new to sell to us hillbillies.
Also of note is the personal savings rate and how it tracks to the cited data for personal debt to GDP ratio. While that debt/GDP ratio took off like a hockey stick from 2000 to 2008, the personal savings plummeted, eventually reaching zero. See the attached text data file from the St. Louis Federal Reserve.
http://research.stlouisfed.org/fred2/data/PSAVERT.txt
The good news is that the personal savings rate is creeping back up. The 5% rate in January 2008 was the highest since 1995 and undeniably a healthy indicator. Savings will solidify personal and home finances, bank finances; it’s a win-win. Anyone who discusses the “paradox of thrift” is barking up the wrong tree at this point in time. If this were a nation with 10+% savings rates and a sluggish economy devoid of investment and entrepenuership, then it might be valid, but it’s not and we’re not. Bottom line to all of us:
put away 10% of your income. keep 6 months of expenses in cash for emergencies. fund your retirement. accept money other people give you (401k and credit card matches). buy your own debt (don’t run a balance on credit cards, pay off loans early).
It’s not rocket science, but every so often we convince ourselves we can cheat the system and ignore those cardinal rules. You just plain can’t.