Global Financial Crisis (Was: Subprime Meltdown)

[Fusion_power]

The problem is that negative economic feedback can only be maintained for a limited time before serious economic damage is done. I can see a situation where reduced demand leads to employee layoffs which leads to even more reduced demand which leads to plant closings and more layoffs, which leads......


You see the pattern. The problem is that it is very difficult to interrupt this pattern as was shown in the great depression of the 1930's. Caveat that today's economy is significantly different from the 1930's.

DarJones

[Xyzzy]

Still $3.59⁹ here.

Just 4 days and now $3.19⁹.

Do we fill up today or tomorrow?

[xilman]

Originally Posted by Fusion_power

The problem is that negative economic feedback can only be maintained for a limited time before serious economic damage is done. I can see a situation where reduced demand leads to employee layoffs which leads to even more reduced demand which leads to plant closings and more layoffs, which leads......
DarJones

That's very nearly a textbook definition of positive feedback.


Paul

[davieddy]

Originally Posted by xilman

That's very nearly a textbook definition of positive feedback.


Paul

You should know better than to expect practitioners of the
"dismal science" (economics) to use analogies with physics correctly.

[xilman]

Originally Posted by davieddy

You should know better than to expect practitioners of the
"dismal science" (economics) to use analogies with physics correctly.

[condescension]I regard education of the ignorant as an act of charity[/condescension]

Paul

[ewmayer]

Originally Posted by xilman

Just got back from a week's vacation and read this:
Perhaps technical language has changed over the last few weeks, but I always thought that negative feedback drove a perturbed signal back towards the previous behaviour, and that positive feedback led either to runaway growth or to oscillations.

Paul is correct - I am mixing up 2 common usage of "[insert qualifier] feedback" here. In dynamical systems-theoretic convention, I should indeed be using "positive feedback" but in the negative [economic] direction. The term "negative feedback loop" to describe the same phenomenon appears to be common amongst economists - the word "loop" at the end of it would be superfluous to a dynamical systems person, but I believe in the economic-theory usage is actually necessary, to connote a self-reinforcing process.

So I surely did need a vacation, if for no other reason than that I've been spending so much time on economy-related sites and blogs that I'm letting their mathematically sloppy [or downright incorrect] usages creep into my writing.

Yosemite was very nice - we got 3 nice warm days despite the longer, cooler nights. Fall colors mixed in with the dominant evergreen, and I always liked the "filtered" quality of the Fall sunlight, with the sun lower in the sky. If any of you have not been to Yosemite, please do add it to your "bucket list" - preferably don't leave it too late, since the park is much more fun to experience when one is still fit and able-bodied. There simply is no other place quite like it on earth. The only drawback of going this time of year [early Fall, before the late-Fall and winter rains start] is that the waterfalls are dry or down to a mere trickle. Spring is the best time to see those.

We did see plenty of wildlife - a magnificent stag late the first evening as we were returning to the hotel from a hike, and a bold Bobcat who trotted across the bike trail we were on yesterday morning, on our way back from Mirror Lake [a seasonal lake, currently dry] below Half Dome. No bears, though they is no shortage of them around those parts. [The ranger station had a vivid "Don't become food for a hungry bear" display out front, featuring a bent car door which was ripped open by just such a hungry bear, using the standard "just get your claws in along the window frame and pull" method. Usually they do it to empty cars containing food of some kind ... usually.

[Xyzzy]

The National Park Service is advising hikers to be alert for bears and take extra precautions to avoid an encounter.

They advise park visitors to wear small bells on their clothes so they make noise when hiking. The noise allows bears to hear them coming from a distance and not be startled by a hiker accidentally sneaking up on them. This might cause a bear to attack.

Visitors should also carry a pepper spray can just in case a bear is encountered. Spraying the pepper into the air will irritate the bear's sensitive nose and it will run away.

It is also a good idea to keep an eye out for fresh bear scat so you have an idea if bears are in the area.

People should be able to recognize the difference between black bear and grizzly bear scat.

Black bear droppings are smaller and often contain berries, leaves, and possibly bits of fur.

Grizzly bear droppings tend to contain small bells and smell of pepper.

[Xyzzy]

http://news.yahoo.com/s/ap/20081011/...ot_environment

[ewmayer]

WSJ | Volcker Makes a Comeback as Part of Obama Brain Trust

NEW YORK -- At 81 years old, former Federal Reserve chairman Paul Volcker is getting a second chance to shape his legacy with a presidential hopeful more than 30 years his junior.

Mr. Volcker has emerged as a top economic adviser to Sen. Barack Obama during a presidential campaign dominated by a global financial crisis. Their growing bond is paying dividends for each man.

Mr. Volcker delivers gravitas and credibility to Sen. Obama, people in the Obama camp say, as well as ideas and approaches to the economic crisis. "Volcker whispering in Obama`s ear will make even Republicans comfortable."

My Comment: This is a very welcome addition to Obama`s circle of top advisors. Volcker is in many ways [and in all the important ones] the "anti-Greenspan". Back during the presidential primary season both Hillary Clinton and John McCain mentioned Greenspan in laudatory terms, which gave me the shivers.


U.N.: Crisis will lead to 20M lost jobs: Labor chief says the lost jobs will push the global unemployment rate above 200M for the first time ever.


22 States face new budget shortfalls: Economists worry that shriveling tax revenues may signal the onset of a historic fiscal crisis for state governments. Pared-down spending plans crafted just months ago may have been just the start.


Lawmakers meet on finance industry reform: Finance experts testify on Capital Hill over the need for regulatory restructuring of the finance industry.

NEW YORK (CNNMoney.com) -- Members of Congress, fiscal experts and Wall Street lobbyists gathered on Capital Hill Tuesday to figure how to change regulation of the finance industry to shore up its foundations and prevent future crises.

"We must recognize that regulation is needed to prevent systemic collapse," said Rep. Paul Kanjorski, D-Penn., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

Kanjorski vowed to reign in Wall Street excesses, focusing on what he called the "shocking" behavior of executives from the battered insurance giant AIG (AIG, Fortune 500), which hosted a $440,000 conference just days after taking out a $85 billion loan from the U.S. government.

To prevent future failures and abuses, Kanjorski said the Federal Reserve must monitor corporate spending and executive pay caps from companies like AIG. He called for more transparency and said the government must take measures to prevent the failure of companies that cause "disastrous, ricocheting effects elsewhere."

Speaking after Kanjorski, fiscal expert Alice Rivlin, the founding director of the Congressional Budget Office, testified that blame for the problem is nationwide, and not just on Wall Street.

"Americans have been living beyond our means, individually and collectively, for a long time," said Rivlin, who under the President Clinton administration served as vice chairman to the Federal Reserve Board and director of the White House Office of Management and Budget.

"We have been spending too much, saving too little, and borrowing without concern for the future from whomever would support our over-consumption habit - the mortgage company, the new credit cards, or the Chinese government," she said.

My Comment: That "...Wall Street lobbyists..." in the first sentence does not make me optimistic that any meaningful, effective reform will emerge from this process. Nice to see former Alan Greenspan crony Alice Rivlin say what both presidential candidates have been too pander-ous to, namely that the failure is a collective nationwide one, and that to a large extent banks and mortgage companies were simply encouraging excess whose root cause was the collective "there is a free lunch" delusion which hundreds of millions of people worldwide bought into, hook, line and sinker. However, as usual she is completely silent on the role her former mentor played in encouraging such excesses. And more "fiscal stimulus" and consumer-level "credit easing" are a complete waste of taxpayer money and precisely the last thing we need, respectively. The cure for what ails us [living beyond our means and spending money we don`t have to support inflated asset prices] is not more of what ails us. This is what Mish Shedlock likes to refer to as Classic Keynesian Claptrap [Although I think he is so focused on the idiocy of further artificial stimulus that he glosses over the valid points made in the Pimco article about the Paradox of Deleveraging].


Dollar rallies as credit thaws: The greenback was boosted by a thawing credit market and stimulus talk by Fed chair Ben Bernanke.

The interbank cost of borrowing U.S. dollars fell dramatically Monday as the overnight Libor rate fell to 1.51% from 1.67% on Friday, according to Bloomberg.com. Libor is the daily average of what 16 banks charge other banks to lend money in London and is used to calculate adjustable rate mortgages.

The overnight Libor was nearly even with the 1.5% rate the Federal Reserve charges banks to borrow. Just two weeks ago the overnight Libor had reached as high as 6.88% after the Treasury's $700 billion bailout bill was signed into law on Oct. 3.

My Comment: That`s a huge drop in the Libor ... question is, will it last or will the jitters return? And even though the overnight bank lending rate has temporarily dropped to non-astronomical levels, all is far from well in the worldwide capital markets:

Armageddon in Corporate Bonds: Credit markets have fallen so far that they are providing a ``once in a lifetime opportunity,'' and investors are still selling.


A local [California] retailer closing which is a good barometer of the overal dismal retail climate in the U.S.:

Retailer Mervyns to close its doors after holiday sales: After filing for bankruptcy protection in July, Mervyns is expected to announce liquidation plans

SAN FRANCISCO -- Mervyns, the 59-year-old department store chain based in Hayward, is closing up shop.

The ailing retailer, which filed for Chapter 11 bankruptcy protection in July and planned to close 26 stores, said Friday that it now plans to liquidate its remaining 149 locations and shutter the business after the holiday season.

"We are disappointed with this outcome but the company's declining liquidity position and the extremely challenging retail environment, together with the fact that we have exhausted all other possibilities, requires that we take this action," said John Goodman, Mervyns' chief executive, in a statement.

Mervyns plans to hire an outside liquidator to hold going-out-of-business sales during the holidays. The company said it determined liquidating its inventory was the best way to maximize value for its creditors. Company officials declined to comment beyond the press release.

Mervyns, a privately held company that operates 175 stores in seven states, is the latest in a string of retailers to go belly up or file for bankruptcy reorganization in the wake of the severe credit crunch and overall dismal economy.

My Comment: Fellow barometer retailer Circuit City [which unlike Mervyns is nationwide] is in similarly dire straits.

[Spherical Cow]

Speaking after Kanjorski, fiscal expert Alice Rivlin, the founding director of the Congressional Budget Office, testified that blame for the problem is nationwide, and not just on Wall Street.

"Americans have been living beyond our means, individually and collectively, for a long time," said Rivlin.

I have a real problem with this- they (pundits,analysts, etc.) keep trying to pin a big part of this on individuals, when really a very small percentage of homeowners are defaulting (less than 5% last I saw), and countless more don't even have mortgages to default on. And while defaulting on money owed has a ripple effect, it is nothing like the possible effect that financial institutions have created with all these exotic financial instruments that are bought and sold numerous times, in different ways, such as the famous credit derivatives and credit default swaps (CDS).

Those are the ones that Buffet called "financial weapons of mass destruction"; the ones that are insurance against default, but since they call them "swaps" instead of "insurance", they aren't regulated as carefully as insurance. The example on the Wikipedia page is of a company with $1 billion debt that could have $10 billion in CDS on that debt. If it goes bankrupt, and can only pay out 40 cents on the dollar, investors lose the other $600 million. Meanwhile, the CDS sellers lose $6 billion. On a $1 billion debt! Now that's what I call a ripple effect. I heard on the radio the other day that the current total CDS obligations (estimated between $50-$63 trillion) are now more than the annual total gross domestic product of the entire world economy.

It wasn't the naive homebuyers getting suckered into adjustable rate mortgages they couldn't afford that created this problem; it's largely the corrupt, unregulated financial institutions.

Norm

[tmorrow]

Originally Posted by ewmayer

A local [California] retailer closing which is a good barometer of the overal dismal retail climate in the U.S.:

There may be more to this case than the current economic climate. This article (http://www.signonsandiego.com/news/b...18mervyns.html) indicates that Mervyns has sued 3 private equity firms and possibly Target for an alleged fraudulent buyout deal. Ain't business grand, makes you want to be part of the corporate sector.