"If you can't predict the future, then you need a system that can handle breakdown" John M. Keynes
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"The birth of economics as a discipline is usually credited by Adam Smith, who published "The Wealth of Nations" in 1776. Over the next 160 years an extensive body of economic theory was developed, whose central message was: Trust the Market." _ Paul Krugman
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"One fear is that foreign investors will stop buying U.S. debt, just as Washington needs to borrow more. Such a turn could lead to a dollar collapse, causing spikes in long-term rates and inflation. The less the U.S. need to borrow from abroad, the less downward pressure on the dollar - and the greater the balance in the global economy." _ James C. Cooper
Retail Sales increase by largest amount in 3 years – Sep 15, 2009 | blog’s carpediem
Opinion:With 70% of GDP is PCE (personal consumption expenditures) Uncle Sam’s health is tied to American’s spending; signal by retail sales which has been reported as good number. The more consumers get back to markets, the bigger uncle sam’s pocket. Retail Sales reflects the current state of the economy, meanwhile, serves as predictor of inflation. Thus, the high-jump figure would trigger the action of Fed in tightening monetary policy (hike rate and shrink money). Time of Crisis has past, now comes Era of Inflation (as a friend of Growth).
…and unique special report, CNBC uncovers the truth behind the crisis all the way back its roots in 2001, and how greed brought the global financial system to its knees…
Opinion: Thanks to rising of equity plus housing markets and learning of savings (not spending by credit debt), people’s vaults are getting bigger. And the simple truth: the more money earned, the more money spent; which in turn would create the wealth to the nation. Remember this: “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it – Adam Smith.”
Opinion: If banks get more deposits meaning they could make more loans. In other words, credit market is evolving eventually, thus businesses would be able to raise more capital investing in news projects, creating more jobs, and so on. The end of the way, economies are better off and people smile .
“…The Federal Reserve wants to reinflate the credit bubble and engineer a return to the old days. But that isn’t possible. When a nation’s businesses and households take on too much debt and the economy stumbles, the cash flow needed for financing dries up, defaults rise, and a vicious cycle of falling incomes, asset prices, and collateral values begins. That cycle ends only when asset prices, debt levels, and incomes get back into balance. Misuse of consumer credit is gone for good…”
“This recession marks the first recorded decline in household debt, ever.”
“1. Financial markets have stabilized – largely because people believe that the government will not allow Citigroup to fail…
2. The real economy begins to bottom out, although unemployment will not peak for a while and could stay high for several years…
3. More broadly, there is sophisticated window dressing in the pipeline but no real reform on any issue central to (a) how the banking system operates, or (b) more broadly, how hubris in finance led us into this crisis…
4. The consensus from conventional macroeconomics is that there can’t be significant inflation with unemployment so high, and the Fed will not tighten before late 2010…
5. Emerging markets are increasingly viewed as having “decoupled” from the US/European malaise…
This is a weekend without any test and project, so I spend some enjoyable-lazy time to play around with numbers and make a graph. I always love graphing because it’s simply worth more than thousand words.
Most of stock markets outperformed GDP or nation’s incomes. So, in my opinion, this finance crisis will lead to more troubles and longer recovery of economies.
The subprime mortgage crisis is an ongoing economic problem which became more apparent during 2007 and 2008, and is characterized by contracted liquidity in the global credit markets and banking system. The downturn in the U.S. housing market, risky lending and borrowing practices, and excessive individual and corporate debt levels have caused multiple adverse effects on the world economy.
In order to understand this crisis, we have created a diagram shown below with a manner of simplifying the crisis process related mainly to mortgage issues ranging from simple mortgage lending to complex structured finance like securitization of asset-backed securities (ABS), mortgage-backed securities (MBS), and collateralized debt obligations (CDO).
To explain the subprime crisis in the simplest way, we’re using the equation: V(A) + V(E) > V(D) assuming that all the wealth of individuals as well as institutions is related exclusively to a mortgage and its derivatives. On the left side of the equation, the value is equal to what is possessed by these individuals and institutions. On the right side of the equation, the value of debt equals what is borrowed by these individuals and institutions. For individuals and institutions who want to maintain a wealthy condition, the value of what they own must be greater than what they owe.
Then when V(A) + V(E) < V(D), it means that the value of the asset is less than the value of the debt. Those involved parties defaulted, which created the crisis.
Our purpose in this case study is trying to answer some of the following questions with easy-to-understand words and methods:
·How the crisis happened
·Who are the players/ Whose responsibility
·What led to this crisis
·When it get started
·Where the issues and solutions placed
Subprime mortgage market
The subprime mortgage crisis could be pictured in draft as vicious cycle:
·The crisis began with the burst of the United States housing bubble and high default rates on subprime and adjustable rate mortgages (ARM), beginning in approximately 2005-2006, which lead to the unexpected dramatically climb of payment default and foreclosure; then drove the devaluation of mortgage-backed securities, collateralized debt obligations, and the like.
·The devaluation of asset-back securities caused financial institutions losing capital due to writedowns of their assets; in turn, those financial institutions want to control the leverage ratio and put themselves in a sensitive condition.
·To reduce a leverage ratio, those institutions went on to sell off their MBS, which led to the more devaluation of these assets, the worse of leverage ratio, the more emergent situation of lending cutting and capital raising, and so on.
Then when V(A) + V(E) < V(D) meaning value of asset less than value of debt, those involved parties fell into default, which exposed as the crisis.
The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers.
Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. On Sunday night, Bank of America struck a deal to buy Merrill Lynch for $29 a share, or about $44 billion. Lehman was working on a possible bankruptcy filing that would allow most of its subsidiaries to continue operating as the firm is wound down.
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![[graphic]](http://s.wsj.net/public/resources/images/nowides03202003164521.gif){kind=small}
