

Mark Shuttleworth: It’s a solvency problem, not a liquidity problem - ash
http://www.markshuttleworth.com/archives/220

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swombat
Interesting read, but where does he support the assertion that it's a solvency
rather than a liquidity problem.

That may be true, as a number of assets (particularly mortgage-backed) have
dropped in price dramatically, thus potentially making some banks which relied
on them insolvent, but it may only be so in the short term, as the price for
those securities is unrealistically low at the moment.

In any case, I'm always one for supporting the point that I make in the title,
somewhere in the article.

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ajross
Yes, but those assets are held by banks, who would otherwise be lending that
money back out into the economy. Even a modest drop in total loan values
across a very broad market (in this case, the US real estate market) means
that a _huge_ amount of money just isn't there any more. So you can't borrow
it to fund your startup, or business expansion, etc...

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olefoo
I like his idea of a 7-year waiting period on executive bonuses. Anything that
gets us out of the quarter to quarter short-term mind set would be an
improvement.

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Tichy
I don't understand that kind of thing. Shouldn't a company be allowed to be
whomever they want however much they want? If not, why not? I know about the
incentives for risk taking, but what would be the point of creating a law
about it? If banks figure out that a particular "bonus construct" is harmful
in the long run, they can change it by themselves.

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michael_dorfman
The problem is that it is not necessarily harmful to them, but harmful to
others (and encourages behavior to that effect.)

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anamax
> The problem is that it is not necessarily harmful to them, but harmful to
> others (and encourages behavior to that effect.)

It's only harmful to others who decide to make the same mistake. It's useful
to (different) others who observe and conclude "wow, that's dumb in 3D".

Someone else doing something different is a free (to you) learning
opportunity. If it works, you can copy. If it doesn't work, you can avoid.

There are CEOs who are worth $240M/year in specific circumstances. Laws are
unlikely to make the right call but the market will, rewarding folks who get
it right and punishing those who get it wrong. What can be better than that?

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michael_dorfman
But do those who do it wrong get punished, or do they get to keep the $240M?
I've seen a lot of incompetent CEOs walk away with substantial golden
parachutes, while employees harmed by their actions got nothing but two week's
noticw...

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albertcardona
If the USA is entering a recession, how come the dollar is now recovering
relative to the euro? Can anybody explain it?

[http://finance.yahoo.com/currency/convert?amt=1&from=EUR...](http://finance.yahoo.com/currency/convert?amt=1&from=EUR&to=USD&submit=Convert)

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mdasen
Currency prices aren't affected by recession as much as they are by interest
rates. The ECB has held really high interest rates through the past few years
(which probably wasn't a good economic policy looking back). So, if you buy
Euros and deposit them in a European bank, you get higher interest than if you
buy dollars and hold them in an American bank. That increases the demand for
Euros and when you increase the demand for something, the price goes up.

Recently, most central banks (including the European Central Bank) coordinated
a rate cut to prevent the economy from collapsing even more than it already
has. That means that European banks won't be offering such high interest as
they used to and it means that the demand for Euros falls.

So, it's not the economy so much as a change in interest rate policy at the
European Central Bank. The high price of Euros over the past few years wasn't
a vote of confidence in the European economy as much as it was the high
interest rates you could get in European bank accounts (when compared to
American bank accounts).

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wheels
It's been an interesting trade off. I've not tracked the reasoning behind it,
but just from watching how things have played out the strong rates managed to
establish the euro as a significant foreign reserve currency, while on the
other hand hurting european exports. For the latter reason I'd (again, mostly
just uninformedly) expected a rate cut for a while.

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mdasen
A lot of people have grand theories of how their government is hurting them by
things like this. Most of it is just bunk because it just swaps ends.

For example: a strong Euro makes European exports expensive. However, a strong
Euro makes it cheap to import things. So, VW has a hard time exporting Jettas,
but they have an easy time importing the parts they need to make Jettas.

It's also one of those situations where that increased demand for Euros would
eventually need to be spent. Lots of foreigners put their money in Euros
raising the price of Euros, but eventually they'll want to spend it and if
their buying power is higher in the US or other non-Eurozone places, they'll
dump the Euros for that currency which lessens the demand for Euros.

Economics tends toward equilibriums. Lots of things push it out of
equilibrium, but not over the long-term.

The one thing that higher interest rates tend to do is discourage investment.
The profits of non-financial firms doesn't depend on interest rates and I
think it's safe to assume that the average firm sees about 10% growth per
annum. So, if you (as an investor) can get a guaranteed 6% from a bank or a
potentially risky 10% in stocks, stocks look less attractive than when your
bank is giving you 2% interest. The reward for the risk of stocks diminishes
as interest rates are higher.

Likewise, on the loan end, higher interest rates make it less attractive for
businesses (or individuals) to borrow money to start a company or buy a house
since it diminishes their potential profit and makes it riskier that they will
even achieve a profit since their costs are higher.

That's not to say raising interest rates is a bad thing in all cases - in
fact, during boom times you want to do that in order to manage the economic
growth. But when faced with an economic crisis, it's good to get the money
flowing more freely (by having lower interest rates).

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wheels
Yep -- and nice commentary. I'm not one of the conspiracy theorists. :-)

The strong euro definitely hurt the software industry and I suppose other
fields where there were "soft" products targeted at international markets.
There wasn't a lot to import, but revenues went down with the dollar and
salaries were still paid in euro.

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tdavis
TL;DR: Econmeez fuct.

Next topic, please.

