

Is the American economy too big to fail? - robg
http://www.nytimes.com/2008/07/20/weekinreview/20goodman.html?partner=rssuserland&emc=rss&pagewanted=all

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gaius
Was the Titanic too big to sink?

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immad
Was the British Empire too big to fall

Was the world too big to get polluted :)

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jonas_b
I think american are getting a bit too anxious. The trend the last hundred
years have been that we talk less about depression and more about recessions.
In fact, if the worst thing that could happen is that a couple of banks close
down and a couple of millions have to start renting, well, that isn't really
so bad. In my view, that's a picture of a pretty resillient economy.

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sosueme
[http://goldismoney.info/forums/showthread.php?goto=newpost&#...</a><p>The
documentary divided into twelve parts tells the story of how debt combined
with political corruption impoverished a nation that was once so rich that the
expression "Wealthy as an Argentine" was once in common use throughout the
world.<p>When the USA took on trillions in debt starting in the early 1980s,
did we enter a Dante's hell as Argentina did when it took on its debt under a
military dictatorship in the 1970s? Is it only a matter of time before US
debts lead inexorably to currency crisis, inflation, and political chaos? The
story will strike North Americans as uncomfortably familiar.

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davidw
And as predicted ( <http://news.ycombinator.com/item?id=245275> ) here come
the "gold standard" links...

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olefoo
Thus illustrating the gresham's law of social news or something like it.

Blacklists, whitelists, gatekeepers, keyword vector analysis, are there any
architectural approaches to delivering 'news you can use' that haven't been
tried several times already?

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gills
I don't know. Have Americans forgotten how to work hard? This article is a
year late, which seems to be fashionable these days in the financial world.

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nickb
Such incredible hubris.

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fallentimes
No.

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ajkirwin
Has there been an analysis of what will happen to the 'common man' should
these banks fail? In plain speak?

By which I mean:

Will the price of my food and gas go up? Will I pay more for the rent on my
apartment? Will I have to pay more if I want to buy a house?

etcetera.

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mdasen
The most obvious impact will be to the thousands of people they employ. They
will be without a job.

In more vague terms, it's really difficult to consider how wide-ranging the
impacts will be. Banking is actually really important. It allows us to
overcome capitalization gaps. In a metaphor that will go over well here: Say
you have a great idea, but you need 10, high-quality 2-U physical servers to
do it (and the room to put them in). Well, that's going to run you probably
around $50,000 - before you have any money. VC steps in and you all get rich.

Likewise, without banking, it becomes hard for you to buy a home because you
can't pull the money together. Who cares? You rent? Well, it becomes harder
for the person who owns that building you're in to buy it and that causes rent
to spike in a way that would seem unimaginable. Likewise, the farmer who needs
cash to live on until harvest can't get it and so they have to charge more for
their goods, etc.

The price of everything goes up because the cost to cover those capitalization
gaps has risen incredibly. Worse, we'd face shortages - large ones.

Beyond that, Banks increase the velocity of money. Basically, the velocity of
money is the time it is between when you get $1 in your pocket and when that
$1 is spent on something else. At first, this looks like the Republican you
should buy to be patriotic argument. That's where Banks come in to actually
help. Banks allow you to get that money back into the economy without wasting
it on useless things. For example, I inherit $50,000. I could spend it on
stupid purchases that I don't want. That might boost things in a very short-
term way. OR, I could put that $50,000 in the bank and the bank can then loan
the company that needs servers that $50,000 and they are creating real value
and growth in the economy. So, banks make the economy more efficient by
keeping money circulating even when you have no use for your money. By doing
this on a large enough scale (with certain safeguards), banks can guarantee
you access to your money while improving economic efficiency (once your server
company hits it big, you'll have lots of money you don't know what to do with
when I want to remove money).

The issue we're seeing right now is that we got a little too ambitious. We
wanted to open home-ownership to people that probably couldn't afford it. Now
we're in a bad place where people have deposited money, but where the bank has
lent it probably won't be able to pay back - the bank is facing a
capitalization gap.

We should all hope that this is just a little blip - and it's unlikely that it
will become worse than that. People are panicking right now because there is
the potential that we're hitting a, say 10%, gap that can't be covered. When
the gap is that small, banks can usually eat it in the long run (rather than
go under) because it just isn't enough to kill them. Likewise, the government
might help out if it's larger because if the banking system goes under,
consumer prices would rise at a rate unimaginable to anyone who didn't live
during the gas crisis in the 70s - but this would apply to all goods.

This could be bad, but there is enough strength in these institutions that
even as pieces crumble, there is too much good in them to completely die - I
hope.

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bilbo0s
This is interesting. Why do you think the prices of homes will go up and not
have significant downward pressures in a credit restricted environment? Or am
I reading your post wrong?

PS - I voted it up by the way because everything else strikes me as spot on.

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mdasen
It's not that the price of homes is going to go up - it would likely go down
as we're seeing now. The difficulty of buying property is likely to increase.

So, with a good banking system, I can afford a $300,000 home. The banking
system collapses and that home is now $200,000. The only problem is that
without a good banking system, I can only afford a $50,000 home because
without a mortgage, I can't pull together $300,000 or even $200,000. This
becomes a problem for renters because the number of people who can afford to
become landlords/ladies decreases. Where you had plenty of people who could
buy a place with a commercial loan and pay it back over time from rental
income, now you need people that can pull together cash.

Something is only expensive if it's hard for me to buy. A $10 dinner isn't
expensive in absolute terms, but try selling that to the majority of Sub-
Saharan Africa. Likewise, if home prices decrease, but the difficulty of
getting a loan increases by more than that, it becomes more expensive to buy a
home.

I'm hoping this won't get so bad so don't read this as my money is
evaporating. Economics can be a delicate balance though. Very good question!

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bilbo0s
Right. That makes more sense to me. In dollar terms the prices go down. In
value terms, they sky rocket. Cheaper houses that no one can afford would be
my guess at what would happen as well.

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mdasen
I really hope that doesn't happen and I don't think it will for more than a
few years. People react harshly to news - they think there is more
significance than is really there.

I think the most likely result is that mortgage loans are going to see
stratification in price - borrowers with high salaries and good credit
histories are going to see little to no negative change with possible positive
change; borrowers with low salaries and poor to mediocre credit will see loans
they can't afford.

Partially, this came about because we (and by "we" I guess I mean US
politicians) wanted to extend home ownership to more people - specifically
historically disadvantaged people who didn't have access to the loan terms
that those brought up as upper-middle class have access to. It's a laudable
goal and one that we should try again in the future (albeit in a different
way).

Since someone will probably ask what other way: One example of that would be
to allow double deductability of mortgage interest to a certain mortgage
value. So, let's say median home value is 300,000. If you allow a double
deduction up to 150,000 in value, people with the median home see no change.
People buying lower-valued homes see a positive increase in their ability to
purchase that home - and that positive increase is paid for by the rich people
in million dollar homes who can't deduct all their mortgage interest anymore.

Macroeconomics is complicated. My best advice is to be prudent yourself, live
within your means, and not get caught up in the trends of people who think the
economy is collapsing or that golden ages will never end.

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ltbarcly
Questions like this are really questions about words.

Was the Roman Empire too big to fail? Sortof, in that it so thoroughly changed
how people thought and lived that even 2000 years later we are very obviously
Roman in many of our laws, habits, and worldview. The key is that the ruling
families of Rome are nowhere to be found as such.

So yes, the American economy will probably continue in much the same form for
the next thousand years or so all over the world. Our huge amounts of natural
resources, talent, and farmable land aren't going anywhere. The __real
__question, the one coded into the title of this post, is "Is America
influential enough to take a huge hit without the people who are currently
very wealthy having to give up their money bins." and hopefully, for the rest
of us who don't have money bins and can only become wealthy through our own
work, and thus depend on a fair system, the answer is no.

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pmorici
This begs the question of why in the heck did they let it get to big to fail.
and what are they going to do to shrink it down so next time they can let it
scum to market forces.

