What U.S. Economic Recovery? Five Destructive Myths

rhody

WSJ Article: European debt crisis in eight graphs
With the US economy inextricably linked to Europe, negative effects on us as a result of their debt crisis can only slow our economic recovery.

Rhody...

lisab

Great link, Rhody. The explanation of why Germany has done so well is really good, I think:
Also the graphs showing the exposure of French banks to Italian and Greek bonds are surprising.

rhody

That must be the reason I have engineering blood running through my veins, Lisa, when the economies of the major European countries can be described in a few crisp precisely worded sentences or paragraphs, exposing the big picture along with graphs of supporting data to back their claims, I am impressed. IMHO, the WSJ researchers (Ezra Klein and Sarah Kliff) did a good job with this story.

Rhody...

mheslep

That's the Washington Post, not the Wall Street Journal.

rhody

Yes, you are correct, I hope Ezra Klein and Sarah Kliff of the Washington Post can forgive me. Rhody face palms... knocks head against wall.

Rhody...

MarcoD

Personally, I agree with the analysis but not the conclusions. We have a fiscal union with fiscal ramifications for those who spend too much, that's exactly what the markets are doing now. There isn't even much need to change that, the markets were just late in understanding how the Eurozone system works. Second, we have stimulus funds for weaker economies.

Exposure and stuff is nice, but that's like studying the exposure of New York/Wall Street with respect to Michigan. It doesn't say a lot. (Okay, the exposures are real, the system might collapse that way, but that's about it.)

The only, but real, risk is that the whole system explodes; i.e., the Euro becomes worthless because no government bonds are trusted anymore. That's about it.

SixNein

I would wager it has already contributed greatly to our weak recovery.

MarcoD

And I would say that if anybody is to blame it is Wall Street and the (resulting) cheap borrowing costs in Europe. Seriously, the collapse of the housing bubble in the US left a debt hole partly owned by Europe, and that debt hole exploded because people got scared and withdrew funding. Let's guesstimate that on about 1-2 trillion. The whole problem in Europe now is the result of some debt-ridden governments -that's their own fault- and banks -same idiots here- trying to fix a debt hole without sufficient funds. The money is gone, and some people in Wall Street now must be exorbitantly rich.

No offense meant. It's not a blame game, it's just a US investment which went wrong.

(The Greeks rigged the books, so that's a different story, but I do feel a bit sorry for Italy. If money would have remained cheap, they could have gotten through with structural reforms (granted, not under Berlusconi). But the increase in costs of money, and a probable capital flight from that nation, means that they're stuck in a hole, maybe for decades.
And I wonder what percentage of pension funds evaporated in my own country because of the debt hole.)

MarcoD

And on a more serious note. The US is on a spending spree. To fund that, they borrow internationally, also from Europe, and spend it on oil and Chinese goods and assets.

Personally, I would prohibit any US funding from European side, since it now has become apparent that it is just a fine manner of giving money away. So I am not against decoupling the US and European economy, and I wasn't that in favor of the latest move of the national banks to stimulate international dollar transfer.

turbo

The major problem in the US is Wall Street. They are practically unregulated, and were allowed to bundle crap into derivatives, sell them to customers AND bet against their own customers, knowing that the derivatives would fail. Why aren't the major players in jail? Even country-club jails?

The second (and perhaps more damaging) problem is the Fed. When the cry-babies on Wall Street threaten to hold their breath, the Fed lowers interest rates again and again. This free money means that the investment banks can afford to pay almost zero interest, even on very large, stable accounts. Greenspan and Bernanke have a huge responsibility for the current debt crisis because they created it by driving wealth to the wealthy. Cheap borrowing came at the expense of the US taxpayers, for the benefit of the big banks and investment firms. And it is continuing. Is the Fed ever going to start charging reasonable interest rates for the borrowing of our money? Probably not, unless the taxpayers demand it.

MarcoD

God, yeah. I have nothing against the US, or the US public, but I think by now you can safely state that Wall Street managed to 'steal' money from literally everyone. There is a note that you can't blame them for the US trade deficit, so it was bound to happen, but the credit crunch was rather extravagant.

(And, contrary to what you think, I guess that the Fed keeps interest low to sponsor the trade deficit. I mean, cheap money means you got more to spend, right?)

(I mean, no offense. But if you really abstract from most details, then the US spends money in, say, China, and for every ten dollars maybe borrows eight dollars from China and two dollars from Europe. It can't pay back, so where will it default on? You can engineer it, or let it happen, but it will always default, also on Europe. It's just a law of nature that Europe can't invest in the US.)

(Ah well, editing again since I guess I should say I have no idea anyway since one would need to check the real numbers. Europe may be bankrupt, a part of Europe may be bankrupt, the US may be bankrupt, and nothing may have happened. Or maybe we're all filthy rich. No idea.)

mheslep

... is the federal government
Nonsense.

Fannie and Freddie, created by the federal government, invented mortgage bundling. They still owe taxpayers $130B (unlike the WS banks who paid off), and after being seized by the government still pay themselves huge bonuses as effective government employees.

So you don't like them, whoever they may be. But before you throw people in jail, exactly what law are you saying was broken? I bought some stock the other day. It went down. I'd like to use the Turbo law to throw the CEO in jail.

MarcoD

On a side note. I decided that economics is essentially the same as women's studies. It is incredibly interesting and academically pleasing, you can study it for the rest of your life, the topic behaves whimsical and erratic, and at the end of your life, you end up concluding that your understanding was less than you started. But pleasing still.

rhody

Sixty Minutes had a segment on this featuring two whistleblowers, who reported that the way mortgages were being doctored, and reported were of dubious quality and a high percentage of their loans fell into this category, if I remember correctly this was somewhere above 50%. The problem was systemic and across the company's. The Sarbanes–Oxley Act of 2002 was supposed to address this.

In a nutshell, the CEO/CFO's of major financial institutions with over 500 million in assets were to sign a document at physcal year end that said all financial statements under their scrutiny were valid and accurate. If fraud could be proven, and they were tried and convicted they could be subject to:
You have to watch the Sixty Minutes program to get the full picture, but to date the Securities and Exchange Commission (SEC) the oversight branch and the US Justice Department, the judicial branch have not prosecuted or convicted any of the major banks involved in the Securities debacle, with exception of two people, one of which, Richard Scrushy is described below.

The laws are in place, and there appears to be substantial evidence to investigate, but as you can see from the fines and the periods for confinement have not been dealt to anyone accused and convicted of cooking the books at the expense of the shareholders. The financial penalty and incarceration time in proportion to the the amount of harm done to our economy and million's of people's lives seems out of whack to me.

One of the guy's who was prosecuted and convicted under Sarbanes–Oxley, Richard Marin Scrushy
recieved this penalty for his crimes. His criminal trial was in Montgomery, Alabama.
His civil trial was in Birmingham, Alabama.
After review of what Scrushy was ordered to serve and pay for his crimes (plea bargained down substantially from the maximum penalty) it hardly seems fair does it ? Do you think his punishments will deter others from continuing the practice of misreporting financial statements as a CFO ? Personally, I doubt it, the reward is too high and the risk and punishment too low. I might add as a final tribute the the Sixty Minute Investigators, they report that the Justice Department has for unknown reasons been unwilling to aggressively pursue other CEO's and CFO's of major US financial institutions.

Rhody...

mheslep

No, the new accounting procedures of SO have little or nothing to do with junk securities sales. SO is about eliminating book cooking, inflating the apparent value of a company and the like.

rhody

So you are saying, until the book cooking stops, we should not hold a CFO/CEO accountable ? They have a legal obligation to do so under SO. BTW, the second whistler blower on the Sixty Minutes segment told the CFO of his company eight days before that they were serious fraud going on, and yet eight days later the CFO signed the financial statements as accurate and true, with full knowledge that he was doing it with the penalties of SO looming. So far he has not been investigated or indicted by the Justice Department, who is NOW well aware of the problem.

What do you want, more regulation at the boots level, where the buying and selling of mortgages and repackaging and reselling them takes place ? It never fails to amaze me when greed is involved what lengths SOME people will go to obtain wealth at ANY cost.

Rhody...

mheslep

Eh? I only said the book cooking CEO example you referred to has nothing to do with mortgage security bundling and bubbles.

I want the Federal government out the actual business of financing home mortgages, either directly or through guarantees. This means a nearly immediate dissolution of Fannie, Freddie, and the FHA. The FHA is another disaster in process, right now, with the same platitudes from leadership saying everything they're doing is risk free and for the good of the country, the same cozy deals with congress (just raised the limit on FHA guaranteed mortgages). How do the likes of FHA get away with this? I suggest in part because of people creating misdirection by pointing to Wall Street.