A Crisis of Trust

Ξ October 7th, 2008 | → 0 Comments | ∇ Basic Investment |

Over the past three decades, these United States have experienced unbridled prosperity. We were told that this rising tide would lift all boats. However, many boats must have had holes in them, because millions of Americans are now underwater. They are having their homes foreclosed on and they are declaring bankruptcy.

The prosperity that America has seen has been an unequal one. We have heard that the rich got richer and the poor got poorer, and it is true. There has been a level of inequity in this country not seen since the turn of the last century, when the Robber Barons concentrated more wealth in their few hands than in the rest of the country combined.

Now that we are facing a crisis in the financial markets, the effects will be just as unequal. This crisis we find ourselves in will reign in the excesses of Corporate America and Wall Street. But it will have a much smaller effect on Main Street and the American worker.

This is not to say that there won’t be pain enough to go around. We are in the middle of an economic slowdown, a contraction, a recession even. Everybody at every level of the economic spectrum will feel some pain. Whether it is the cost of food and fuel raising, loosing a job, or seeing your retirement savings shrink by half. Whatever pain the poor and the middle-class feel, it will be ten times worse for the rich, but we should not put our good money after their bad.

The true threat of our current crisis is to the credit market. The seizure of the credit market is what brough the economy to a halt during the Great Depression. Something needs to be done to ensure this doesn’t happen again, but a contraction of the credit markets is not necessarily harmful. Cash has been far to cheap for far too long, through both Democratic and Republican administrations. Cheap money has both lead to this crisis and contributed to the government inability to respond to it.

It has been cheap cash that has lead to the government, corporations and individuals to live far beyond their means. The growing debt and inability to repay loans is what started this crisis. It has been the low interest rates that have hindered the government’s fiscal policy tools. They have simply been unable to lower the interest rate enough to affect this crisis. Instead, what is happening is that we have turned to giving away money, effectively having a negative interest rate so the money will never have to be repaid.

Up to this point, the government has tried to solve this crisis by putting more money into a system that is failing under the weight of too much money.  The availability of capital isn’t the problem, plenty of institutions have the ability to lend money.  The problem is that they don’t trust anybody except the government enough to pay them back.  This is a crisis of trust.

Instead of handing out money to try and staunch the bleeding, the government needs to pass regulations to force companies to disclose their positions in these secondary and tertiary markets.  The best case for this is made in this past weekend’s This American Life entitled Another Frightening Show About the Economy.  Transparency, and not liquidity, is needed now, something Wall Street and Washington are scared of providing.

Original post by dram


Poor reporting on millions

Ξ June 28th, 2007 | → 0 Comments | ∇ Basic Investment |

Even the best reporters covering issues of money and the economy do a poor job covering wealth. For example, take a listen to a segment from today’s Marketplace. The segment is on a report out today about the growing number of millionaires in the world. The report says that there are 9.5 million millionaires and that the number of new millionaires is growing fairly rapidly. From this, Marketplace says that the number of wealthy people around the world is increasing. However, there is no discussion about whether people are actually becoming wealthier (ie if they have more spending power) or whether they just have more dollars that aren’t worth as much. In other words, there is no discussion about how inflation has affected the number of millionaires.

Original post by dram


  • Rumours and Lies