Random Thoughts on the Financial Crisis

• Whoever wins the election is likely just a one term president. This mess is going to take years to clean up and federal budgets will be constrained. Most Americans will think they were better off in 2008 than 2012.
  
  
• Do Americans not know what Wall Street is? One day I hear that they don't support the rescue plan because it bails out Wall Street. Then, the next day the bill fails and Wall Street is down 700 points. Instead of being happy that those fat cats on Wall Street took a hit, Americans were upset because their 401k plans were down. Um, hello, did you not understand that your 401k was invested in stocks on Wall Street?

• The fact that the House was unable to pass the rescue bill shows that our political system is currently paralyzed and cannot respond to major issues. In crucial times, they just can't get it done.
  
  
• While the Senate was able to pass it, they added tax breaks. Are you kidding me? We are adding $700 billion of new debt and yet somehow we think that we can lower taxes and borrow even more money to finance our spending?
  
  
• How long will foreign investors continue to lend to the US? Warren Buffet says they are loaning us $2 billion a day. Tim Duy says we have already had a "quiet bailout” of $283.5 billion from global central banks. If they should ever slow down loaning us money, we are in big trouble.
  
  
• Americans have taken on too much debt as shown in the image to the left. The Economist writes:

  Morgan Stanley reckons that total American debt (ie, the gross debt of households, companies and the government) has risen inexorably since 1980 to more than 300% of GDP (see chart), higher than it was in the Depression. Consumers, in particular, were encouraged to borrow by low unemployment and interest rates and (until last year) rising asset prices. Their debt jumped from 71% of GDP in 2000 to 100% in 2007, a bigger increase in seven years than had occurred in the previous 20.

  The NY Times profiles how this has occurred.
  
  
• The Naked Capitalist writes:

  The sorry fact is the US has consumed at an unsustainable level. We need to reduce consumption and increase savings (and reducing debt is a form of savings). Reduced consumption means a fall in GDP.

  I agree completely with this sentiment along with Juan Enriquez and Joesph Stiglitz. Until Americans start saving more and quit borrowing so much money we aren't going to get out of this problem. And getting to that point is going to be painful.
  
  
• How overvalued is the real estate market? Calculated Risk looks at different ways to value how much the housing market is overvalued: price to household income (update), inventory levels, price to rent ratio, and real prices. These suggest that housing is still at least 20% overvalued. Calculated Risk also estimates that 15.4 million households will be underwater or already foreclosed on by the end of 2008.
  
  
• Edward L. Glaeser has a chart showing that real estate in Las Vegas, Phoenix and other "flat land" areas are overvalued by 60% compared to building costs and likely to correct quickly.
  
  
• According to Warren Buffet, the residential housing market is worth around $20 trillion. If it were to go down 20%, that would be $4 trillion in lost assets.
  
  
• If the housing market is overvalued, is it better for it correct right away or is it better to have it happen over many years? I don't know. I would think it would be better to try and stabilize the currently overvalued prices now and then try and keep prices flat for a few years while inflation eats into the real value of them. That way you don't have as many defaults in homes. On the other hand, keeping them inflated will cause problems elsewhere.
  
  
• Will the rescue package work? I wish I knew. Arnold Kling doesn't think so. George Soros and Paul Krugman believe that instead of purchasing troubled assets the bulk of the funds ought to be used to recapitalise the banking system.