“The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years. However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.”
George Soros, Financial Times, January 23, 2008
Pop, pop, pop that thang…
[quote]Headhunter wrote:
The current crisis is the culmination of a super-boom that has lasted for more than 60 years."
George Soros, Financial Times, January 23, 2008
[/quote]
Headhunter, there are a number of articles on that page. What is the title of the article by Soros?
Call me an idiot (And I know many will…), but I still don’t quite understand how this housing “bubble” is the root cause of this economic crisis that the media loves to hype.
So people bought homes they couldn’t afford. O.K. I still don’t understand how this affects Wall Street, and is causing world wide shenanigans.
I thought, and my grandfather told me this, that our current economic crisis is due mainly to the weakening dollar caused by inflation, caused by our governments excessive and out of control spending.
I also read that this housing crisis is being wildly over-exaggerated, and that the reality is quite tame compared to the medias “OH MY GOD!!! RUN FOR THE HILLS!!! NO ONE GETS OUT ALIVE!!! WERE ALL DOOMED!!” version.
[quote]skaz05 wrote:
Call me an idiot (And I know many will…), but I still don’t quite understand how this housing “bubble” is the root cause of this economic crisis that the media loves to hype.
So people bought homes they couldn’t afford. O.K. I still don’t understand how this affects Wall Street, and is causing world wide shenanigans.
I thought, and my grandfather told me this, that our current economic crisis is due mainly to the weakening dollar caused by inflation, caused by our governments excessive and out of control spending.
I also read that this housing crisis is being wildly over-exaggerated, and that the reality is quite tame compared to the medias “OH MY GOD!!! RUN FOR THE HILLS!!! NO ONE GETS OUT ALIVE!!! WERE ALL DOOMED!!” version.[/quote]
Banks are highly leveraged institutions. They are allowed to loan out far more than the capital value of the bank. This is called fractional reserve banking.
Suppose bank A has capital and deposits of $10,000,000. If the required reserve (money kept liquid by the bank) is 10%, the bank can make $100,000,000 in loans and earn interest on that huge amount.
Suppose now that $20 million of the loans go sour. The bank has lost 20 million but had assets of 10.
Here’s a better example, since banking is obscure: You buy a $400,000 house with $40,000 down. The value of your home declines in a recession to $360,000. You now have no equity in your home. Then, let’s say it falls to $320,000. You’re long gone and the bank is out the 40 you gave it AND another 40, all on created money, money it created by fractional reserve banking (magic money).
Note: no one truly understands FR Banking. It was done on purpose to confuse the public. Also, to interest on money created out of nothing…
[quote]skaz05 wrote:
Call me an idiot (And I know many will…), but I still don’t quite understand how this housing “bubble” is the root cause of this economic crisis that the media loves to hype.
So people bought homes they couldn’t afford. O.K. I still don’t understand how this affects Wall Street, and is causing world wide shenanigans.
I thought, and my grandfather told me this, that our current economic crisis is due mainly to the weakening dollar caused by inflation, caused by our governments excessive and out of control spending.
I also read that this housing crisis is being wildly over-exaggerated, and that the reality is quite tame compared to the medias “OH MY GOD!!! RUN FOR THE HILLS!!! NO ONE GETS OUT ALIVE!!! WERE ALL DOOMED!!” version.[/quote]
Asset bubbles pop - and this asset bubble is very similar to the asset bubble of the 19902 tech wreck: easy capital + unjustified expectations in the hype of eternal appreciation.
It infects the economy because of the chain reaction of large amounts of borrowers defaulting on loans. But “large” is relative term, and has been overstated in the media.
Whether or not it is a “crisis” really depends on how much the losses can be spread out and whether it spooks actual economic actors into cooling their activities. The mitigating factor is that once assets shake out and reach a certain low, they become good investments.
The media always need a crisis narrative for the economy, especially this close to a national election - but I think it has been exaggerated. There will definitely be an impact - it would impossible if there wasn’t, stupid decisions have consequences - but as an investor, I think this is a great opportunity to buy in.
I suspect George Soros does too, but why does anyone care what he thinks anyway? He made his gazillions shorting currency and he is a sleaze - it is in his best interests to generate bad news about the dollar. And more besides, if a Democrat was in office, his “analysis” would be conveniently different.
[quote]thunderbolt23 wrote:
I suspect George Soros does too, but why does anyone care what he thinks anyway? He made his gazillions shorting currency and he is a sleaze - it is in his best interests to generate bad news about the dollar.
[/quote]
A sign that the end is near. I agree with Thunder on this one. Labeing Soros a sleaze would be an understatement.
Dustin
Everyone thought Japan was going to rule the world back in the 80s and early 90s. Then the Japanese bubble economy popped like sushi-flavored bubblegum. Now, nearly two decades later, the economy is in the throes of recovery, but nobody is terrified of the country’s economic might anymore.
Even the mighty Soviet empire came crashing down and shattered into pieces when their economy failed.
It will be interesting to see what happens when the US bubble finally and decisively pops.
Interesting in the sense of the Chinese curse, “may you always live in interesting times.”
[quote]Varqanir wrote:
Everyone thought Japan was going to rule the world back in the 80s and early 90s. Then the Japanese bubble economy popped like sushi-flavored bubblegum. Now, nearly two decades later, the economy is in the throes of recovery, but nobody is terrified of the country’s economic might anymore.
Even the mighty Soviet empire came crashing down and shattered into pieces when their economy failed.
It will be interesting to see what happens when the US bubble finally and decisively pops.
Interesting in the sense of the Chinese curse, “may you always live in interesting times.”[/quote]
In another thread, Boston linked to an article in The Economist (which I think is a Rothschild publication btw) describing the worldwide real estate bubble as equal on paper to all the wealth in the world, the largest bubble in history.
One thing of great concern is then that states and municipalities are already hurting. With so many homes not paying taxes, one of these entities will be awfully tempted to ‘reschedule’ their general obligation bonds. This’ll open the floodgates, with massive defaults and repudiations.
That should REALLY get the ball rolling…
[quote]Headhunter wrote:
Banks are highly leveraged institutions. They are allowed to loan out far more than the capital value of the bank. This is called fractional reserve banking.
Suppose bank A has capital and deposits of $10,000,000. If the required reserve (money kept liquid by the bank) is 10%, the bank can make $100,000,000 in loans and earn interest on that huge amount.
Suppose now that $20 million of the loans go sour. The bank has lost 20 million but had assets of 10.
Here’s a better example, since banking is obscure: You buy a $400,000 house with $40,000 down. The value of your home declines in a recession to $360,000. You now have no equity in your home. Then, let’s say it falls to $320,000. You’re long gone and the bank is out the 40 you gave it AND another 40, all on created money, money it created by fractional reserve banking (magic money).
Note: no one truly understands FR Banking. It was done on purpose to confuse the public. Also, to interest on money created out of nothing…
[/quote]
O.K. I see. But doesn’t this mean that these losses are only on paper? No real “tangible” money has been lost, right? If the money never existed in the first place, then how can they lose it?
Why can’t the banks just open their books, take out a big red pen, and simply write these loans down? I don’t understand. Just take the loss, that technically never existed in the first place, and there! Problem solved.
[quote]Dustin wrote:
thunderbolt23 wrote:
I suspect George Soros does too, but why does anyone care what he thinks anyway? He made his gazillions shorting currency and he is a sleaze - it is in his best interests to generate bad news about the dollar.
A sign that the end is near. I agree with Thunder on this one. Labeing Soros a sleaze would be an understatement.
Dustin
[/quote]
Damn - we agree on something.