WP Column: It's Not 1929, But It's the Biggest Mess Since

[Ancalagon the Black]

Anyone else getting worried? (And, for the record, I don't think we're headed for another Great Depression, but I'm pretty sure this'll be worse than the downturn of 2001 and may resemble the 1970s.)

http://www.washingtonpost.com/wp-dyn/content/article/2007/12/04/AR2007120402186.html

It's Not 1929, but It's the Biggest Mess Since

By Steven Pearlstein

Wednesday, December 5, 2007; D01

It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one.

We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon.

But let me assure you, you ain't seen nothing, yet.

What's important to understand is that, contrary to what you heard from President Bush yesterday, this isn't just a mortgage or housing crisis. The financial giants that originated, packaged, rated and insured all those subprime mortgages were the same ones, run by the same executives, with the same fee incentives, using the same financial technologies and risk-management systems, who originated, packaged, rated and insured home-equity loans, commercial real estate loans, credit card loans and loans to finance corporate buyouts.

It is highly unlikely that these organizations did a significantly better job with those other lines of business than they did with mortgages. But the extent of those misjudgments will be revealed only once the economy has slowed, as it surely will.

Article continues at link.

[Toe Jam]

This is depressing.

Are you telling me there is no good news at all anymore?

[LD0506]

It's virtually impossible to predict future economic activity BUT the 800 lb gorilla in this subject is the amount of the US capital that China controls. If they wanted to, for whatever reasons of international attention or economic leverage, they could trigger something far WORSE than '29. We are much more interdependent now than then. The vast majority of the US populace was rural and to a large extent self-sufficient in basic survival needs, ie. food, shelter, etc., then. A major collapse triggered by cascading profit losses in the mortgage markets and lender failings or even a conflict between India and China where we sided w/ India is not out of the realm of possibility.

Likely? Maybe not, but by no means impossible.

[twa]

Not worried at all,but then my butt ain't hanging out there either.

There is something to being conservative.

As far as China they and others have too much invested in our well being to provoke a collapse.

[DeanCollins]

Not worried at all,but then my butt ain't hanging out there either.

There is something to being conservative.

As far as China they and others have too much invested in our well being to provoke a collapse.

read I'm in texas and bush is my friend :laugh:

[twa]

read I'm in texas and bush is my friend :laugh:

Well having a very diverse economy helps(we got hammered when oil was king and crashed and learned from it)

As far as Bush...not sure he is all that much help. :laugh:

btw ain't ya'll got a Bush over there?

[PeterMP]

Not worried at all,but then my butt ain't hanging out there either.

There is something to being conservative.

As far as China they and others have too much invested in our well being to provoke a collapse.

I've said it repeatedly and will say it again. At some point in time, China will decide that the harm they can inflict on us is worth the pain to them. There decision might even be wrong. Countries, especially those that are essentially dictatorships, don't always make rational decisions. Either way, we will be in big trouble.

[twa]

I've said it repeatedly and will say it again. At some point in time, China will decide that the harm they can inflict on us is worth the pain to them. There decision might even be wrong. Countries, especially those that are essentially dictatorships, don't always make rational decisions. Either way, we will be in big trouble.

There is another side to that,foreign ownership and debt is only good/viable if we allow it...it would mean war of course to write it off.

[DjTj]

IMO, this looks a lot more like the Savings and Loan Crisis of the 1980's than the crash of 1929.

It will be bad for the financial sector and the housing market, but I don't see a Great Depression around the corner.

[LD0506]

I've said it repeatedly and will say it again. At some point in time, China will decide that the harm they can inflict on us is worth the pain to them. There decision might even be wrong. Countries, especially those that are essentially dictatorships, don't always make rational decisions. Either way, we will be in big trouble.

When you look at the inroads they have made into production markets, the influence they are buying in Africa along with raw materials access, the cozy covert relationship they have with many in the middle east that they supply weapons to, the recent attempts to improve relations with Japan, etc., I think that you could make a case for their long term strategy against us counting on exactly that- they may position themselves for it and drop the hammer in a quite rational and intentional fashion.

Anticipating it and preparing themselves to step in if we stumble? Wouldn't shock me one bit.

[isle-hawg]

We are China's ***** right now. They make most of the stuff we purchace, and we owe them tons of money. This country is not longer self sufficient and since we are well beyond being on the gold standard , should we default on what we owe, our currency will fall big time (it already is BTW).

[Larry]

Mostly my problem with the "China won't ever do that, because it would hurt them, too" argument (besides the "and you think the decision makers in China care about the Chinese economy because . . . " response) is why anybody would think that it's acceptable to give a country we've been at war with, recently, that big a weapon to use against us.

If I were to wire my house with explosives, and give the detonator to my neighbor, them maybe I could tell myself that "well, he'll never push the button, because if my house blows up, it'll damage his, too". But that still doesn't make it a good idea.

[jbooma]

To fight this they will keep dropping the rates to give people a chance to refinance. This is what I am praying for so I can lock in as well

What many people do not understand is the biggest impace will NOT be people in their foreclosures, it will be all the companies that were selling mortages back in forth. That is where it will get interesting.

[skinfan133]

As far as China they and others have too much invested in our well being to provoke a collapse.

thats a slipery slope of denial right there. we my be their number one customer right now, but just like always, the chinese market is definately for sale to the highest bidder. our dollar colapses and that bidder becomes europe. there is a flase assumption in this country that China needs us. this is hardly the case, as china finances your public services through US treasury bonds, which they WILL collect someday. just a tidbit to munch on for now.

[skinfan133]

Mostly my problem with the "China won't ever do that, because it would hurt them, too" argument (besides the "and you think the decision makers in China care about the Chinese economy because . . . " response) is why anybody would think that it's acceptable to give a country we've been at war with, recently, that big a weapon to use against us.

If I were to wire my house with explosives, and give the detonator to my neighbor, them maybe I could tell myself that "well, he'll never push the button, because if my house blows up, it'll damage his, too". But that still doesn't make it a good idea.

quoted for truth. the problem with Chinas that no one in this country understands or even knows abot we can thank Clinton partly for. If China looms large in our future in a negative way I guarentee you Clinton's goodwill will disapear overnight.

[Ancalagon the Black]

To fight this they will keep dropping the rates to give people a chance to refinance. This is what I am praying for so I can lock in as well

If rates drop much further, you're going to see some massive inflation.

[baervt]

Hey all, I would appreciate any and all the financial advice I can get.

Ok so I read The Little Book of Common Sense Investing by John Bogle over the summer. I felt it was a great book and he had some good points . Basically, I bought into his theory about the greatness of index funds and I invested all of my money into two Vanguard Index Funds (VTSMX and VGTSX) a few months ago.

Anyways, so my investment in these two funds has earned $5,000 since I invested in them three months ago. However, I've been hearing all this talk about the market is going to crash soon and their will most likely be a recession etc.

I plan on investing this money long-term (at least 20 years) and after reading the book, Bugle preaches about how important it is to invest the money and not touch it. He says we shouldn't try to predict the market and buy and sell accordingly. But I'm in a dilemma because so many people are talking about a recession taking place, I'm contemplating wheter to pull out temporarily or sit tight like Bugle insists.

So I wanted some advice as to wheter I should sell my investments in these index funds and wait for this much anticpated "recession" to take place, where I can then rebuy them at a lower price? Or should I just keep these funds and think long-term?

Thanks for all and any input!

[Koolblue13]

See, I knew my dumb ass understood what a "global economy" meant and i'm still happy I bought my $30 shovel.

[skinfan133]

See, I knew my dumb ass understood what a "global economy" meant and i'm still happy I bought my $30 shovel.

:laugh:

[Kilmer17]

2 things.

1- You can expect the fed to lower the rate another 2 points over the next year. That will help short term issues (and create bigger longterm issues).

2- China wont do anything. Anymore than we will. China may own a large part of our debt, but it pales in comparison to the amount of debt we own from other countries.

[PleaseBlitz]

Historically, people predicting recessions have been less successful than simulated Madden games picking NFL winners. Also, the authors premise that the "same executives, with the same fee incentives, using the same financial technologies..........." MUST have made the same errors is extremely flawed.

That being said, i do think we are heading towards a downturn. How severe is going to depend on a lot of factors and im certainly not smart enough to make a prediction.

[techboy]

Hey all, I would appreciate any and all the financial advice I can get.

Ok so I read The Little Book of Common Sense Investing by John Bogle over the summer. I felt it was a great book and he had some good points . Basically, I bought into his theory about the greatness of index funds and I invested all of my money into two Vanguard Index Funds (VTSMX and VGTSX) a few months ago.

Anyways, so my investment in these two funds has earned $5,000 since I invested in them three months ago. However, I've been hearing all this talk about the market is going to crash soon and their will most likely be a recession etc.

I plan on investing this money long-term (at least 20 years) and after reading the book, Bugle preaches about how important it is to invest the money and not touch it. He says we shouldn't try to predict the market and buy and sell accordingly. But I'm in a dilemma because so many people are talking about a recession taking place, I'm contemplating wheter to pull out temporarily or sit tight like Bugle insists.

So I wanted some advice as to wheter I should sell my investments in these index funds and wait for this much anticpated "recession" to take place, where I can then rebuy them at a lower price? Or should I just keep these funds and think long-term?

Thanks for all and any input!

Sit tight. Study after study has shown that when investors try to time the market, they inevitably fail, buying high and selling low.

What you may want to consider, though, is whether or not you are overinvested in stocks. You need to have a stock/bond allocation that you can stomach if the markets get dicey. It's important that you have really considered your ability, need, and desire to take risk.

Speaking of Bogle, you should ask this question at the Bogleheads forum: diehards.org. This is a forum run and populated by devotees of low cost, passive index investing, and they really know their stuff, and are incredibly gracious about helping others. There are even 4 or 5 financial professionals offering advice for free, running the gamut from basic questions like yours to complex data-driven discussions about things like value tilting.

Go there, read the FAQs, and post a question, and they'll help you determine a proper asset allocation that you can buy and hold and ride out whatever the market may throw at you.

[techboy]

Historically, people predicting recessions have been less successful than simulated Madden games picking NFL winners.

There's a reason for that. Many economists argue that the market is largely (or completely) efficient, meaning that information flows so freely that any news is virtually immediately priced into the market, meaning that only new, unknown information can have any effect, meaning that stock prices are essentially random (though historically with an upward trend). Burton Malkiel's A Random Walk Down Wall Street is an excellent book dealing with this.

[Rocky21]

quoted for truth. the problem with Chinas that no one in this country understands or even knows abot we can thank Clinton partly for. If China looms large in our future in a negative way I guarentee you Clinton's goodwill will disapear overnight.

??? I've read this post 3 times and it makes no sense whatsoever.

[PeterMP]

There's a reason for that. Many economists argue that the market is largely (or completely) efficient, meaning that information flows so freely that any news is virtually immediately priced into the market, meaning that only new, unknown information can have any effect, meaning that stock prices are essentially random (though historically with an upward trend). Burton Malkiel's A Random Walk Down Wall Street is an excellent book dealing with this.

I'll actually read the book, but a quick analysis would suggest that it isn't likely to be random (I love the role of randomness/noise in anything. It is always interesting to see how things in one field apply to another). It is affected by information. Most information becomes public pretty quickly, and therefore the market adjusts quickly and unlikely will cause a recession. What information doesn't become known quickly and could build up to the point that it would cause a recession? Sometimes history changes quickly and in those cases I could see that it being essentially random, but in othe cases there is information that people/institutions are trying to keep out of the public eye- that is they are trying to keep it a secret. Once the dam breaks, the information comes out and the economic adjustment is severe (e.g. the case w/ Enron related scandals, and the role had in the subesequent down turn in the market). Such information isn't likely to be random because it is related in case after case (i.e. it is worth being hidden, which frequently means illegal) so my guess is that there is an essentially random (my guess is that even that isn't random, but it would take a substantially longer arguement to explain in defend my point) and non-random component. The trick is teasing them apart.