The End of the Financial System and Global Economy
I feel like I should include a playlist with this post – something that truly highlights the doom and gloom being cast upon the financial markets. Sheesh.
I was reading an interesting blog article, which I’ll share with you here
Danny Schechter, the author of the blog, reinforced the terrible position we find ourselves in due to poor money management and credit card usage. I’ll admit that things could definitely be better; however, I find it premature to predict the end of all things financial. First of all, the financial system has had its ups and downs over the years and while things are pretty rough now, they’ll eventually stabilize.
Here’s why.
Danny’s argument presupposes that all banks and credit unions are invested fully in mortgage and credit cards. As I’ve mentioned before, when looking into a bank or credit union, it is wise to find one that has a balanced portfolio of investments, i.e. loans, credit cards, accounts, etc. That’s why seven banks failed this year – they were too heavily invested in the mortgage industry and had a lot of bad loans on the books. However, that’s not indicative for every bank or credit union out there. Several, in fact, are still doing well, despite the damage done by the real estate bubble. They have their balance sheets in more stable resources that protect their stock- and shareholders.
The same would hold true if the credit card bubble were to bust. As not all banks and credit unions offer credit cards (i.e. they’re not invested in the debts) then if that particular bubble were to burst, it wouldn’t cripple the entire industry – nor do I believe it would cause the global economy to come to a screeching halt.
We are making progress, albeit slow. Gas prices have fallen slightly every day for a month, stock prices have rebounded, credit card usage has slowed a little, and people are learning to make do with less. Being in a recession is no picnic, and the number of job losses is disheartening; however, the prediction of everything being crippled only serves a self-fulfilling prophecy in my opinion. People get scared, they don’t spend money, they don’t pay down debt and that’s when the cycle starts to take a turn for the worse.
Consumers and their credit cards fuel the business economy, which in turn fuels the global economy. As consumers spend and pay down debt, this keeps businesses in business and creates new jobs, or at the very least, sustains old jobs. This then contributes to money being poured into the economy. Why do you think the government tries the stimulus packages? It’s to help jump start the economy, even in some small measure. But, economists and “experts” predicting all these horrible economic outcomes makes people want to stay in doors and not spend money at all for fear of losing everything. While it’s important for people to save, it’s equally important to the economy that they spend money. When they don’t businesses fail, jobs are lost, and the economy goes to the crapper. Self-fulfilling prophecy.
I’m not suggesting we should be out there spending money unwisely. Nor am I suggesting that maxing out credit cards for the sake of saving the economy is the right thing to do. I am; however, suggesting that we not take everything these so-called experts say to heart. Bubbles will burst, that’s the nature of a bubble. Follow history back through time and you’ll see the trend. But, it’s not a reason to hole up and stop spending because that only makes things worse. Furthermore, the idea that the credit bubble bursting could bring the demise of the entire financial industry to their knees is ridiculous. It will hurt, I won’t deny that, but it certainly doesn’t mean the end.
What are your thoughts on this? Is the economy doomed to fail, or do you feel like there are those out there who look for reasons to panic?
The economy doesn’t have to fail completely but the size of the problem this time around is beyond what has been seen before.
There is the housing market collapse, there is the credit card bubble, you did not mention the amount of people who will no longer be able to pay the monthly fees for their car loans, at the same time the country has record deficits, obscene public debt [10 trillion, think about it].
The problem is not so much all these problems as a whole, which the country would dig itself out of, given enough time and chomping down the sour apple. The problem is credit default swaps and leveraged credit instruments which create money out of thin air. Those investment instruments have been leveraged as far as they could [they are not bound to the same oversight as the banks, silly government regulators]. What that means is that as the foundation of these debts fails the entire construction, as a matter of course, has to fail. The Carlyle Group has seen one of its investment arms, Carlyle Capital, implode overnight. There’s -nothing- left of it. They failed to make some margin payments and it folded almost immediately.
When more of these failures occur, that’s when your financial system vaporizes. Taking a loss is one thing, totally disappearing is another. Bear Stearns had two hedge funds that went nix from one day to the next. You can’t recover what is no longer there.
Look at the state of Fanny Mae and Freddy Mac. They insure 40%+ of the US mortgage market and they are basically insolvent. They will be bailed out by the US government, because that is what the promise was, but that has to come at the expense of some serious financial consequences. And how long is the US going to be able to finance all these failures? The US dollar is fiat money, M3 [emission of paper currency] is now a secret, and the US has made it its business to make as many enemies abroad as they could. These are the people who can sink the US economy overnight by sending back all the dollars they bought.
A total collapse of the financial system seems dramatic and with a healthy economy, good foreign relations and a balanced budget it would never happen. Unfortunately, none of these are present today. The foreign relations hold up only because of what it would mean to actually tank the US economy. That cannot be done without serious repercussions for the world economy.
Somewhere, somewhen there has to be a consequence for the American citizen. Joe Sixpack might hope that when he keeps his end of the bargain all will be alright. At the same time the financial world, which really should know better, hasn’t kept up its end of the bargain. And they have more power.
I don’t like doom and gloom better than the next guy, but unwarranted optimism is just pie-in-the-sky. We’re in serious trouble, the world over. The reason is regulations. If banks were tightly regulated, it could not happen. Rampant capitalism -must- end up devouring itself, just as unfettered communism will consume itself. The idea behind the system is not what causes the problem, it is the people within the system that are the inherent weakness.
Wow, some post huh? You asked for my thoughts, I think a lot about these things [which does not make me an expert].
Wow, that’s all I can say. I’ve read both sides, and this is definitely not something I had considered. I worked at a bank, one of those that lost a lot during the mortgage crisis. It was not pretty.
Taking a step back, I think whatever happens will be for the better. As human beings money is just a representation of good deeds & favors. We can all revert to barter and trade, forget about the little pieces of paper. ;) (Could we?)
You have some interesting thoughts, Hank. But, I still believe that credit card bubble burst or not, our financial system is not going to end. As you yourself pointed out, destroying our economy and burying us has serious ramifications to the rest of the world. However, that doesn’t mean that I believe we can just keep going at the same pace we are. Certainly, changes need to be made. I was looking forward to seeing what Obama would do with those changes, but given his VP choice and the fact that McCain brilliantly went with a woman nominee, I can’t say as I’m feeling optimistic about this year’s elections. And frankly, these elections are really going to determine a lot of what happens in the financial industry.
If McCain is voted into office - which I’m beginning to think is going to happen - we’re in for a rough ride. Policies as a whole aren’t going to change and we’ll continue to fund a war that is no longer any of our concern. The money being sunk into that could be better spent. I’d like to see the government step in and take responsibility for the fact that our national deficit is out of hand. I mean, we’re owned by countries that have, on several occasions, expressed hostilities towards us and are known to have WMD. So, my notions are not pie-in-the-sky, I assure you.
What I can say is that the credit card burst won’t bring the end of the financial industry as we know it. Yes, we’re in a bad time right now, but historically speaking, we’ve always been able to bounce back. Yes, the banking industry is taking a large beating, but as I pointed out, not every bank and credit union is going under. It’s all about balance.