A report by the Dallas Federal Reserve Bank, Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath, puts the costs to the average household of the great recession at $50,000 to $120,000.
The worst downturn in the United States since the 1930s was distinctive. Easy credit standards and abundant financing fueled a boom-period expansion that was followed by an epic bust with enormous negative economic spillover.
…
Our bottom-line estimate of the cost of the crisis, assuming output eventually returns to its pre-crisis trend path, is an output loss of $6 trillion to $14 trillion. This amounts to $50,000 to $120,000 for every U.S. household, or the equivalent of 40 to 90 percent of one year’s economic output.
They say “misguided government incentives” much of which are due to payments to politicians by too-big-to-fail institution to get exactly the government incentives they wanted. There is a small bit of the entire problem that is likely due to the desire to have homeownership levels above that which was realistic (beyond that driven by too-big-to-fail lobbyists).
“Were safer” says a recent economist. Which I guess is true in that it isn’t quite as risky as when the too-big-to-fail-banks nearly brought down the entire globally economy and required mass government bailouts that were of a different quality than all other bailouts of failed organizations in the past (not just a different quantity). The changes have been minor. The CEOs and executives that took tens and hundreds of millions out of bank treasures into their own pockets then testified they didn’t understand the organization they paid themselves tens and hundreds of a millions to “run.”
We left those organizations intact. We bailed out their executives. We allowed them to pay our politicians in order to get the politicians to allow the continued too-big-to-fail ponzie scheme to continue. The too-big-to-fail executives take the handouts from those they pay to give them the handouts and we vote in those that continue to let the too-big-to-fail executives to take millions from their companies treasuries and continue spin financial schemes that will either work out in which case they will take tens and hundreds of millions into their person bank accounts. Or they won’t in which case they will take tens of millions into their personal bank accounts while the citizens again bail out those that pay our representatives to allow this ludicrous system to continue.
Banks Seen at Risk Five Years After Lehman Collapse
“We’re safer, but we’re not safe enough,” said Stefan Walter, who led global efforts to revise capital rules as general secretary of the Basel Committee on Banking Supervision.
If you get the impression I am upset by the actions of those who have been given responsibility that can be used to ruin millions of people’s economic lives and who have done so you are correct. When teenagers are selfish, irresponsible, brats it is obnoxious but fairly common. When our political leaders and those giving those political leaders the most cash behave as our have the last 20 years it is reprehensible. When the obvious result occurs and tremendous suffering is caused by their reckless, greedy, selfish, foolish and uncaring actions and then just continue to do the same things it is despicable.
That we chose to put those politicians that enable this is sad. But those that are risking the global economy in order to continue their narcissistic behavior are not excused by our foolish decision to re-elect those selling out the country to those paying them for favors.
The exact balance that is unknown. What amount of corruption from political leaders and financial executives can the economy support and survive? I don’t know. Maybe we can support the unforgivable behavior of those leaders in the last 5 years and the the 10 years before that. Maybe throwing millions of people out of jobs, killing thousands of businesses, forcing retirees to have their yields cut to almost zero in order to bail out banks that allow their executives to bleed their treasuries dry with more gusto than kleptocratic dictators in soon to be bankrupt countries. It is disgusting that this behavior continues. How many hundred of billions or trillions more in bailouts and fraud will be extracted from the productive parts of our economies to pay for this unsupportable behavior. Maybe our economies can take this kleptocratic behavior and survive. Maybe it can’t. That we elect people that have decided to take the cash and allow that risk to be tested is a foolish risk to take.
The too-big-to-fail crowd is just fleecing foolish taxpayers and paying those taxpayers representatives (I imagine to knowing continue to fleecing or I suppose it is possible the politicians don’t have the ability to understand what they are doing). The global economy generates trillions of benefits. Such wealth allows for a great deal of kleptocracy and risky bets (that can just be passed onto foolish taxpayers if they don’t work).
The scope of the swindle being perpetrated by the too-big-to-fail crowd and their bought and paid for politicians (who it must be said we continue to put back into office) is beyond anything every attempted before. The devastation caused by their reckless action doesn’t slow them down. They just take the bailouts and place even biggest bets, continue to take tens of millions for themselves, and leave the taxpayers to pick up the mess when it is too large.
That too-big-to-fail bailout champions are not only still alive and allowing those working their to take millions every year is nearly unbelievable.
In order to survive this massively risky economic future you would be wise to be very financial adept. Debt is very risky in such a situation. But debt is actually a way to get huge rewards at the right times in this environment (but do this wrong and you will be bankrupt). The huge bailout culture creates bubbles – making a great deal during the bubbles can be used a way to get capital to survive the costs of bailing out the kleptocrats we have allowed to steal from the productive economy. I am not even sure what are safe investments.
My guess is that the right real estate is one good place to invest (but the kleptocrat economy creates all sorts of risks that are difficult to measure). Companies that are very resilient to economic catastrophe are likely another good place. You have to find companies that don’t listen to the too-big-to-fail crowd that attempts to create risky financial structures in order to make cases to justify taking tens of millions (basically they pretend that this financial engineering created millions in value today so count that as earnings, based on those earnings I get millions… it is innately crazy that anyone accepts this junk but just watch those CEOs of our too-big-to-fail institutions when they testified on the hill and you see these are people that don’t have a clue about running an honest business.
This is such utter crap. For decades this excuse has been used to justify insane risks. Businesses may need cash to fund growth (buy assets, invest in research and development…). They might need some cash to get by while cash flow is not adequate. It may well make sense to have some sensible hedging. None of this requires too-big-to-fail banks.
Relatively small banks can do facilitate these needs. Insurance for business risks can be financed by insurers.
There is nothing that requires us to have speculators allowed to create risks that require government bailouts larger than the largest expenses any governments have every made (larger than World War II). There is nothing that requires 98% of the speculation. I don’t care if people speculate with their money and do not have the ability to massively impact the entire market (capitalism is based on the idea no actors have market power – every actor is a the mercy of the market, not the other way around).
Too-big-to-fail speculation mainly allows fake financial estimates to claim profits that haven’t actually taken place yet have. We can eliminate that with no loss to society. It also allows creating financial speculation so complex no-one can understand the huge fees the too-big-to-fail crowd takes. Again who cares, eliminate this. Nothing should be allowed to be 1/10 the size of too-big-to-fail. The only potential cost of this (and I doubt it would be a cost but theoretically it could be) is perhaps borrowing or hedging would be a bit less efficient. This is completely fine. There is not even remotely any justification for large, risky financial institutions in order to reduce the costs a small bit.
The current financial system is extremely complex and risky. There is no economic reason to allow such risks to continue. We can have financial needs met without ludicrously risky financial gimmicks. We should not vote in people that continue to sell out our productive economy to kleptocrats in the too-big-to-fail financial institutions to game the system the way they have the last 30 years.
The collusion (investment banking fees, front running trading [“high frequency trading”], libor, foreign exchange price fixing…) are illegal actions that use fraud to steal from market participants. Those actions should be investigated and criminally prosecuted but frankly that is minor compared to the main too-big-to-fail system corruptions.
The truth is I am able to navigate the massively distorted investment climate created by out too-big-to-fail designed financial system better than most. It is tricky but I think I’ll do fine. I imagine I will actually likely benefit – there are massive distortions and bubble that too-big-to-fail directed economies will generate that I imagine I will likely benefit from (though I have a greater risk of messing up in this riskier investment climate than one that would be much better for everyone in the economy outside the too-big-to-fail kleptocrats). I would much rather be able to invest without the massive distortions caused by the too-big-to-fail directed economic policies of our largest governments. But others are much less able to navigate the massively distorted investing climate. It is immensely more difficult to just make sensible long term, and safe, investment strategies today than is was until recently (the last 10 years or so).
But hundreds of millions or billions of people are suffering greatly and likely to continue to as long as we allow the kleptocrats at too-big-to-fail institutions to direct our government’s to continually do those too-big-to-fail institutions huge favors.
More remarkable, the responses of both the Bush and Obama administrations to the crisis–bailing out the megabanks on generous terms, without securing any meaningful reform–demonstrate the lasting political power of Wall Street. The largest banks have become more powerful and more emphatically “too big to fail,” with no incentive to change their behavior in the future. This only sets the stage for another financial crisis, another government bailout, and another increase in our national debt.
The alternative is to confront the power of Wall Street head on, which means breaking up the big banks and imposing hard limits on bank size so they can’t reassemble themselves. The good news is that America has fought this battle before in different forms, from Thomas Jefferson’s (unsuccessful) campaign against the First Bank of the United States to the trust-busting of Teddy Roosevelt and the banking regulations of the 1930s enacted under Franklin Delano Roosevelt. 13 Bankers explains why we face this latest showdown with the financial sector, and what is at stake for America.
Related: Buffett Calls on Bank CEOs and Boards to be Held Responsible – Credit Crisis the Result of Planned Looting of the World Economy – The Best Way to Rob a Bank is as An Executive at One – Is Adding More Banker and Politician Bailouts the Answer? – Paying Back Direct Cash from Taxpayers Does not Excuse Bank Misdeeds – Executive pay “excesses are so great now they will either force companies to take huge risks to justify such pay and then go bankrupt when such risks fail” – Failure to Regulate Financial Markets Leads to Predictable Consequences – Small Banks Having Trouble Competing with Bailed Out Banks
Comments
3 Comments so far
I’m interested in hearing your strategies for investing in today’s bubble markets.
The government is obviously inflating the securities markets, but it has to give way at some point. So finding an investment that will survive the next meltdown is non-obvious to me.
Very disturbing indeed. Is there anything that can be to change this sad state of affairs before everyone loses their shirts?
> I’m interested in hearing your strategies for investing
> in today’s bubble markets.
For the last 3 years I have thought we are in the most difficult investing climate I can think of (maybe the great depression was worse). As I say above, I don’t know how to invest today. I am thinking for me
1) I am fairly l knowledgeable about investing in stocks and the stock market and booms and busts
2) I can understand and accept the risks I will take
that the bet answer is
1) save a lot (to cover future risks)
2) take substantial risks to capture gains while they are available due to politicians and the Fed continuing risky policies enabling too-big-too-fail system (massive intervention, bubble inducing in size)
This is a risky strategy but I think the best one for people that are knowledgable and can accept risk and can actually invest in the face of risk (there is the psychology of being able to sleep… but there is also a need to be able to make good decisions when taking large risks which sometimes throws people – they make bad decisions when pressured).
For those without this ability and background
1) save a bunch (you have to compensate for much lower expected returns, decent chance the people we trust screw up the economy so badly we are thrown out of work, etc.)
2) invest in things that will survive a very bad economy – this general advice then has to be operationalized (which is trickier). My guess on how to operationalize is companies that have very strong cash flow positions and likely to remain profitable (even if at a lower profit level) even in bad times.
3) take some risks (but fairly small) to profit in bubble times to balance out the busts that are being created. This part is even harder than 2 to pull off. But basically I don’t think going completely risk averse will work, you lose too much over the long term.
I have greatly increased the level of risk in my investment (allocating much more to risky investment) in the last 6 months based on the thoughts above. My idea is to make substantial profits while the bubble is being induced. Then I will try to limit my losses at the end of the bubble. I have done this in the past and it is possible (not to eliminate losses but to limit the size of them). You must be willing to accept the losses and cut them before they grow to big. if you do it carelessly you can lose all your speculative gains and then more as the bubble collapses.
I have trouble accepting losses but have gotten better and have learned to focus on that when speculating – when I am investing I can worry less about cutting losses, instead focusing on whether it is still a good long term investment and if so, sticking with it.