Freedom from a Sense of Futility in 2009

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Statistics suggest 2008 was the worst year most Americans can recall .. with stocks posting their biggest annual drop since the Great Depression. (Only 1907 and 1931 posted bigger negatives.)

Family of the Great Depression, liberated from a sense of futility

People who work with such statistics seem to agree things will likely worsen before they improve. Exactly how much worse is, of course, the source of much speculation. (Because nobody knows for sure.)

From what I've gathered (in talking and listening), most people are hoping for the best, but "preparing for the worst," which means they're buying nothing but essentials (.. further depressing the economy).

Might be worth noting that the worst year most Americans will ever see would still represent the best year for people living in many other parts of the world. So the terms 'worst' and 'best' are relative. (Important we maintain perspective.)

Interesting that (as someone recently noted) bin Laden's aim in targeting the World Trade Center towers was to criple the US economy .. (cuz that's how they defeated the mighty Soviet Red Army in Afganistan).

Another thing I find interesting is that everybody now claims to have seen it coming. Even at the coffee shop, I hear people saying things like, "Everybody knew this was coming. No big surprise."

••• today's entry continues here below •••

Well, if everybody could foresee the coming collapse of the housing market (which precipitated the banking crisis, which led to the credit crunch, which caused the economic meltdown...) uh, how come nobody did anything about it?

On the flip side, such challenges are not necessarily all-bad. Nietzsche said » "That which does not kill us makes us stronger." And Eric Hoffer said:

"The most gifted members of the human species are at their creative best when they cannot have their way, and must compensate for what they miss by realizing and cultivating their capacities and talents."

Of course, Hoffer also said (food for thought as we enter 2009):

"The poor on the borderline of starvation live purposeful lives. To be engaged in a desperate struggle for food and shelter is to be wholly free from a sense of futility."

The unspoken concern that everybody seems to have (an intuition?) is that this is more serious than a (normal) cyclical economic downturn, but rather more far-reaching & longer-lasting .. and something that may prove immune to efforts by (even) our government.

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> Another thing I find interesting is that everybody now claims to have seen it coming.

Well, there are two parts to this. On the one hand, the signs of an asset price bubble in housing aren't hard to see. In fact, bear in mind that there were similar housing-price bubbles (fueling construction booms) in many economies all over the world: the UK, Spain, Australia, New Zealand, as well as the US.

However, bubbles can pop explosively or they can deflate relatively harmlessly. In particular, it's worth bearing in mind that the asset price bubble in the US started later than in most of the other countries experiencing them, and indeed most markets outside the US looked set to, or indeed had begun the kind of orderly but necessary reversion to start bringing prices back into line, after reaching peaks far frothier than the US market came near to.

Now, other problems such as the enormous notional value of outstanding CDS contracts, and a worrying fall in the standard of credit underwriting in the US (which didn't happen in other markets; also, in other markets mortgagees can't walk away) were also being talked about but I think it's fair to say that what very few people expected was that the (widely expected) peak in the housing-price asset bubble would be transmitted into a substantial shock in financial markets that created a liquidity crisis that lead via deleveraging to a solvency crisis.

Both the fact and the speed of that contagion were pretty remarkable; the level and the speed with which housing markets have fallen is equally, not what most people would have expected, since the financial crisis triggered by the bubble bursting has fed back into the bursting process making it much more rapid and extensive that it would have been normally.

So, while it's fair to say that both a housing bubble specifically and a general need to unwind some serious economic imbalances building up (such as, say, negative savings rates in US households) were pretty widely expected and being commented on by economists and the press, that doesn't say that either the form or suddenness of what happened was expected at all. It simply wasn't.

As to the question of "why didn't anyone do anything", that also rather begs the question of what *could* be done by anyone, given that it was largely a market phenomenon.

Now, asset-price bubbles can be damaging, and regulators would like to be able to lean against them, but that's an extremely hard thing to do (especially for central bankers, who have a comparatively limited number of tools and too many objectives to achieve). In particular, because many of the tools used by central bankers act with large time delays, in leaning hard against a bubble once it has unmistakably formed they run a serious risk of being too late, and have their policies impact post the peak - thereby turning what would be otherwise a mild event into a more serious one.

The kinds of approaches (market, and regulatory) that might have forestalled the bursting of a bubble turning into a worldwide financial rout are not things that could have been put into place quickly; central clearinghouses for swaps don't come into being overnight, resolving the conflict of interest present in the ratings agencies is absolutely not an easy thing either.

These are systems problems, and systems problems fight back - markets game regulators, unintended consequences abound, and time lags mess up all our perceptions of cause and effect and mean that systems don't reach a simple passive equilibrium.

(PS. I tried registering with your MT install but it never e-mailed me so the registration didn't take, hence I created a LiveJournal account to post instead.)

Sorry about the registration glitch. It appears the most recent upgrade to Movable Type changed the way comments are approved.

I have approved/accepted/verified your user-profile, so you should have no obstacles in the future.

RE: "What very few people expected was that the (widely expected) peak in the housing-price asset bubble would be transmitted into a substantial shock in financial markets that created a liquidity crisis..."

I see what you're saying. Interesting. In other words, while one part of the equation may've been predictable, it's consequences were not.

What are "CDS contracts"?

RE: "the financial crisis triggered by the bubble bursting has fed back into the bursting process"

It's like it's feeding on (or 'off') itself.

What do you see foresee?

> In other words, while one part of the equation may've been predictable, it's consequences were not.

Yup. In fact, untangling all this is going to keep lots of academic economists very busy writing for years. Fortunately, now it's easy for everyone to follow along with them as they theorise and discuss. My feed reader runneth over thanks to the likes of and many many others.

> What are "CDS contracts"?

Credit-default swaps; insurance against some party in a contract defaulting, more-or-less, which began as ways to hedge counterparty risk in financial arrangements. But thing is that the total notional value of these things outstanding is colossal. They aren't turned into net exposures so, an instrument which in theory hedges against risk could also magnify it immensely - a really substantial unwinding had never been done, which is why the Lehman bankruptcy sent so much terror throughout the markets.

A good intro is

> It's like it's feeding on (or 'off') itself.

Very much so, not just directly thanks to systems couplings (say, tight credit plus temporary customer pullback leads an otherwise perfectly viable firm into a cashflow crisis, who lays off workers, who then default on their mortages, leading to more losses at banks and tighter credit, etc) but also due to the fact that markets are moved not just by data but by *expectations of the future*.

Right now, there's a lot of general uncertainty about, for instance, what otherwise viable non-financial firms might be forced into bankruptcy due to short-term funding crises. That uncertainty is damaging in and of itself to equity markets.

But all it takes is enough time to pass and then the markets will decide that whoever is left standing at the time isn't going away, and things will turn pretty rapidly.

> What do you see foresee?

I'm no optimist by any means, but the fact is that despite this being a massive financial event, the world isn't ending. The scary numbers do represent real pain for some people, but when the fear is driven out of the markets things should get back on track - although world GDP growth probably will be lower for a couple of years than it would have otherwise been, this isn't going to be a Great Depression by any stretch of the imagination.

In fact, in 20 years time I'd be surprised if all this lasted as long or leaves as lasting an impression on most folks' lives as the 70's oil shocks did.

Incidentally, although the above is nothing more than my (not exceptionally well informed) gut opinion, I have to note today this commentary coming through -

By the way, this morning I got to read an interesting pair of articles in the print edition of _The Economist_: on the downbeat side about US jobs, but that was followed by which talks about Charleston. Aside from the obvious connection with Radified via the Nuclear Power School, the juxtaposition of the two articles is striking in that I read the latter as a timely success story of recovery from what many would have thought terminal decline.

It is true that the unspoken concern that everybody seems to have is that this is more serious than a normal cyclical economic downturn, but rather more far-reaching & longer-lasting as well as something that may prove immune to efforts by our government.

In relation to economic recession, did you know the issues that banks are facing on? We used to see Banks full of money and gold, but after billions in bailout money given to banks, I think these guys are up to something. The average amount of bank charges, for late fees, overdrafts, ATM fees, and the like, is going up.

It is a bit abrupt that we, the customers as well as the taxpayers, just gave them more installments loans from our taxes. I don’t think they really helping us when in fact this is the time they must be are umbrella in “rainy days”.

It seems like they had better put that bailout money to use so that those of us who paid the taxes to bail them out don't have to get installment loans for charges for using the services of these banks. I just hope the all the banks manage to provide its consumer a valid reasons why they do such things.

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