ARealConservative

This? Section 8 makes me very uneasy.

I would like to see this road map.

I am worried most for my parents who are only months away from supposedly retiring. I fear their accounts have suffered so much that they won't be able to.

MC.no.spin

That will probably get amended in committee. This is Paulson's version, so he'll shoot for the moon.

Personally, I trust Paulson and wouldn't blink if it came out with the same provison. He's a white hat.

Paulson's proposal gives some indication where this comes to a close, and also it's limitations:

This move by Paulson saved them a lot of money.

Be sure they don't fall for the reverse mortgage b.s.

__________________

The heart of human intelligence is pattern recognition ~ Ray Kurzweill

donsutherland1

In my opinion, the fact that the U.S. dollar is a reserve currency and that its financial institutions/markets are linked to major money centers throughout the world would strongly suggest that a collapse of a significant portion of the U.S. financial system would have worldwide ramifications. Moreover, given modern technology, the reactions would have been near-instantaneous.

The fact that overnight money markets were breaking down as uncertainty and fear rose concerning the U.S. financial system highlights the global nature of the impact. When Japan's housing and equities bubbles burst, the contagion from the failures in its financial system did not directly infect U.S. and European financial systems to the extent that their institutions/markets suffered substantial damage. When the Scandanavian banking crisis unfolded in the early 1990s, the fallout was severe, particularly in Finland which was confronted by near-depression conditions, but also limited. In the case of systemic failure of the U.S. financial system, I suspect the U.S., Europe, and Japan would all have been impacted both severely and swiftly.

In the U.S., one would very likely have witnessed the rapid emergence of a destructive debt-deflation condition and a deflationary wage-price cycle were credit to dry up as fearful or overleveraged financial institutions defaulted on their counterparty payments.



I believe Yale professor Irving Fisher's classic study of the Great Depression provides arguably the best description of debt-deflation in which prices fall so rapidly that they overwhelm borrowers' efforts to pay down debts. In such a situation, even as debtors repay part of their debts, the deflation leaves them owing more money than they owed at the beginning of the deflationary cycle. Here's what professor Fisher wrote:

...deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe.

A quick example for illustrative purposes, only:

A person owes $50,000 on his/her mortgage. He pays off 10% of the mortgage, but deflation runs 20%. Hence, in real terms (deflated dollars), he/she actually owes $54,000. The effect of the deflation had increased his/her real debt burden by 8% despite his/her payments. In such circumstances, even more people would wind up defaulting on their debts and the financial crisis could worsen before it gets better.

So, if I had to speculate, I would suggest that the nightmare financial meltdown scenario would not only lead to a much more substantial economic contraction than is currently likely, but the recovery from such a collapse could take much longer were debt-deflation to unfold. The Great Depression and Japan's "lost decade" during the 1990s (even as Japan's deflation was much milder than that which occurred during the Great Depression) offer some hints of the impact of such an outcome.

Given what was at stake, much as I would have preferred that federal intervention would not have been necessary, I do not believe there was any choice for policy makers, but to go ahead with a massive rescue. The markets had moved into near panic and a crash (liquidity or stock market) could have started a catastrophic chain-reaction implosion of the financial systems in the U.S., Europe, parts of Asia, etc. By that time, the scale of any rescue effort would have become magnitudes of order larger than the presently proposed figure of up to $700 billion by Treasury Secretary Paulson.

Thanks for the generous compliment.

prrriiide

Be sure you don't mention the chief culprit: Phil Gramm. Recently the architect of McCain's economic plan and chief author of the Gramm-Leach-Bliley Act. See also Commodities and Futures Modernization Act.

Oops. Too late. You already left him out.