Tuesday, September 23, 2008

Dire Straits

billmon on dailykos has some grim reflections:
The US economy is by nature bubble prone, but there are many ways for the monetary powers-that-be to cushion the blow when bubbles burst and inflate new ones to take their place (as the Greenspan Fed proved several times over). Too much political capital has been invested in the model (i.e. asset price inflation as the engine of growth in an increasingly distorted economy) for it to be otherwise.

That being the case, it was probably inevitable that the bubbles would continue to grow in size and destructive force until they finally outstripped even the US government's ability to manage them without triggering a run on the biggest bank of all -- itself.
Read the whole thing.


cynthia said...

Let me speak the obvious by saying that our military might isn't worth a damn if our economy is on the brink of collapse. And no matter how hard some want to believe otherwise, no amount of military might can do a damn thing to stop our economy from collapsing. So I'd like to think that this financial crisis plaguing Wall Street is something of a blessing in a disguise in that it should serve as a potent antidote to all of our poisonous military adventures, here and abroad.

Anonymous said...

The doubt I had after reading this diary was that after all, however large it was, the huge amount of fake value was attached to mortgages/home loans, ie only one sector of the economy.

How can the whole economy collapse due to fake valuing of only one sector, however humongous that fake valuing? Aren't there other sectors of the US economy which are likely to keep performing in real value terms regardless of all these events; whose underlying valuation is less inflated; and thereby by definition not so vulnerable to collapse due to collapse of the mortages sector. JMT-Nanu

Arun said...

Cash flow is the lifeblood of all business; no matter what assets you have and how well they're performing, they don't pay the bills, unless you sell them off for cash. I guess it usually works out to be more efficient for a business to have a line of credit with the bank rather than to rely entirely on a cash reserve. As I understand it, the credit markets are drying up as banks hoard cash to cover unpredictable demands that they may face as firms tumble down like dominos. So it hurts the whole economy.