What will this month be called?

[jducoeur]

A light question about a serious topic: when the historians write about the roller-coaster ride we're in the middle of, what will they call it?

I mean, every important historical event gets a catchy name, from "Watergate" to "9/11" to "Black Monday". It's clear to me that this September is one that they'll be talking about for decades to come, which means that they *will* settle on a common name for it eventually. How long it takes for such a name to arise ranges from days to years, but there's no time like the present.

So here's your chance to influence the history books. What would *you* call this mess?

Fine print: Winner will be selected by consensus of historians in 20 years. It is not guaranteed that any entrant will win. Chances of winning are directly proportional to relevance and pithiness of name, but it is entirely possible that these will not matter. Bad puns do not guarantee victory. Keep your hands inside the ride at all times.

Comments

[snarkyman.livejournal.com]

You completely missed my point. I do not mean commercial banks that take individual deposits that are insured up to $100K per account. I said investment banks, like Goldman Sachs. What happens if these institutions are allowed collapse? What happens when your employer cannot get credit to continue manufacturing widgits and therefore has to layoff all everyone in the company? What if the same thing happens to 20% of all US employers? Or to 50%?

[meiczyslaw.livejournal.com]

I've been asking a different question lately:

If these investment banks fail, how long would it be before someone else takes their place? It's not like the money's disappeared -- it's still out there somewhere.

Are we really in dire straits, or is it just Wall Street?

[jducoeur]

It's not like the money's disappeared -- it's still out there somewhere.

That's really not true -- or at least, it's only half the story. It's true that *real* assets haven't disappeared, but *credit* has, and credit is enormously crucial to the working of the modern economy. There's a credit economy that has built up, laced through the real economy and probably at least its size.

So while yes, you can claim that the economy should in some sense keep working, the reality is that many, many businesses will crash and burn because the credit system that they have built their businesses around no longer exists. That'll hit all sectors of the economy, including many that seemingly are all about physical objects.

(The simplest example, oft-cited recently, is cars. It's lovely to claim that cars could still be made, and people would still want them. But without credit, most people simply can't buy them, so the automakers will for the most part go bankrupt. And without easy access to buying cars, many people will have to greatly change their job habits, causing huge disruptions in the practical economy...)

[meiczyslaw.livejournal.com]

See, I still don't get where credit has gone -- credit is created by leveraging assets. You deposit money with a bank; people can then borrow against that money at some rate. (The bank is only required to keep some small percentage.) They then re-deposit the money at the bank, which means the bank can re-lend it.

There's some lag time while this happens, of course, but money can still be made, and anyone who's a low risk should still be able to get capital. (Assuming there isn't a bank panic -- mass psychology is a big player in all this.)

Though, if our two statements are both correct, this means that the economy runs on too-easy capital, meaning that we're screwed even with the bail-out.

(Also, I'm not sure that the car example is a good one -- car companies own their own lending companies -- but I do grok what you're saying.)

[dryfoo.livejournal.com]

Credit is today's money exchanged for future money. Future money exists because of the belief that it will exist. The financial writers call this "market confidence". If people no longer believe in the guarantees that support future money, then future money simply disappears, like the protagonist in a time-travel paradox. Without market confidence, there is no credit.

Money is not a substance. Money is not a barter good. Money isn't even gold anymore. Money seems like particles that have no rest-mass. They only get mass from the energy of their motion.

> anyone who's a low risk should still be able to get capital

From who? Via what financial machinery? Short-term credit vibrating back and forth between banks is the current of the financial markets. And even if your hypothetical Mr. Low-risk got his loan, what would he do with it? Invest in building up his company to create what? For what customers?

No. Money really can just disappear. Sometimes it's a wonder that it's there at all. (Having just compared money to Marty McFly, photons, and AC current, I'm going to stop now, before invoke a metaphor of virtual particles. Ooops, too late.)

[meiczyslaw.livejournal.com]

My problem is that I don't see it that way. If the big investment firms are overcommitted, that means that there's an opening for new players in that market. If you've got money to lend, now's the time for you to get involved.

(And speaking of loans -- did you notice that no-loans-ever-Microsoft took out a $40 billion loan the other day to buy back some of its stock?)

[jducoeur]

If you've got money to lend, now's the time for you to get involved.

True in theory -- problem is, most of the people with money to put into that have been taking a bath in the crisis. Remember that a huge fraction of that money is already *in* the market, and has been sinking recently: that's driving most people *away* from the market, into safer havens.

It's true that some smart people are going to time the market right, buy while things are low, and make a *serious* killing. But market timing is always risky, so some will probably lose their shirts in the process. We've already seen some of that: some folks invested in the investment banks only a few weeks ago, to capture what looked like a good opportunity, and lost everything.

Really, it's nothing new -- high risk gets high reward. Uncertainty is making things risky right now; some people will reap those rewards.

did you notice that no-loans-ever-Microsoft took out a $40 billion loan the other day to buy back some of its stock?

I hadn't, but that's not surprising. The reality is that Microsoft is the bluest-chip stock there is nowadays: despite Google and Apple, they're still a very reliable money-spinner. But they're one of the more extreme cases of looking "safe" in dangerous times...

[meiczyslaw.livejournal.com]

[...] some people will reap those rewards.

For examples, see JPMorgan and Warren Buffet.

I think the bottom line is that we're talking about $700 billion -- which is one of the estimates of the cost of the Iraq War.

[jducoeur]

See, I still don't get where credit has gone -- credit is created by leveraging assets.

Correct -- the problem is, to a large degree, that the assets have been over-leveraged. (Sometimes to a preposterous extent: I've taken to referring to some of these 30-fold-leveraged companies as "subprime" just to drive the point home.) Even some perpetrators have tacitly admitted that, in the fact that they are switching over to different structures that don't permit such extreme leverage.

(Assuming there isn't a bank panic -- mass psychology is a big player in all this.)

Arguably the principal issue. Most people admit that the main purpose of the bail-out is purely psychological: by providing an amorphous sense that things might get better, it theoretically helps avoid a credit panic. (Which we're hovering dangerously close to -- my general sense is that the markets are hanging on Congress, to see what happens before deciding whether to panic or not.)

Though, if our two statements are both correct, this means that the economy runs on too-easy capital, meaning that we're screwed even with the bail-out.

Quite possibly so -- the main benefit of the bail-out is that it potentially allows the air to be bled out of the mess gradually, instead of crashing suddenly in a total crisis of confidence. There's no question that things have to be unwound, though, and I suspect the choice is at best between an irritating recession and a genuine crash...

[meiczyslaw.livejournal.com]

I've taken to referring to some of these 30-fold-leveraged companies as "subprime" just to drive the point home.

From what I've been reading, 30:1 is actually a rational leveraging ratio. The companies that have folded supposedly had a 60:1 ratio.

More on psychology:

If you notice in a previous post, I mentioned that the foreclosure rate in 1999 was worse that today's -- yet does anyone remember this kind of near-panic? Much less hearing about it?

[jducoeur]

Basically true, although it all comes down to assessment of risk. While things were frothy, everyone was sure that foreclosures would be Low Low Low. Now, everyone is worried that the rate is rising and will continue to rise. That's not entirely irrational -- all those unwise ARMs are starting to tick upwards, and are gradually getting worse. So there is reason to believe that we're still basically at the tip of the iceberg, and that the rate will rise; that *uncertainty* is a large part of what's making things crazy.

But all that said: yes, a lot of people are just as irrationally worried now as they were irrationally sanguine before. Herd psychology is very powerful...