I think we’re starting to see the great herd mentality form. The word depression is popping up more and more. This is when the masses expect the worst, and it feeds on itself. Here’s a quick def in terms of Behavioral econ: “People tend to believe that something is a better idea if a lot of other people are doing it. In essence, they are trying to free ride on other people’s analysis, on the assumption that someone must have thought this thing out. This has its uses–we don’t all need to learn every hard lesson for itself. But in markets it produces herding behavior, which makes outcomes more extreme on both the upside and the downside. In other words, we get booms and busts. In the professional world, this is exacerbated by the fact that you’re less likely to get fired if you fail at the same time everyone else does.” But a caveat to the above is that the herd is generally wrong. If you go against the herd, you would probably do very well in the investing game.
In 2006,financials contributed to almost 40% of the S&P profits- (source:Ken rogoff article) that clearly has been wiped off -so we seem to have had an earnings bubble in housing and financials.considering large number of jobs since 2002 were created in the housing sector (i believe more than 1.2 million), the employment situation can indeed get much worse. edit: http://www.doctorhousingbubble.com/america’s-codependence-on-housing-30-of-job-growth-contributed-by-real-estate-5-point-plan-on-how-the-bubble-will-burst/ so almost 30% of the jobs since 2000 were in housing compared to mean of almost 10% in the decades before -we may see a mean reversion there.
How many of those jobs were from “undocumented” workers? That might not show up in the data as accurately as reality would have it.
no idea. i guess BLS statistics doesnt include undocumented ones.so it could be worse.
I heard that the remaining primary bond dealers are hiring some of those undocumented workers away from landscaping firms to sit on their mortgage desks. Couldn’t do any worse than those Harvard kids, but much cheaper and less obnoxious.
LOL! Spierce is out. Pedro is IN!
JoeyDVivre Wrote: ------------------------------------------------------- > I heard that the remaining primary bond dealers > are hiring some of those undocumented workers away > from landscaping firms to sit on their mortgage > desks. Couldn’t do any worse than those Harvard > kids, but much cheaper and less obnoxious. And might even be able to can reach another demographic that can sign up for no-documentation-required mortgages.
Akanska - here’s one comparision that seems to hold true: in normal times, problems in the economy cause problems in the financial markets because hard-pressed consumers and businesses have trouble repaying their loans. But this time - for the first time since the Great Depression - problems in the financial markets are slowing the economy rather than the other way around. If the economy continues to spiral down, that could cause a second dip in the financial system - and we’re having serious trouble dealing with the first one.
^That’s a pretty good observation.
Yes, I think that’s the key comparison. Thanks LB for pointing that out nice and clearly. The only quibble I’d have is the (implicit) assumption that the “regular economy” was otherwise running fine. In truth it was running on borrowed money created by financial markets. So when the financial markets froze up, much of the real economy’s ability to invest and consume was/is - albeit with a delay - frozen up too.
Good observation, I’ll agree… Based on that, compare the gov’t responses!
I understand that from a technical perspective this is not the tech bubble, but from a fall out perspective it is with the exception of the bailouts. Since the idea of losing money at a bank is considered much worse and is less acceptable than losing the same amount in tech stock, uncle sam is bailing firms out. I understand the importance of the financial system, I understand how this mess is different from 2000-2002, but I just don’t think the world is going to end because of this. I think people are panicking, which is capitulating all the doomsday talk. Especially when the old grizzlies from the 70’s and 80’s start saying things like “I’ve never seen anything like this before” or “it’s never been this bad”, of course there are going to be even more people who use that as ammo to perpetuate the end of days argument. I find it hard to believe these same people said the same thing in when the stock market opened after 9/11. I think never experiencing something gives them less credibility to make assertions about the future. I mean if they’ve never seen anything like this before, how the hell do they know whats going to happen next.
The problem (getting a blog piece ready here) is that the bubble was in risky assets, stimulated by artificially cheap credit. The cheap credit created extra leverage which must now be deleveraged. Thus virtually ALL assets that can decline in value are going down, not just stocks. In the tech bubble, it was pretty much only stocks and tech sector fixed income that were hit. You still had other sectors of fixed income and real estate that could perform (need to check my facts to be 100% sure here, but I’m pretty sure that’s how it went). The credit was artificially cheap because the risks of securitization were understated/unknown while the interest rate was driven down by competitive pressures to originate loans. There should at least have been some kind of “complexity premium” to account for the difficulty of modeling, but of course then you have to figure out what that premium is. If you just have a subjectively defined premium, then it’s easier for a salesperson to talk you down to close the sale.
Gouman Wrote: ------------------------------------------------------- > I understand the importance of the financial > system, I understand how this mess is different > from 2000-2002, but I just don’t think the world > is going to end because of this. > > I think people are panicking, which is > capitulating all the doomsday talk. Especially > when the old grizzlies from the 70’s and 80’s > start saying things like “I’ve never seen anything > like this before” or “it’s never been this bad”, > of course there are going to be even more people > who use that as ammo to perpetuate the end of days > argument. I find it hard to believe these same > people said the same thing in when the stock > market opened after 9/11. > It was almost this bad in 1973 -74. The world was horrible then.
LonghornBrian Wrote: ------------------------------------------------------- > Akanska - here’s one comparision that seems to > hold true: in normal times, problems in the > economy cause problems in the financial markets > because hard-pressed consumers and businesses have > trouble repaying their loans. But this time - for > the first time since the Great Depression - > problems in the financial markets are slowing the > economy rather than the other way around. If the > economy continues to spiral down, that could cause > a second dip in the financial system - and we’re > having serious trouble dealing with the first one. i dont think it is that clear cut. the troubles in wall street began in the first place because people started defaulting on their payments ,presumably because they lost jobs or were underemployed (read lower wages) -a statistic not reported .so the troubles in the real economy began at the same time if not earlier. it is pretty obvious that a lot of people were flat broke before these troubles began to show up on wall st. ofcourse,now it is all in a negative feedback loop.
1973-1974 was a cash economy We’z got ourselves in a credit economy. Who needs cash when you got a 750 fico!