Law School Discussion

Tough Times


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Re: Tough Times
« Reply #20 on: December 02, 2008, 10:13:54 AM »
I think we are agreed on pretty much everything. I was talking about imediate causes of the recession (ongoing causes) and you are looking at ultimate causes (why it is happening); to which I would add the EXTREMELY low interest rates the fed was charging after the 2001 downturn which made it even easier for banks to get money for those risky loans.

The mortgage crisis is the immediate cause since that is what is actually shorting the banks. They depended on the payment of those mortgages and the ability to bundle them and trade them off for capital to lend: a complex cycle of borrowing and lending. The ultimate cause of that crisis is likely the basket of issues you mentioned, but for right now we don't know for sure.

Many banks are short of funds and having a hard time getting them, so they are making fewer loans. There is also an element of fear in that banks will now only loan to people with VERY good credit (720 or higher). I know several bankers with wells fargo, the only AAA rated bank in north america, and one of the best capitalized banks in the world, and they are also having a terrible time getting loans approved. Though much of that is caused by small business owners managing their credit poorly (using personal loans for business expenses for example) that weren't a problem in a better lending environment.

Look at the chain of causes: mortgage crisis -> large bank write offs (which are over now) -> general panic in the stock market -> bank failures and tightening of loan requirements -> consumers and businesses lose confidence and tighten belts -> stock markets (and oil market) tumble as everyone pulls their money out of even safe businesses (walmart anyone?) -> businesses start layoffs to deal with the downturn -> consumers slow even more... and so on.

The stock market is down, employment is down, bank loans are down, and even oil is down, but not for any real reason. There is no war, no shortage of resources, no substantial shortage of money, nor any natural disaster. It is simply a cascading loss of confidence: most people are now speculating that the recession may go on for years. Even companies posting record market share captures and sales are still seeing their stocks loose value, which they have to explain to their shareholders despite the lack of a good reason.

The current economic situation is not substantially different from two years ago, well other than the fact that banks now have fewer bad loans on their books. Yes, oil speculation is down, but so is walmart speculation, wells fargo speculation, apple speculation, loan speculation etc. Why? Fear. Fear that Corporations will fail, that businesses can't get loans, cant afford their employees, that people won't have jobs, etc. If everyone just woke up tomorrow and decided to put their money back in the stock market and start trusting the economy again, everything would turn around.