She Nails It
Echidne of the Snakes is absolutely, positively, unequivocally correct when she identifies what is happening as a crisis of trust in her post, Restoring Confidence in the Markets.
The people, institutions, companies, et al. that have money no longer trust those who don’t and want to borrow. This is why even the massive infusions of cash by the Fed aren’t having any real effect. The rate drop has had no effect.
People have been talking about problems with the mortgage and housing industry for years and the people at the top have been berating the truth-tellers as Chicken Littles. The people in the government have been lying about the real condition of the economy, and then when they could no longer hide the problems, they shifted to panic. Well, they got their panic, but they don’t know how to deal with it.
What is happening now is a result of the last 7½ years of incompetence, greed, and criminal conduct. In truth the job market has never recovered from the 2001 recession, and when two-thirds of the GDP is dependent on consumption, that was a disaster waiting to happen. The housing bubble has been another contributor, as has the outsourcing of manufacturing jobs. When real investors realized they had been lied to for an extended period, they decided to hold on to their capital.
There will be no improvement in conditions until the people with money can be certain they are being told the truth about conditions. It is highly unlikely they will believe anyone currently in positions of “trust”.
4 comments
The problem is, basically, that the USA has no room to maneuver at all. Interest is too low to cut any more, the USA has a big deficit and has no money to spend on infrastructure, unemployment high and getting higher… etc.
Here, we can cut interest (It was just cut a full 1% so the banks could pass on a .75% cut (they actually were generous and passed on .8%) and have .2% to strengthen themselves). We have a good surplus and the gov is going to fund $billions of new infrastructure development over the next few years or so to increase employment, more savings in the banks, more money being spent by consumers, etc. And the banks have promised to make obtaining credit much harder. 🙂
If I were ‘da peepul’ in the USA… I’d be demanding an immediate cessation of hostilities everywhere and use the money at home. But… that’s just me. 🙂 LOL
“The people, institutions, companies, et al. that have money no longer trust those who don’t and want to borrow.”
True, but there are also plenty of us who had major spending planned (new windows and siding for the house) and are now terrified to spend the money sitting in the bank. People with money (a little bit in our case) won’t spend, people without money can’t get it to spend. No one is spending.
No one is spending. How true. While I do have the money to spend, I’m not parting with it either. I don’t know if I will have a job after the end of this year. (The company I work for is for sale and we all know how that goes.) And with the job market the way it is, it will take a while to find comparable work.
The fed could drop interest rates to zero and it still won’t stimulate the borrowing they need. Along with a confidence problem we also have a solvency problem. There is just too much debt out there.
Consumer spending has slowed, unemployment is rising and businesses aren’t going to expand without demand. We are going to have a recession whether the central banks like it or not. Government needs to stop interfering; it can’t be stopped; lets get it over with instead of dragging it on for a decade.
Greedspin caused this by interfering and holding rates way too low for way too long to avoid a recession in 2001. In return we get a recession in 2008 that will be twice as bad for twice as long. Thanks a lot.
When you hold interest rates down borrowing makes more sense than saving. Savings accounts that aren’t paying a interest rate that will beat inflation don’t attract much money.
The reaction to the 2001 recession created the conditions for the housing bubble. When money is cheap it encourages gambling rather than investing. If you want to encourage investing you lower the long term capital gains and raise the short term capital gains rates.
Derivatives don’t need to be regulated, they need to be made illegal as a confidence game. As long as Ponzi schemes are ignored in the name of free markets, people will lose a lot of money.
The job market has never recovered from the 2001 recession. This economy has been a basket case since the Republicans gained political control. The numbers, the real numbers, have been saying that, which is why they keep changing what they report. The profits that corporations have been making haven’t gone to investments, research, or jobs, they have been hoarded.
It makes no sense to spend money until there are some fundamental changes, and that won’t happen until next year.