international econ lesson -- what's going on with the world?!

[rajan]

Ubuntu users, I have a few hypothetical questions for anyone with a keyboard and a few ideas about economics (because econ is DEFINITELY not my expertise).

Given that the world is falling apart economically, what is the difference between now and the depression? Do we as americans, or residents of any country for that matter, have more assets now that may be able to prevent starvation and suffering like there was during the 1930s?



Also, what would be the effect of a collapse of China's or India's economy? Let's say that the rest of the world is just sitting on a decline and not a depression, but either China or India becomes insolvent. What happens to our loans that we owe them? Do we also collapse because we do not have any creditors anymore? Where does walmart go to get the cheap plastic crap that has brought down our economy?


Finally, if China says "hey we want our money back," can we say "no?" Do we have to do the Jimmy Stewart thing from It's a Wonderful Life and say "your money is in Al's house and Frank's house and Steven's house?"

[Sealbhach]

What you need is a crystal ball. Why don't you just wait, and see how tomorrow turns out? It might be sunny, it might rain.

I don't have any personal debt, so I feel quite blasé about this whole thing.

As for China, I think they're sensible people, they're not going to bring the whole house down around our heads.


.

[lisati]

Economic isn't my area of expertise either. It still amazes me how cumulative greed can lead to international fiscal woes which can potentially hurt innocent bystanders.

[fatality_uk]

Firstly, DON'T PANIC. The hysteria in the media is so YOU tune in or buy the paper.


Finally, if China says "hey we want our money back," can we say "no?" Do we have to do the Jimmy Stewart thing from It's a Wonderful Life and say "your money is in Al's house and Frank's house and Steven's house?"

China could bring down the globe overnight if they wanted to. They hold tens of TRILLIONS of US $ in exchange accounts.

They don't want to. It's not in their interest to. So they are extending credit to the west behind the scenes B2B.

The banks are making the most of the opportunity to let governments take the risk over the next few months. The UK, US and EU have made available or directly injected about $2,500,000,000,000 (Billio) over the last 8 weeks and the banks still say that's not enough. That more than covers bills maturing in 6-9 months.

So, hang in there. This WILL go away VERY quickly as soon as government put the next piece of the jigsaw in place, guaranteeing 3 month interbank lending.

[LMP900]

Economic isn't my area of expertise either. It still amazes me how cumulative greed can lead to international fiscal woes which can potentially hurt innocent bystanders.

I don't think it's necessarily greed that caused this. You can easily balance greed with fear. For example: A bank, under normal circumstances, will not give out high-risk loans to individuals despite the potential of huge returns since there is also the potential of huge losses. Fear keeps greed in check.

However, this notion that "everyone has a right to own a home" has pushed institutions (with government and other groups doing the pushing) to lend to those they wouldn't normally lend to. Now they're being bailed out when they fail.

When you eliminate the fear with bailouts and other similar government actions, then greed is indeed very dangerous. Actions without consequences are what these institutions are essentially guaranteed.

[fatality_uk]

For example: A bank, under normal circumstances, will not give out high-risk loans to individuals despite the potential of huge returns since there is also the potential of huge losses. Fear keeps greed in check.

One word

SUBPRIME

[LMP900]

One word

SUBPRIME

Exactly my point. With this idea that we all should have a home, we're pushing not only institutions to lend to irresponsible borrowers, but we're also pushing the borrowers to take out loans they cannot possibly pay for.

Fear keeps greed in check, not only for producers but consumers as well.

[Sealbhach]

One word

SUBPRIME

In the old days they used to call that "bad lending decisions". Somehow this got re-branded as the "subprime market". You can see what happens next...


.

[fatality_uk]

Exactly my point. With this idea that we all should have a home, we're pushing not only institutions to lend to irresponsible borrowers, but we're also pushing the borrowers to take out loans they cannot possibly pay for.

Fear keeps greed in check, not only for producers but consumers as well.

Example
I have a store selling widgets for $1. You come to me and say you want to buy 100 widgets but you can only afford to pay for 75 widgets. I don't really know you but I know you have a part time job. I sell you $75 worth and give you the extra 25 because you PROMISE to give me the rest of the cash you owe me over the next 2 weeks.

I go out of business later that year with massive debts.

Who's fault is that?

Mine for giving you credit when I had doubts you would pay me back?
Your's for being greedy and wanting something for nothing?

The answer, in case your wondering, is mine. BAD business decisions led to me going out of business.

The banks made VERY bad business decisions and we, the global tax payer will have to cover them for the next 9 months.

The nice thing is in the UK we will make a profit in the long term and a windfall tax in a few years.

[LMP900]

Example
I have a store selling widgets for $1. You come to me and say you want to buy 100 widgets but you can only afford to pay for 75 widgets. I don't really know you but I know you have a part time job. I sell you $75 worth and give you the extra 25 because you PROMISE to give me the rest of the cash you owe me over the next 2 weeks.

I go out of business later that year with massive debts.

Who's fault is that?

Mine for giving you credit when I had doubts you would pay me back?
Your's for being greedy and wanting something for nothing?

The answer, in case your wondering, is mine. BAD business decisions led to me going out of business.

The banks made VERY bad business decisions and we, the global tax payer will have to cover them for the next 9 months.

The nice thing is in the UK we will make a profit in the long term and a windfall tax in a few years.

Of course it's yours! And you should fail. I don't have a problem with a business failing. I have a problem with it being bailed out despite being an incompetent company.

The failure of these giant institutions hurts indeed, but the government is making it worse with these "rescue plans." Our nation will heal. The bailouts are just temporary "feel good" fixes that will only extend the pain.

[lisati]

http://3.bp.blogspot.com/_6yUNdcXfZlE/SO95U_GyfbI/AAAAAAAACOs/CFvVQ9qjhQc/s200/ShrinkingDollar-blog+(2).jpg

[rajan]

I don't have a problem with a business failing. I have a problem with it being bailed out despite being an incompetent company.

I have been wondering for a long time what would happen if every bankrupt institution was allowed to fail instead of a bailout. I would think a good housecleaning would be beneficial for the economy in the long run, but I would wonder whether it would cause short term damage that becomes irreparable. Also, I think most of the incompetent people making these businesses fail are the ones who have already left with millions, so cleaning house wouldn't really clean them out. They're already consultants somewhere.

[mysticrider92]

I don't think it's necessarily greed that caused this. You can easily balance greed with fear. For example: A bank, under normal circumstances, will not give out high-risk loans to individuals despite the potential of huge returns since there is also the potential of huge losses. Fear keeps greed in check.

However, this notion that "everyone has a right to own a home" has pushed institutions (with government and other groups doing the pushing) to lend to those they wouldn't normally lend to. Now they're being bailed out when they fail.

When you eliminate the fear with bailouts and other similar government actions, then greed is indeed very dangerous. Actions without consequences are what these institutions are essentially guaranteed.

I would say greed has caused a lot of it. I have noticed what happened to gas prices lately, and that kinda confirms it. They were really high, then we hit this market problem, and no one is speculating on the price, so they dropped nearly a dollar within two days. As soon as the economy is balanced, people will start speculating, gas prices will soar, and the same vicious cycle will repeat in 10 years, or less.

It is almost the exact same thing that happened in the Depression. Stocks began to fall, so everyone sells, causing them to fall more, causing more people to sell, until the government has to bail out the companies. Then, you have groups like AIG sitting over there, using the bailout money to pamper their high-ranking officials (the company was going to pay $500 a night for about 150 of these people to stay at a California hotel). Sounds like they are a big part of the problem too.

What I am still trying to figure out is how we became so reliant on the stock market and credit to get into this mess in the first place. Everybody wants to be rich, and own stuff they can't afford, but someone has to draw a line somewhere. And the "it is everyone's right to own a big house" stuff doesn't help much.

[smoker]

we're seeing the start of the decline of western civilisation, and before long we'll be trading with chocolate, it won't be worth the price of ink printing money :-(

the aztecs had the right idea :-)
http://wiki.answers.com/Q/Did_the_aztec_have_currency

[EdThaSlayer]

It all started long long ago during the subprime mortgage crisis. Now, the USA is in huge huge debt, and I have heard that every USA citizen owes $65,000 or something. Recently they had to replace that "debt" "clock" by getting rid of the dollar sign to fit in another digit. This whole financial crisis is very complicated though, there is no single cause, there are many and these "politicians" Obama and McCain don't even know what to do about this. :)