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The credit crunch

World on the edge

Oct 2nd 2008
From The Economist print edition

Whatever happens in Congress, the crisis is now global; that means governments must work together

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AMERICA’S Congress is not used to being second-guessed. But as lawmakers wrestled in the Capitol, world stockmarkets have been giving real-time odds on the Bush administration’s $700 billion bail-out becoming law. After the plan’s thrashing by the House of Representatives on September 29th, spurred on by voters’ loathing of “casino capitalism”, investors panicked. Yet as The Economist went to press, they were optimistic that, after winning the Senate’s approval on October 1st, the plan would pass.
Even if it does, that should not be a cause for optimism. Look beyond the stockmarkets, especially at the seized-up money markets, and there is little to see except bank failures, emergency rescues and high anxiety in the credit markets. These forces are drawing the financial system closer to disaster and the rich world to the edge of a nasty recession (see article). The bail-out package should mitigate the problems, but it will not avert them.

The crisis is spreading in two directions—across the Atlantic to Europe, and out of the financial markets into the real economy. Governments have been dealing with it disaster by disaster. They have struggled to gain control not just because of the speed of contagion but also because policymakers, and the public they serve, have failed fully to grasp the breadth and depth of the crisis.

Step forward, Peer Steinbrück, Germany’s finance minister, who rashly declared on September 25th that America was “the source…and the focus of the crisis”, before heralding the end of its role as the financial superpower. Within days, the focus shifted and Mr Steinbrück and his officials were obliged to arrange a €35 billion ($51 billion) loan from German banks and the German government to save Hypo Real Estate, the country’s second-biggest property lender.
The hapless Mr Steinbrück isnot alone. European banks were collapsing at a dizzying pace even as Christian Noyer, governor of the Bank of France, declared that “there is no drama in front of us.” Hypo Real Estate was just one of five banks in seven European countries bailed out in three days. Belgium, Luxembourg and the Netherlands carved up Fortis, a big bancassurer; Britain nationalised Bradford & Bingley; Belgium, France and Luxembourg saved Dexia; and Iceland rescued Glitnir. Separately, Ireland took €400 billion of contingent liabilities onto the national balance sheet, when it stood behind the deposits and debts of its six large banks and building societies. You have to wonder what Mr Noyer regards as dramatic.
By some measures, many European banks look more vulnerable than their American counterparts do—and that is saying quite something, given the past week’s forced sale of Washington Mutual, America’s biggest thrift, and Wachovia, its fourth-biggest commercial bank. In America, outside Wall Street, the banks have lent 96 cents for each $1 of deposits. Continental European banks have lent roughly €1.40 for each €1 of deposits. They have to borrow the rest from money-market investors, who are not especially confident just now. Some Europeans, including the British, Irish and Spanish banks, have housing busts of their own. And they must contend with the toxic American securities they bought by the billion, as well as their own slowing economies.
Western Europe is not the limit of this: the panic has also struck banks in Hong Kong, Russia and now India. And it is not just the geographical breadth of this crisis that is alarming, but also its economic depth. Because it is rooted in the money markets (see article and article), it will feed through to businesses and households in every economy it hits.

Most of the time nobody notices the credit flowing through the lungs of the economy, any more than people notice the air they breathe. But everyone knows when credit stops circulating freely through markets to banks, businesses and consumers. For almost a year the markets had worried about banks’ liquidity and solvency. After the bankruptcy of Lehman Brothers last month, amid confusion about whom the state would save and on what terms, they panicked. The markets for three-, six- and 12-month paper are shut, so banks must borrow even more money overnight than usual.
Banks used to borrow from each other at about 0.08 percentage points above official rates; on September 30th they paid more than four percentage points more. In one auction to get dollar funds overnight from the European Central Bank, banks were prepared to pay interest of 11%, five times the pre-crisis rate. Astonishingly, rates scaled these extremes even as the Federal Reserve promised $620 billion of extra funding.
Bankers have always earned their crust by committing money for long periods and financing that with short-term deposits and borrowing. Today, that model has warped into self-parody: many of the banks’ assets are unsellable even as they have to return to the market each day to ask for lenders to vote on their survival. No wonder they are hoarding cash.
This is why those politicians who set the interests of Main Street against those of Wall Street are so wrong. Sooner or later the money markets affect every business. Companies face higher interest charges and the fear that they may one day lose access to bank loans altogether. So they, too, hoard cash, cancelling acquisitions and investments, in order to pay down debt. Managers delay new products, leave factories unbuilt, pull the plug on loss-making divisions, and cut costs and jobs. Carmakers and other manufacturers will no longer extend credit (see article) and loans will become elusive and expensive. Consumers will suffer. Unemployment will rise. Even if the credit markets work well, the rich economies will slow as the asset-price bubble pops. If credit is choked off, that slowdown could turn into a deep recession.
Financial markets need governments to set rules for them; and when markets fail, governments are often best placed to get them going again. That’s pragmatism, not socialism. Helping bankers is not an end in itself. If the government could save the credit markets without bailing out the bankers, it should do so. But it cannot. Main Street needs Wall Street; and both need Washington. Politicians—and President George Bush is the most culpable among them (see article)—have failed to explain this.
Governments need not just to communicate, but also to co-ordinate. Past banking crises show that late, piecemeal rescues cost more and work less well. Ad hoc mergers work for a while, but demands for help tend to recur. Inconsistency sows uncertainty. Cross-border banking can make one country’s policies awkward for the neighbours: the Irish government’s guarantee of all deposits threatens to suck in money from poorly protected British banks. France’s suggestion on October 1st that Europe’s governments should work together was a good one; Germany’s rejection of it was wrong.
Central banks have co-ordinated their liquidity operations. Now that oil prices have plunged and worries about inflation are receding, interest-rate cuts are possible. They would be more powerful if co-ordinated. But it is not only central banks that need to combine. Whatever America’s Congress does, governments should work together on principles to stabilise and recapitalise banks—not just to stem panic but also to save money. Even if, as the Europeans claim, the crisis was made in America, it now belongs to everyone.

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CamanoCal wrote:
October 04, 2008 06:06
I wonder if the rest of the world has an inkling of what really transpired down here at the grassroots level.

About 4 years ago a real estate agent friend of mine warned me of this crisis. Her comments centered upon something called a Nehemiah gifting program. Her real estate company was “in-the-loop” and was being funneled clients. There was some sort of agreement that they would steer these Nehemiah people only to certain builders who too were in-the-loop.
She was making money hand over fist but told me that the good times would all explode one day. The loans they these clients obtained would all be adjusted in about three years.
That made my ears prick up, but it was her description of the clients that made the hair on my neck rise though.

The “clients” were absolutely the most dreadful people she had ever encountered. Most of them were from the South (U.S.) and were very hesitant to even talk about how or why they moved to Seattle. They had no jobs, and when queried as to how they were going to pay the mortgage, either clamed up or tersely said something like “the church would take care of us”.
As my real estate friend described them, I began to picture those hillbillies in the movie Deliverance. She told me I wasn’t far off. She thought that somehow all this was tied into the Office of Faith-Based initiatives and certain churches and a church network that was the initiator that introduced these people to the Nehemiah program, recommended the mortgage brokers, the builders and the real estate companies.

Have you ever heard of Harriet Tubman’s underground train? One day, I suspect that you may read about the Nehemiah train. Rural hillbillies living in trailers all across the Southern U.S. are enticed to move to Seattle where one of the best social healthcare systems in the U.S. for poor people has been absolutely swamped almost to breaking. They are given the keys to a half a million dollar home and told, for the next three years – enjoy!

A few months ago I saw an ad on craigslist for a Décor oven. It was one of the later models and the ad only wanted $700. (These are about $3400 new).
I obtained the address and drove to the residence. It was a very nice home in an upscale development. The man had the oven in the garage. I immediately suspected he had stolen it. He was a “Deliverance sort of guy”.
I informed him that I wouldn’t buy unless it was tested.
To make a long story short (we used the dryer outlet for 220V power), I entered the house and sure enough, it looked like the place was being gutted.
Something told me his pay-as-you-go mortgage had stopped being so nice and he was taking his profits by selling on Craigslist, packing up the van and heading to a new city where he would get another NINJA loan.
Pretty slick set-up when you think about it now isn’t it?
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longline wrote:
October 04, 2008 05:33
Maswood I like your idea for a global currency and rekon that may just come about as a result of this global finacial upheaval. The idea is hellishly efficient, yet would be perversely complex to establish and administer. Not long ago the same was thought of the Eurozone & that the Euro would be unmanageable. Perhaps the Economist could present an article on the concept of a single currency. Or is this way too advanced for this period of history.
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GerD77 wrote:
October 04, 2008 04:30
Although I may agree with the Economist's opinion that action has to be taken I also believe that the Economist and others should have been harsher in the analysis before the whole banking ! sector went down the drain.
Main street knew what was coming, I have had endless discussions regarding the housing bubble, ultra-loose cheap money and an american president tapping foreign policy disaster with a loose money boom at home. Where has been the critical analysis of this before, where have been central banks, where have been governments???
The whole bloody systems has failed so that some people could become perversly rich and we are not supposed to be angry? Of course not, it's only our lives savings on the line + 6 or 7 Hundred BILLIONS of taxes. I mean seriously, people must have felt this way before storming the Bastille.
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One_come_from_east wrote:
October 04, 2008 03:26
Well,actually I think that there is something ineffective deep into the recent economic system, and so there is crisis one after another. The economic is too free to overperform, even the prosperity looks like a bubble. The whole economy needs the management of the goverment, prediction and proper measures to prevent the exposure of the crisis. ^^ of couse,
it is pragmatism, not socialist.
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MartinStephens wrote:
October 04, 2008 02:36
The standard of living and rampant consumerism enjoyed by the populations of Europe and America was only backed by the liquidity of invisible debt. The debt has become visible and now is seen for what it is - a mirage. The tape recording of economic growth over the last 100 years is rewinding, and the garbled twittering it is playing back is what is coming out of Wall Street & the bourses of Europe. Unless the populations of developed countries revert to a fundamentally more prudent lifestyle, the problem is insoluble. But this is unlikely, and discontentment will rise exponentially. The roots of military conflict usually take their nourishment from discontented populations, and, to divert attention from domestic stress, governments encourage it. The seeds of war have been planted, and unless we wake from the dream of endless unsustainable growth, will grow into a 21st Centurys Armageddon.
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QA_2 wrote:
October 04, 2008 01:14
Amazed: I don't think this is a problem with capitalism as a concept, but it's definitely a problem with capitalism as interpreted by American culture. As you said, this was foretold by the media years ago, but people were so blind with greed and sure that it wouldn't be *them* who lost that they kept at it. This applies to both the subprime lenders and borrowers. That's why I think this is so difficult to address: it's a fundamentally cultural issue, but the only fixes we can make are economic and legislative. Let's hope that's enough to change behavioral patterns.

To the Ron Paul brigades: If you are going to rant about how all of this is fiat money's fault, please explain why giving control of the money supply's levels to mining companies is better than giving it to a government agency.
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Amazed by People wrote:
October 04, 2008 00:03
Is there really any hope for the free market capitalism. Right now the problem seems to be there is no easy credit to be had. I hear people being concerned about not being able to borrow money to send their kids to college or to buy a new car. Few people save money, like I did for my kids and grandkids to have college paid for, so they try to borrow more and more money. In the end, keeping on borrowing is going to be totally destructive to society. In particular, the American people just borrowed and borrowed, no savings, just spending. No capital formation within the US, huge trade deficits and the constant need for funds from overseas. Why didn't anybody see this train wreck coming years ago (of course, the Economist saw it coming and wrote about it). So, what is wrong. It's democracy, stupid. If you want to stay elected, you got to create jobs and growth, but not the way the US is doing it. One $trillion worth of exports for a nation of 300 million people? Give me a break. How stupid are we anyway. Now, everbody is crying.
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Maswood wrote:
October 03, 2008 22:23
The whole financial world is based on false swearing through fake promissory notes---one such promissory note signed by the borrower that s/he will pay back loan on a future date and another promissory note in the form of currency issued by a central regulatory bank that the money the borrower is getting in paper currency carries genuine value. Both the promissory notes are in fact deceitful as has been proven by the latest falls of giant American banks and financial institutions.

Consumerism in America has made manufacturers blind and desperate to churn out commodities without weighing the buying capacity of the consumers to such an extent that a carpet manufacturer is ready to ship and lay carpets in your house asking not a single penny for you to pay now, if only you agree to pay the price without any interest exactly one year after you have received the carpet. By lending the carpet the manufacturer is ensuring sale of his overproduction and also saving expense on account of storage. Your house is his free storage for one piece of carpet for one year.

The same way bankers had lent money so recklessly that the value of a home to be mortgaged had to be overestimated artificially to justify financing and refinancing at exorbitant rates of interest offered by subprime banks and accepted by consumers who were blind only in fulfilling their delusory wishes of owning houses being oblivious of the cumulative debt burden to be shouldered in future.

Now the whole world is watching an American drama with congressmen and senators debating how to stabilize their wobbling economy, the bankers sitting idle without lending any money even to their tested clients, some manufacturers turning into lenders of last resort for their customers with bankers’ loan desks closed, the home owners keeping their fingers crossed in the expectation that the government’s bailout plan with 700 billion dollar will keep the bankers away from their doorsteps, the taxpayers looking askance at the government’s philanthropy for the bankers at default at the cost of their money paid in tax, and foreign buyers with their stronger currencies rushing madly to buy anything American as if “America is now on sale” with US Dollar plummeting in value in an unprecedented pace!

The root cause, I dare say, responsible for the global unrest for escalating price of commodities is the culture of financial transactions only through ‘promissory notes’ and our gross departure from legal tender or money based on or convertible into gold or silver and our embracement of fiat money, especially paper currency, authorised by a government. The circulation of fiat money may have led to inflation resulting in price hike, whereas money redeemable in gold or other securities would have been less likely to devalue our money so greatly.

In fact, whenever our so-called civilized people in an outbreak of commercial frenzy had distanced themselves from the natural way of living catastrophes befell them and then the same people in another outbreak of frenzy had to revert to their original style of living for maintaining equilibrium with the nature.

We were enamoured with high yields of genetically modified food (GMF) and considered GMF as the penicillin to fight food poverty. But, when we have realized that such inorganic foods are carcinogenic we are now crowding shops to buy anything organic.

A new era based on false promises has ushered in when financial institutions are behaving more like futurologists than financialists and players in the Wall Streets are exercising the rights of the shareholders from the Main Streets to play more like gamblers than the co-owners of the securitized companies.

With a view to keeping our future currency stable and organic we have to devise a mechanism to introduce a uniform currency for all citizens of the world under supervision of a new World Body. A single world currency convertible to a variety of precious minerals may be defined in terms of a basket of all the major currencies---somewhat akin to Special Drawing Rights (SDR) used by International Monetary Fund for internal accounting purposes which is also used by some countries as a peg for their own currency.

Maswood Alam Khan
General Manager
Bangladesh Krishi Bank
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BSA Scouter wrote:
October 03, 2008 20:23
One could view the current global financial crisis as an opportunity to create among all nations a better model that is regulated by one set of rules and regulations and regulators from many countries - oops that would mean that each nation would have to sacrifice for the good of the world economy and perhaps cessation of wasteful ruinous wars and conflicts.

BSA Scouter

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Marek Zielinski wrote:
October 03, 2008 19:41
To the Editors of Economist.

Cutting the story short.

The present global financial crisis is comparable with some trials to rescue or save some dying cows from mad cow disease some time ago. They tried to inject an antidote to already dying animal eventually decided to burn all the stock.
In this case even though there will be more injections, they never will be able to save this dying cow of its natural madness.
As VP candidate Sarah Palin recently said:
... Bad guys should be wiped out from the face of the earth ...
Would it be a fulfillment of the prophesy?
..."the time has come for destroying the destroyers of the earth."
Book of Revelation, Chapter XI, Verse 18 taken from the Moffatt Bible.
Nothing is gonna ever save this melting mischievous cow, an object of adoration of many, since the Moses' time.

My father used to say: ... the energy spend on production of one loaf of bread is everywhere the same on any place on earth. ... and so on the base of that the new economical system will be created.

Marek Zielinski
Your recent article on the financial markets is dead on. This will take a global effort with all concerned to work together. To bad that the current president of the US and past presidents failed to understand just how dangerous it was to combine traditional banking with exotic "toxic" securities, especially when so many traders are only concerned with gather booty for only themselves.

BSA Scouter
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bradw2k wrote:
October 03, 2008 17:59
"Financial markets need governments to set rules for them; and when markets fail, governments are often best placed to get them going again. That’s pragmatism, not socialism."

Every word of this is dead wrong. The markets *as such* have not failed; only after decades of massive distortion by government intervention have we had a boom that is now a bust. At the root of the boom: real estate prices were judged to be too low by *rational* investors for years because of government incentives to give money to high-risk recipients on loan terms that a free market would not have dreamed of. This continuous and growing influx of money -- which gave the *appearance* of vast resources of wealth and productivity funneling into real estate -- caused the overwhelmingly rational marketplace to adjust prices upward. (Markets are ignorant of the intricacies and depths of government intervention; investors assume the marketplace is free, they cannot do otherwise.) The bust came when investors finally, and then quickly, realized that the supposed wealth and productivity at the foundation of this economic expansion was artificial: the sub-prime crowd can't reliably pay its mortgages.

In a free market, people of lessor means could not come into the control of large extensions of credit. But in this mixed economy, the socialism of altruistic redistribution schemes co-conspired with the pragmatism of Keynesian central planning, setting up rational investors to unwittingly pour money onto unsound investments, eventually magnifying the defaulters' little acts of destruction into a worldwide financial catastrophe.

The defaulters certainly have their share of blame, but it is insignificant compared to the guilt due our government policies. It takes a sustained market distortion to victimize an entire generation, and it takes sustained acts of statism to seriously distort a market.

Now, more of the poison is proposed as the cure. These bailouts amount to IOU's made out by our future selves. Who are we kidding? Wealth is a real thing, actual goods and services. We can't "borrow" from ourselves the wealth *we have not yet created* -- such is ludicrous. Future tax receipts do not exist yet, there is no way to borrow them in order to use them today.

We should abandon Keynesian economics and Marxist social theory, and discover that the only way to find wealth is to create it; and that the only ones who can create it are free individuals, whose rights must be guaranteed in a fully capitalistic society. We continue to distort markets with government programs and deficit spending at our own peril.
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goodperson wrote:
October 03, 2008 17:39

Loose monetary policy and securitisation did not happen by chance and the quest for higher returns was not dictated by God.

Americans should now realise what choosing free capitalism means.

And The Economist is wrong to pamper that country: "That’s pragmatism, not socialism."

Socialism indeed, and of the worst kind: socialism for the rich. With misery for the uninsured poor coming with that.

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Peisistratos wrote:
October 03, 2008 15:08
Speaking of global cooperation, is it likely that a global currency will ensue from this crisis?
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JustAnInvestor wrote:
October 03, 2008 14:07
The guy is Arnold Schwarzenegger...

"California Governor Arnold Schwarzenegger has advised the administration that his state may need an emergency loan of as much as $7 billion from the federal government within weeks, the Los Angeles Times reported."

What more could possibly fall apart in this great country?
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OLDIE wrote:
October 03, 2008 13:50
More and more often the economist swallows hard and is obliged to say something good came from Europe (yes the E word). Indeed if the pound had made it to the euro the governments would have had already the habit of working together, rather than once in a while.
It would have taken just a bit of modesty, and pegging the pound much lower in the famous snake, as you correctly underlined when Mr Major's government made that mistake. Less than two years later the obvious showed; the pound could not make it, and from then on, the brits were adamantly against any mention of europe as a consequence.
I stay convinced that more Europe is good for you, like everybody else. Not any sort of Europe, but not a bunch of competing nationalisms either.
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Tir Tairngire wrote:
October 03, 2008 13:26
The swine in the US Congress belly up to the trough to swill down the bribes and vote in the Bailout, ignoring the decent people who elected them. Another day in Paradise.
Tir Tairngire
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Yankee Doodle wrote:
October 03, 2008 12:41
Vive_la_chimie wrote: "To Yankee Doodle: Haven't you noticed that Airbus has recently opened a factory in China (which Boeing refused to do), so as to be better able to compete in the Chinese market over the next 20-30 years?"

Good point Vive_la_chimie, Europe does have the option to move most AirBus jobs to China. That will work. Have the European taxpayer finance this company and then ship many of the jobs to China. Then Boeing will have a competitor.

Will the French support this plan?
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Akagi wrote:
October 03, 2008 11:54
Mr. market is always right. Though governments may influence the market, the fairest time will tell Economist that you are wrong definitely.
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Vive_la_chimie wrote:
October 03, 2008 11:48
To Yankee Doodle:

Haven't you noticed that Airbus has recently opened a factory in China (which Boeing refused to do), so as to be better able to compete in the Chinese market over the next 20-30 years?
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Morgan Kelly in the Irish Times says: The Swedish government stepped in and, in return for banks' admitting the scale of their losses and firing the senior managers that had caused their problems, provided capital in return for a share of ownership. As the Swedish economy recovered, the government was able to sell off its share in the banks, with the result that the Swedish taxpayer lost nothing on the bailout."

This seems a wise solution compared with the idiots in Congress who have added a $100 plus Billion tax forgiveness feature to the current Bailout Bill to soften the opposition. Bribery and corruption still are rampant in the good USA.
Tir Tairngire
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Darden Cavalcade wrote:
October 03, 2008 09:53
Thank you for the lucid explanation of what has happened and may happen in this financial panic. I disgree only with the article's title, World on the edge, and the graphic of a man standing on a edge of a precipice that is the cover of this week's issue of The Economist. Both the article and the graphic are too optimistic.

We aren't on the edge of the precipice of economic contraction and deflation. We are in that early moment of stumble and collapse when our senses tell us that we could recover our footing before the fall, but gravity knows otherwise.

The post-World War II international monetary system, system of international trade, and the standards of living that have depended on them are about to come to an end. And there is very little that any of our governments can do about it.

Our leaders have applied band-aids, tourniquets, and now amputation and organ replacement to cure the disease in our economic system. I hope their heroic efforts succeed, but I fear the patient is dying and the world's best medicine won't make a difference.

If our collective well-being can be recovered, it will only be through the kind of international cooperation The Economist recommends. We must write a new international social contract.

The United States wrote the last one preparing for the peace following World War II. It pains me to say it, but the United States Government should not be trusted to write the next one. Our domestic political system is too corrupt, and we Americans will be too busy re-writing our own social contract to take the pen.
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JustAnInvestor wrote:
October 03, 2008 09:12
This thing just gets totally messed up.

Wachovia, having struck a deal with Citigroup just on Monday, now walks away, and gets taken over by Wells Fargo. Citi's shares said to be -20% pre market. Everything is messed up.

Again: Who is responsible for this whole mess? Everybody picks the most oppotune contributor from his point of view. I'd rather say, when you set up a system, that incentivizes participants to make inappropriate bets, like: Mortgage applicants, Mortgage brokers, Banks, Rating Agencies, and finally Investors and Wall Street, then the system set up is to blame, i.e. those, responsible for a functioning system. If one argues that even capitalism needs at least some rules, then this a total failure of the politicians, or the political system if you will in charge of rules' setting.
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whs806 wrote:
October 03, 2008 07:07
Greed is alive and well. When you establish laws that let people with poor credit to borrow money without any proof of ability to pay, you establish a risky condition. That is exactly what happend when Jimmy Carter established the CRA (Community Reinvestment Act) in 1977 and Bill Clinton kicked it into high gear in his administration. It has taken 30 years to get the consequences. Just like Carter promised to make America Energy Independent. (empty promises)
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maydserhal wrote:
October 03, 2008 06:10
I agree with the author that governments need to set rules for the financial market, yet the absence of this role is in the heart of the current problem. So the question is not about being pragmatic, for ultimately governments' intervention is very urgent now, as the global financial system has been shaken. Where were the governments when the monetary policy was dangerously loose and policy controle and regulations left astray, while the banks were acting irresponsibly with the risks involved?
A dangerous game with time has begun with the aftermath hitting the real economy everywhere, and most probably the new interventions are not enough to solve this major crisis, especially that the medicine used is the same venom that erupted the whole issue, ie bailing contaminated debts. Before it is too late there is a major need to learn from the mistakes and redefine the relationship between the government, the economy and values, and only then a new foundation of rules could be set to regain what was lost, instead of expanding the loss or trying to shift it in time and place.

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moreoveragain wrote:
October 03, 2008 06:02
"Actually American debt on a debt/GDP basis is lower than many European debts, and is a third of that in Japan."

I presume you mean debt of the US federal government. That's only the smaller part of the parcel, I'm afraid.

Private and corporate debt has to be serviced as well. America as whole is borrowing since the 1970's as a cursory glance at the current account reveals. Americans may prefer to fool themselves but eventually the piper has to paid.
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davepolit wrote:
October 03, 2008 05:24
"Financial markets need governments to set rules for them; and when markets fail, governments are often best placed to get them going again. That’s pragmatism, not socialism."

Well, how about a bit of control from below, not from the governments, but from the ordinary bank workers? Doesn't the crisis, amongst other things, reflect a complete lack of democracy and real control in the business world at large?
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Bianca75 wrote:
October 03, 2008 05:23
The article is a lot of baloney, I am afraid. We need a sound banking system – absolutely yes, but we do not need a corrupt Wall Street elite that has its representation at the US Treasury. Has anyone wondered why Goldman Sachs appears to be one of the survivors so far? Wasn’t Hank Paulson at the helm of Goldman Sachs before moving to the Treasury?

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October 03, 2008 05:15
The effect of the American economic crisis is not global as the article is making us to believe.

Europe and Japan are likely to be the regions that are most likely to be hit. Of course these two regions are known to be tightly "hooked" to America since the second world war.

Other regoins like Asia and elsewhere are not going to be severly hit as they have strong growth fundamentals and huge reserves which America might need to save their own financial system.

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Oommenz wrote:
October 03, 2008 04:48 Yes, the crisis is global.

The world needs to tone down the salaries paid to the bankers, investment companies to make it profitable.

Quality credit should be provided and not reckless credit. Managers need to be accountable for the reckless credit.

Right now we all are in the same boat. Boat safety is utmost now or else the credit sqeeze is going to bring all us down the ocean.

For that the President of USA and all heads of all countries need to provide liquidity in the system and at the same time start punishing the defaulters / managers etc as in any criminal case.


Following the American way, the world started living on credit and living of credit... may be this crisis will get us all to think about the unsustainable and dangerous trend of floating on credit. Equally, banks and other companies that entice customers with easy credit will finally sit back and re-think their strategies...

This is indeed a painful lesson.
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rkleincanada wrote:
October 02, 2008 21:20
Financial analyists have stated that we are in a Bear Market. No, for this situation we need a new term. Let us try Humpty Dumpty. Yes, that is it, we are experiencing a slight correction within a Humpty Dumpty Market.

And all Bush's Senator's and all of his men
Won't be able to put Humpty Dumpty
Back Together Again
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FormerRepublican wrote:
October 02, 2008 20:34
Statusquocritical brings up the interesting idea that all parties in financial transactions should be certified, registered and regulated to improve the quality of the financial instruments being offered. In many cases, the professionals involved in these transactions do meet professional standards and oversight set by the states and the feds. Where the system failed in this case is that there were so many parties involved that nobody took responsibility for due diligence on the transactions above their position since they could just sell the mortgage on for a fee.
The real estate appraiser gets his $500 fee, and it better be higher than the offered price or he won't get any more appraisals to do. The mortgage broker gets his 1% cut for signing that it is a conforming loan, even though several aspects are weak, and sells the mortgage to Frannie. If the mortgage is current for at least 6 months, there is no recourse back to the mortgage broker.
Frannie bundles the mortgages and sells them as CMOs, getting its cut, in return for having a guarantee. The CMOs are parcelled out all over the world.
Further regulation is not the answer. You cannot ban stupidity. However, diligent investors can restrict their operations to dealing with reputable firms that have a tradition of high standards. In the pell mell rush for growth and earnings, many firms relaxed, to the point of totally ignoring, the professionalism of the parties they were dealing with. Those parties should absorb significant losses for their imprudence. If it bankrupts them, that is probably for the best.
Lehman is gone and there should be several others. Buying these worthless securities is distorting the lesson that should be learned here. These learning experiences last for about 8 years and then they have to be retaught by the stupid ones, who have had great earnings for several years, losing their shirts. It is the way the system advances - creative destruction.
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Yankee Doodle wrote:
October 02, 2008 20:19
JustAnInvestor, I imagine that there is now less global interest in dollars and dollar investments, right? This means that the dollar should devalue somewhat more? This is great news for the US economy, if not for Americans. The US economy will thus grow a lot, and US consumer spending will also shrink?

Right now the European central bankers (who are not one bit independent) are getting their orders to reduce US investments. This political direction is of course almost always wrong, and it is now way too late for this to help. All this does it fuel the US economy by lowering the dollar and making the US economy more competitive.

Will Europeans lower the euro and compete - or will they maintain their standard of living and just take unemployment benefits when jobs are lost?

Imagine telling the French that they get 12 fewer vacation days for the same pay? US workers would just shrug and then start talking about golf or baseball.

What does the US plan? Why to compete economically, of course. What does Europe plan to do?
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JustAnInvestor wrote:
October 02, 2008 19:25
@Yankee Doodle

I think you got some things mixed up here. However, maybe I just "misunderstood" sth.

"This crisis will in the end greatly help the US economy."
Well then... After Sweat and Tears, there will be relief. Somewhen.

"The shock will stimulate debt reductions and enhance savings, and will end the excessive debt-fueled US consumer spending. The US will then buy less from Europe and Asia, and the US trade balance will improve."
That sounds reasonable. I'd rather think though, that the US also produces more, i.e. exports more. At least this would be a better strategy than just import less, in particular since much of the US imports are non discretionary items like oil anyway. However, either way, THE US WILL SAVE MORE, SPEND LESS, right?

"Europe would be wise to ... adapt now to increase productivity and savings..."
What, I'd thought the US saves more, and Europe less as you said earlier on.

"[Europe] while adjusting the curriencies down to protect exports and jobs."
Again, talking about two currencies, their relation can either increase or decrease. Do you suggest the USD depriciates vs European Currencies and the European Currencies depreciates at the same time vs USD? Well, sounds everybody can improve balance of payments this way. What exactly is the color of the sky on your planet?
Or do you intend the very big robbery? I mean the largest since Imperialism?

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ReformerRay wrote:
October 02, 2008 19:22
"If the government could save the credit markets without bailing out the bankers, it should do so. But it cannot".

This is an untested proposition, in the current context. To save the credit markets, without bailing out the bankers, the government would force banks to come clean concerning their "toxic"assets on their books. Then the government would save the system by allowing that information to destroy those firms that are weakest. The remaining firms would be able to resume operation.

This process would avoid the "comming back again" scenario that many foresee as a consequence of acceptance of the Paulson plamn.
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Tir Tairngire wrote:
October 02, 2008 18:50
'That’s pragmatism, not socialism."
Wrong! That's socialism, and its not even smart socialism. In the following paragraph you dither about spreading blame on anyone that doesn't cater to your preferences.
We need to leave the mess to be fixed by those who made the mess. And fixed with their dollars and assets. Then we are doing a wise thing. And we are ridding the world of fools that believed that they were (are) too big to fail. They should fail.

We should first create a new set of laws to govern the rules of finance. We need only bring back Glass-Stegall and add others that disallow what the idiots did. That could happen quickly. Use this panic pressure for good. Then we can use the money to set up new entities, entities that will live by the legislation that will govern them well.
If we can create a great new law to give away money, we can first create laws to restrict the use of the money. First reform and new entities, next (and not in a panic) the money.
Tir Tairngire

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Yankee Doodle wrote:
October 02, 2008 18:41
This crisis will in the end greatly help the US economy. The shock will stimulate debt reductions and enhance savings, and will end the excessive debt-fueled US consumer spending. The US will then buy less from Europe and Asia, and the US trade balance will improve.

The dollar will trend lower against the euro, and Americans are now expecting the resulting modest reductions in purchasing power. Jobs are very important to Americans who lack the economic insulation of Europeans who no longer really need jobs at all. The US economy will compete even more effectively with workers and companies that use highly valued currencies like the euro. The slowly dropping dollar will fuel enormous economic vitality within the US.

The eurozone will be stressed with exports sharply down and unemployment rising. Expect some national defections from the euro, Italy for example will demand policies that Germany will resist. Europe will either reduce the already rather low living standards to respond to the lower dollar, or will borrow heavily to sustain governmental committments.

Much of Europe never really liked capitalism and prefers her native socialism, so significant anti-capitalism measures will be now enacted that will reduce European capitalism and global capital inflows. The US will remain the center of global capitalism, India and non-european economies will increase their role, but European voters will demand an end the era of European global capitalism.

The primary European economic challenge will be to convince Europeans to work harder and get paid quite a bit less for a few years. If this does not occur, the only strategy left to Europe will be to increase debt. Ironically the Europeans would then be copying the American errors of recent years. Will Europeans then agree to lower incomes, higher taxes, and more productivity? Will they instead opt for the very comfortable unemployment benefits that are their birthright?

In a year, the always adaptible US economy will have adapted once again. Europe will have then opted to test several new socialist/capitalist hybrids that will again eventually fail, and the eurozone experiment might be approaching an end.

Europe would be wise to avoid copying the US debt strategy - and adapt now to increase productivity and savings while adjusting the curriencies down to protect exports and jobs.
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Tir Tairngire wrote:
October 02, 2008 18:41
'That’s pragmatism, not socialism."
Wrong! That's socialism, and its not even smart socialism. In the following paragraph you dither about spreading blame on anyone that doesn't cater to your preferences.
We need to leave the mess to be fixed by those who made the mess. And fixed with their dollars and assets. Then we are doing a wise thing. And we are ridding the world of fools that believed that they were (are) too big to fail. They should fail.

We should first create a new set of laws to govern the rules of finance. We need only bring back Glass-Stegall and add others that disallow what the idiots did. That could happen quickly. Use this panic pressure for good. Then we can use the money to set up new entities, entities that will live by the legislation that will govern them well.
If we can create a great new law to give away money, we can first create laws to restrict the use of the money. First reform and new entities, next (and not in a panic) the money.
Tir Tairngire

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geowhizz wrote:
October 02, 2008 18:38
Governments work together? The US Congress is hyper challenged on this point. Let's hope world governments are more competent, but bet on it ?????????

This financial fiasco driven by greed and power lust unambigously demonstrates markets need strong and competent government oversight. Even war is/was ruled by the Geneva conventions. Outrageous!

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werwolf9156 wrote:
October 03, 2008 03:30
Could anybody tell us to whom belongs the profits?
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Solston wrote:
October 03, 2008 01:44
It's interesting to note how the Economist transitions to the idea of government intervention as if its the most natural thing in the world now that this crisis has come about. But just pick up any back issue from even four months ago, and any notion of 'government participation' in the economy is considered like being agaist the laws of gravity or something. Yes, it is going to be necessary for massive government intervention this time but is the notion of growing the economy through serial growth spurts and then painful busts the most effective.
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DarthSidious wrote:
October 02, 2008 23:51
The smug europeans shouldn't be saying that it is all the US fault, even if the collapse did start here. Remember, some countries (like the UK and Ireland) had credit fueled housing booms that boosted prices much more than in the USA. The bigger a bubble inflates, the harder things fall back to earth when the bubble pops. In fact, the USA may have done the world a favor with its subprime mess. It was the subprime collapse in 2006-2007 that ended the house bubble in the US, and in the rest of the world as well. If US subprime lenders hadn't been so incredibly reckless, US house prices would probably still be rising now, and that would set up conditions for a much bigger and more devastating crash later. Now it would have been much better if the US Federal Reserve had acted to prick the bubble in 2003 instead of letting it inflate, but maybe future policymakers will learn from those mistakes.

"Even if, as the Europeans claim, the crisis was made in America, it now belongs to everyone."
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justanonymous wrote:
October 02, 2008 23:21
The metaphor of contagion is not appropriate in the article. These problems are systemic and pandemic.

Most definitely it is a global crisis.

Central Banks should work together. Governments should work together too.

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Yankee Doodle wrote:
October 02, 2008 23:13
Frank Castle for President!
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frank castle wrote:
October 02, 2008 23:01
Based on the bailout package somewhere around $700 billion and while I agree that something needs to happen I feel that maybe we should look at a different approach. I am proposing to give every American, a million dollars and let the chips fall where they may. This package described below will be cheaper than the $700 billion package currently passed around. There are some rules for the stimulus package: if you are incarcerated at the time of the passage of this package, you are not eligible. If you are under the age of 18 at the time of this passage you are eligible for the stimulus but are not able to access the money till the age of 21. The money for the people under the age of 18 will go into account that is accessible by them if they are going to college without any penalty but no access to the larger amount till the age of 21. Those born on the day of the passage of this stimulus will be eligible as well. Adults will be given the stimulus on the condition of making an investment of half of that money in to banks, 401k, IRA and the like are to stimulate the economy at the bank level. It creates money for banks to invest and make loans. This would turn around the housing market in one fell swoop. Think of the people of who have been affected by natural disasters and what they could do to turn around their lives. Also allows people to buy houses and then make the necessary renovated to allow the housing prices to go up. This will also effect urban environments to allow large scale renovation of neighborhoods and clean up most cities. The other half is at the discretion of the citizen to stimulate the economy at will. This I feel will allow the citizen to make the decisions necessary to take control of this country and really put it to the heads of financial institutions to really pander to their customers to get their part of the check. This will allow small town banks to float and truly affect their communities in a big way. One aspect of this is potential job creation just in the construction/renovation market alone and everything that is affected by that. We can see how the housing market has affected the rest of the economy, it will do the same thing in the other direction. This will allow every kid to go to post secondary schools with this package and will give them a nest egg fresh out of school to allow them buy a house, start a business. The money for those who will be born on the day of the passage of this package will be the generation who become the generation who can say I can afford that. There are people who would like to take advantage of alternative power sources that current citizens cannot due to the price. Think of the generation born that day, what they could become. 21 years of interest of a million dollars and what they could do. The next Bill Gates, Thomas Edison, and Alfred Nobel.
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Yankee Doodle wrote:
October 02, 2008 22:42
Yes ricecake, China will soon help the US and by doing so, help China. Europe will now be selling US assets, and China will wisely invest more into US industry equity. Europe will withdraw and China will expand.

American stocks will be real bargains as the dollar ebbs.

Look at Boeing for one example, AirBus cannot compete if it is building aircraft with expensive euros and selling them against aircraft made with cheaper dollars. Bye bye Air Bus, hello Boeing. Why wouldn't China want to own Boeing? Why wouldn't we all since with AirBus gone there is now little competition.
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ricecake wrote:
October 02, 2008 22:23
Chinese media said that China will come out to help the U.S soon because 1) the U.S's really need's support now, and 2) if the U.S in too deep a trouble China will be deeply affected by it too. China's holding the largest amount of the world's cash deposit in her banks.

金石财经20081001 -- 全球金融业面临信心危机


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ricecake wrote:
October 02, 2008 22:13


"Financial markets need governments to set rules for them; and when markets fail, governments are often best placed to get them going again. That’s pragmatism, not socialism. Helping bankers is not an end in itself. If the government could save the credit markets without bailing out the bankers, it should do so. But it cannot. Main Street needs Wall Street; and both need Washington. Politicians—and President George Bush is the most culpable among them (see article)—have failed to explain this."

This is best article ever about the meaning of this crisis. Why didn't Economist put it out before the last Congress vote?
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Its easy to blame Wall Street, but the ordinary citizen is just as much to blame. The whole of america has been living beyond its means for years , financed by the huge surpluses earned by the Asian economies. Wall Street has only catered to the demand of ordinary americans who want to live beyond their means in the rather naive belief that everything will keep on going up. Now the problem has come home to roost , with a vengeance.
Had there just been the tiniest bit of common sense or even intelligence we would not be in this situation today.
But there is also some good in all this. We are seeing the end of the unipolar world. Americas influence is weakening all the time and its only a question of time before Asia will be dominating the world economy
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julgom wrote:
October 02, 2008 17:15
If you are a prospective swindler, make your fraud as big as you can. Not only will it be more profitable, but also you can be sure of getting a nice bail-out (in order to preserve
the poor of "Main Street" from a greater harm than being dispossessed of 2.000 dollars per capita).
That's the moral of today's crisis !!!
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IL SARDO wrote:
October 02, 2008 17:10

The thesis of this article is that the US and several other countries made enormous financial mistakes and now the fallout
of these errors is disruption of the credit markets across the
globe. It is implied that we now live in a global communal
society and we are all brothers.

The solution offered by the Editors is: Share the blame
and share the pain. We are all in this together and we must
work together for a new happy ending.

How cute! A sixth grader couldn't have written a more
tearful story.

There is no mention of who will receive the fruits of our
collective endeavors. Possibly wealthy corporations and their
wealthy owners?

There is no mention of why we have come to live in a global
communal society. Perhaps to make giant corporations larger
and wealthier?

Perhaps a more effective solution to that proffered by the
Editors is not to share the blame and pain and work together--
but rather, to feel the pain, ignore the blame and work independently,
as we once did, to find a new economic structure that is
not global and not dominated by the big powers but simply
a manifestation of our unique national qualities.

What do we have to lose? Only our debts.
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juicepro wrote:
October 02, 2008 17:02
when did the economist turn socialist, i thought the markets had the answer for everything?
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statusquocritical wrote:
October 02, 2008 16:58
The most frustrating aspect of this article, and perhaps of the entire episode so far of this 'condition' that we are just starting to see the breadth of - is the lack of a true accounting of what people at all levels of this fiasco were thinking. I hate to point blame before possible solutions are implemented, especially when the blame is almost entirely based on a dysfunctional attitude in every person from ex-homeowner who may or may not have understood what they were getting themselves into (real estate lawyer anyone?) to the people who crafted these deviously complex financial instruments to the utterly misguided and quite frankly, negligent, bankers who took on these instruments. But, can all of these portions of society be so simultaneously ignorant and negligent to the scenarios they were undertaking. As an engineer, I am fully aware of the complexities, risks, and outcomes of things that I undertake. I have to take oaths and undertake ethical/legal examinations - society, the users of my buildings, and my industry are all counting on me to be reliable, professional, and diligent in my duties. I can't help but see ridiculous risk, miscomprehension, and just an incomprehensible laissez-faire to all aspects of this situation. I think we are not just talking about a vigorous regulation of all aspects of investment and loan-granting, but a serious examination of all persons who are in the position-of-trust to offer these instruments to the public and investment community at large. I am talking about a level of licensing, internship, and examination at all levels that many may think as an impediment into getting into the financial sector. We test our engineers, doctors, and lawyers this way - why not those who uphold our financial future in their hands. Let this be the last time that lending decisions are made at the desk of any local 'mortgage specialist' or 'investor institution' without true and substantial certification of the individuals who are given this responsibility.
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Yankee Doodle wrote:
October 02, 2008 16:26
"Financial markets need governments to set rules for them; and when markets fail, governments are often best placed to get them going again. That’s pragmatism, not socialism."

Why is this not socialism?

This crisis has its origins in socialism, the Community Reinvestment Act was modified to require US banks to lend money for homes to people who did not have assets or an income to repay these loans. These loans are in part, the "toxic securities" we are now discussing. Socialists took control of the key US Congressional committees in 2006 and installed socialist policies.

The solution is to keep socialism away from capital markets, it is a form of contagion that has wreaked havoc, as it always has.
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m ilci wrote:
October 02, 2008 16:15
You are absolutely right. Unfortunately few politicians, if any at all, have time to read the Economist. They must worry about getting elected and reelected. After all this their profession!

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Yankee Doodle wrote:
October 02, 2008 16:13
moreoveragain wrote: "The mere fact that Germany had to help out a bank with a shortfall doesn't mean that Steinbr�ck wasn't right about the source of the problem. It's America which is drowning in debt, not the world, let alone Germany."

Actually American debt on a debt/GDP basis is lower than many European debts, and is a third of that in Japan. US debt peaked in 1959 and the US survived 1960 with greatly more debt than today.
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juntai wrote:
October 02, 2008 15:54
This is not a black and white issue. Virtually everyone who voted elected someone who helped the debacle along. Most Americans benefited-at least temporarily-from the bubble. Now we have to pay for our lack of realism; Running the country on slogans about free market capitalism, the virtues of radical deregulation and unrealistic visions of a Louis Vuitton in every pot (it all started with "Lifestyles of the Rich and Famous").
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rep3 wrote:
October 02, 2008 15:42
When a third world country gets into a financial crisis, America always tell that country to under go IMF’s structural adjustment program. There terms are raise interest rates, cut government spending on health care and education, privatize public infrastructure and strategic sectors (resource related), and open up newly privatized domestic economy to international market (western companies).

Now that American has fallen into the same predicament, I suggest America undergo the famous structural adjustment program.

Nothing shows leadership better than taking the same medicine that you subscribed.
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we keep hearing from the Economist here how we 'have to support this to avoid disaster.' but maybe we deserve a disaster? sucks to say it, but hey that's karma. clearly there was a lot of bad practice at work in the last few decades, esp in the last 8 years IMHO.

i'd rather than everyone from main street to wall street suffered equally than merely have the taxpayers suffer [more]. blame is shared. consequences should be as well.

extinction, like death, is a fact of life. i still don't see how giving more money to a broken system is going to magically fix aforementioned broken system.
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Yes, we've seen how it works; and it's not even a baby to be laid at Bush's door. By the way, is Gordon Brown an Anglo-Saxon capitalist or an EU socialist?
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vsamonis wrote:
October 02, 2008 13:27
Anglo-Saxon capitalism works despite the Bush era shenanigans; EU socialism does not work despite Sarkozy!
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moreoveragain wrote:
October 02, 2008 14:50
The mere fact that Germany had to help out a bank with a shortfall doesn't mean that Steinbrück wasn't right about the source of the problem. It's America which is drowning in debt, not the world, let alone Germany.

From an international perspective, tackling the problem means dismantling Wall Steet's role as hub of the world financial system to prevent it from choking the free flow of finance.

As far as the Ameicans are concerned, they will have to spend less, and pay more taxes.
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eurotrader wrote:
October 02, 2008 14:49
Just wait for the fun to start when Spain and Italy starting talking about pulling out of the Euro so they can revalue when they want. No reason to send a thank you to the US I am looking for a new summer house in France after the fall.
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tltemple wrote:
October 02, 2008 14:40

Yes, this started as US problem with the Clinton Administration's relaxed rules for Fannie/Freddie back in the 90's. European banks were also a bit hungry for some of the action so they jummped in as well. Now here comes Uncle Sam with a check he cannot afford to write and the poor strapped US taxpayer gets to pickup the tab. We need to let free markets do what they do best, pick the winners and losers.
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Adlai W. Stevenson wrote:
October 02, 2008 14:37
In hindsight does the decision to let Lehman fail look like a mistake, since it set off wholesale panic in the banking system?
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JPChance wrote:
October 02, 2008 14:00
Don't worry. When the casinos of Wall Street and the City of London lose all of their "liquidity" (debt-based "credit"), you're all welcome to gamble with your own silver dollars or renewable energy credits (RECs) at honest casinos run by Native Americans.




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Ulrich123 wrote:
October 02, 2008 13:59
john pedler:
This is a result of the huge housing bubble, which in terms of severity dwarves the Iraq war by orders of magnitude.
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Capi Adonay wrote:
October 02, 2008 13:56
Certainly work together is the wish, but...
who is going to profit from it? Where is the responsability of the taxpayer? Why the common citizen is going to pay the errors of the bankers? The "naivette" of all, believing markets can grow for ever, happened again. "Human being is the only animal which trip over more than once with thesame stone"
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john pedler wrote:
October 02, 2008 13:55
There are two crises simultaneously: the U.S. financial/security/military crisis - largely resulting from the the Iraq war: the fact that it is costing overall some $700bn and rising to the trillion means it's part of the financial meltdown.
And the fact that with two wars at the same time stretching the US militarily and financially, there is a potential for not one but two "Vietnams" (Iraq and Afghanistan)- situations where there is a dilemma: "leave or not leave".
Then there's the existential crisis for humanity: global warming; energy, water, food shortages; epidemics; over-population, genocide etc.
Both the U.S. crisis and the parallel world crisis require "change" from the last eight years of confrontation to a new era of co-operation made possible by the end of the Cold War.
(for more on this see www.dipconsult.eu)

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abohar wrote:
October 02, 2008 13:48
Amidst the ruins of the zumbo-sized banks of U.S.A. which have collapsed or are about to collapse, long sermons are being delivered by the 'experts', post-mortems are being performed by the newly-christened nay-sayers and many other Mr. 'I had said it so'. But no one one is saying the plain and simple thing that foremost reason for the abject failure of the these gigantic finacial institutions is greed. Greed on the past of the top executives of the banks to lend more and more and more to the hapless home-owners without giving a damn about the artificial bubble in the prices of homes, greed on the part of a very large number of house purchasers who went in for bigger and costlier new houses with loans at usurious rates of interest not because they desperately needed a roof on their head but because they wanted to make a fast buck in the artificial escalation of home prices.

But with highly paid financial analysts on their rolls, sophisticated economic think-tank well in place in their systems, high executives of the banks are the major culprits and fully deserve to be taken to task for their failure to call the bluff when the prices of homes were going through the roof. They convenintly forgot the lesson of the nursery-class story "Greedy Dog" where the dog with one loaf of bread in his mouth sees his reflection in the water of a well and in his greed for snatching the second piece from the 'other dog' in the well barks at him and ends up losing the one bread it actually had.

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