Tag Archives: financial crisis

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Can Cyber Attacks Prompt the Next Financial Crisis?

Howard Schmidt, former White House cybersecurity coordinator, discusses the threat to the U.S. economy from cyber attacks against corporations and the black-market for the selling of information on system vulnerabilities. He speaks on Bloomberg Television’s “Bloomberg Surveillance.”

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Blame Obama? Judging the recovery time from the Great Recession

Judging the recovery time from the Great Recession – Capitol Report – MarketWatch.

By Russ Britt, MarketWatch

LOS ANGELES (MarketWatch) — Getting a handle on how long it’ll take to recover from the Great Recession is more art than science, but a few economists think there are lessons from the past that might prove useful for those seeking a light at the end of the tunnel.

Academics from California to Massachusetts agree this last downturn is unlike any of the nation’s 10 previous recessions, dating back to the Great Depression. The collapse of the nation’s financial system is the main culprit, though there is plenty of blame to spread around: the housing and credit bubbles, to name two other offenders.

What is unclear, however, is whether more could have been done by President Barack Obama to get the economy up to speed faster. That, of course, is the central question in this year’s election, and voters’ answer to that question will go a long way toward determining if Obama gets a second stint in the Oval Office or if Republican challenger Mitt Romney unseats him.

Is the economy really improving?

Orders for long-lasting goods posted the largest gain in more than 21/2 years in September and the number of U.S. workers filing applications for jobless benefits fell last week. Mesirow Financial Chief Economist Diane Swonk discuss the state of the U.S. economy. Photo: Getty Images.

While some economists, not all them conservatives, say more could have been done, others point out past history indicates that given the size and scope of the downturn — virtually a depression in some views — the economy’s recovery is relatively on schedule.

“We’re way below how a normal recession [would behave] . But we’re about even, maybe a little better, than what a financial recession looks like,” said Alan Taylor, an economics professor at the University of Virginia.

Fact-checking recessions

Taylor recently released an article “Fact-checking Financial Recessions,” an update of a 2011 study conducted for the National Bureau of Economic Research. He and two colleagues examined the recovery patterns of 223 recessions in 14 advanced countries over the last 142 years. The study shows that downturns precipitated by a financial system collapse last longer and are much deeper than more “normal” recessions. Read about Taylor’s paper here.

Taylor’s study, conducted with Federal Reserve researcher Oscar Jorda and Moritz Schularick, economics professor at the University of Berlin, is similar to that of a 2007 examination that also was recently updated by Harvard University economics professors Carmen Reinhart and Kenneth Rogoff. The Harvard duo later published their findings in the 2009 book “This Time is Different: Eight Centuries of Financial Folly.”

“Rather than the V-shaped recovery that is typical of most post-war recessions, [U.S.] growth has been slow and halting,” Reinhart and Rogoff wrote in their most recent update of their research, an essay released last week. “Based on our research, this disappointing performance should not be surprising.” See the report here.

But some conservative economists take issue with the studies. They also disagree with the premise, articulated by former President Bill Clinton at the Democratic convention in September, that no president could have cured all the nation’s economic woes within four years.

“[Obama] focused exclusively on short-term band-aids,” said Lee Ohanian, a fellow at the conservative Hoover Institution at Stanford University in Palo Alto, Calif., and current economics professor at UCLA, of the various stimulus efforts by the president. “These short-term band-aids didn’t do anything to help.”

Faster bouncebacks

Michael Bordo, another Hoover fellow who teaches economics at Rutgers University, conducted his own study with Cleveland Fed Vice President Joseph Haubrich. Bordo contends there have been several recessions with a financial crisis element since World War II, and those have all bounced back faster than the current downturn. See the study here.

Bordo, along with conservative economists Kevin Hassett and Glenn Hubbard, have been feuding in op-ed pages with Reinhart and Rogoff over the pace of the recovery. Advisors to the Romney campaign, Hassett is a fellow at the conservative American Enterprise Institute and Hubbard, a visiting scholar at AEI, was chairman of the Council of Economic Advisers under George W. Bush. Bordo isn’t affiliated with the Romney campaign but says he supports the Republican.

The three insist that correlating the U.S. economy with other nations is a mistake.

“They’re pulling data across a number of countries, all of which have different institutional environments, different policies,” Bordo said of the Harvard study as well as Taylor’s. “There’s a lot of information that’s going in there.”

Bordo, though, says this recession is different since it was compounded by the housing bubble, an element that has never played a significant nationwide role in previous downturns and could be the nagging factor in this crisis.

Asked if Clinton was right about when he insisted this downturn couldn’t have been shortened, Bordo said: “I don’t know. I really don’t know.”

Taylor and the Harvard duo say they have no political motivation when it comes to examining recession patterns, and aren’t questioning government policy. Taylor’s paper first was completed a year ago and Reinhart and Rogoff started looking at the issue in late 2007, 11 months before Obama was elected.

Key metric

Both studies use real per-capita GDP as their barometer for determining when a downturn has run its course. According to their data, the end of a downturn is complete when that gauge, which measures individual productivity, has returned to its pre-recession peak and is starting to grow again.

Taylor says that in most “normal” recessions, real per-capita GDP dips for one year, returns to its pre-recession peak within a year or two, and then starts surging past the old peak. Bureau of Economic Analysis data show this was true in all recessions dating back to World War II.

For the Great Depression, though, it took until 1939 for that gauge to get back to levels reached in 1929, prior to the stock market crash, the BEA says. Stocks generally recover at about the same pace as individual productivity, but that wasn’t true for the Depression. Back then, it took the Dow Jones Industrial Average (DJI:DJIA)   25 years to get back to its 1929 levels.

“There’s a reason it was called the Great Depression,” Taylor said with a chuckle. “We can have a lot of depressions but they’re not all great. It was the great one for a reason.”

Why global recession may return

The International Monetary Fund warned that the global economy risks skidding toward another recession.

With the current downturn, real per-capita GDP hit a peak in December 2007, Taylor says. BEA figures show that the metric reached $44,005 in the fourth quarter of that year and haven’t revisited that level since.

BEA data show the low point was the second quarter of 2009, when the GDP metric hit $41,389. It has been slowly climbing, for the most part, since then and now stands at $43,152, roughly 98% of where it was at the pre-recession peak. The Dow, meanwhile, stands at about 94% of its pre-recession peak.

Taylor says when it comes to real per-capita GDP, the current slow recovery fits the pattern of other similar, bank-fueled recessions in other mature economies, as well as the pre-Depression bank “panics” in the U.S.

The credit factor

Of 223 recessions Taylor looked at, 50 were initiated by a financial crisis. One key difference between Taylor’s study and that of the Harvard researchers is he examines how an excessive amount of credit issued in the years leading up to a banking downturn will factor into the equation. In the current malaise, he estimates that a medium-to-high level of excess credit circulated throughout the U.S.

Taylor says bank loans alone put the U.S. into the “medium” excess credit level, but there has been what he calls a substantial amount of what he calls “shadow credit” — student and auto loans, credit cards and securitized mortgages. He says there probably was enough of that to catapult the U.S. well into the “high” excess category.

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His data show that even after five years, individual productivity still is slightly below the pre-downturn peak in the average bank-fueled recession. BEA data show the current downturn was steeper during the first year when compared with what Taylor says is the average bank-fueled recession, but recovered faster and is slightly ahead of schedule.

“I think it’s pretty much on par, maybe a little better, if you take into account the shadow system. When you put in the extra bit of credit that was generated, the [GDP] path could have actually been lower,” he said.

In another update to the study released earlier this week, Taylor points out that the U.S. is doing much better than the U.K. While the U.S. is getting close to pre-recession GDP levels, the U.K. appears headed for another downturn in productivity, he notes.

No ax to grind

There are some economists who say they don’t have a political ax to grind and yet remain critical of Obama’s handling of the crisis, or at least don’t think the downturn needed to last as long as it has. But views differ on the best remedy.

Enrique Mendoza, economics professor at the University of Maryland, says Obama diagnosed the problem incorrectly, using Keynesian tactics of government largesse to try and boost demand. Quantitative easing should have been introduced simultaneously with the bank bailout, and a more aggressive addressing of the housing crisis should have been the order of the day, he says.

“The approach of attacking the crisis mainly with massive fiscal and monetary easing completely missed the point that the financial crisis was the culprit, not the Keynesian fairy that made private demand disappear,” he said.

Barry Eichengreen, economics professor at University of California, Berkeley, says even if this is a typical bank-fueled recession, the nation is right to demand quicker solutions because the U.S. is the world’s biggest economy and it has its own currency. But he thinks more stimulus might have been the answer.

“When debt is free and when interest rates are zero and the private sector is deleveraging, that is the right thing to do,” he said.

Source: Marketwatch

Economy: The Financial Crisis – How It Happned And How It Can Happen Again – Videographic

Learn about infographic design.

 

Financial crisis, five years on: animation Five years on from the start of the credit crunch, Phillip Inman explains how it happened – and how it could happen again

Source: Visual.ly

Lehman E-Mails Show Wall Street Arrogance Led to the Fall – Bloomberg

Lehman E-Mails Show Wall Street Arrogance Led to the Fall – Bloomberg.

 

Lehman E-Mails Show Wall Street Arrogance Led to the Fall

Lehman E-Mails

Illustration by Brian Walker

 

If one wants to understand the full complicity of Wall Street in the Great Recession, look no further than the voluminous package of pre-collapse Lehman Brothers documents that have been made available by the law firm Jenner & Block LLP, which has acted as the coroner in the Lehman post-mortem.

 

Most important, the cache dispels the myth that Dick Fuld, chief executive officer of Lehman Brothers Holdings Inc., and his close associates were unaware of the risks their business faced in 2007 and 2008. That would be bad enough, but the more devastating reality is that Fuld and his sycophants were warned repeatedly but were blinded by their hubris…More

Europe – Everyone is playing…

Financial Crisis – Why are there no bankers in jail…

Tonight…

Supercommittee failure? No, the U.S. voter failed – You get what you vote for, or not vote for

Supercommittee failure? No, the U.S. voter failed – MarketWatch First Take – MarketWatch.

True story. If you look at the outcome of an election, one has to wonder what people do expect to happen in politics. One can make out an educational problem, or just take political membership as a lifestyle. With at least the half of the population suffering from the financial crisis and the following recession, it is hard to believe that we have a political mess such as this.

If, one day, all Americans decide to go vote after really thinking about what is really good for them, then we will have a clear direction in American politics. “Good for them” means thinking about important stuff such as health care, social services, jobs, tax, not gun rights, abortion or other material to “make a catch”. Until then, it will be the same as usual. The minority that is going to vote will vote as a lifestyle, whether it fits their needs or not. If grandpa voted Republican, the grandchild is voting Republican as well and the other way around. The rest is complaining and watching TV rather than go vote.

Long live the housing crash?

Housing and jobs are the two biggest problems in the US economy. Both have their origins in the financial crisis caused by the banks with speculating on ever rising housing prices and greed. As we all know, that kind of business practice derailed the US economy and many others worldwide. Not only that, but millions of people and families found themselves in heart-breaking crisis.

Today, nearly 5 years after the crash of the housing market, the organizations causing the crisis, are on the way to write profits again, while Main Street America is still suffering. Families and individuals are in a fight for their home for years and as it looks like, will continue to suffer from the fallout for years to come.

Years ago, when the mortgage bubble was pumped up, a mortgage was available for almost everyone. Banks, motivated by certain Wall Street firms, wrote loans to everyone with the desire to own a home, financially sound or not did not matter. Today, things have changed. Banks, while regrouping from incredible losses  with government help hesitate to lend. The entire housing market is actually only accessible to a small percentage of the American population. This is one of the reasons why the housing market will not reach levels of 2000 to 2006. Currently the market and its prices, with some exceptions, is stuck on levels of the 80’s and early 90’s. Another reason why housing is not taking off sometimes soon is the job market. As housing, the job market was hit by the financial crisis with millions of people losing their job and their life line and others working jobs that bring only in a fraction of the income from before the crisis.

With the “newly acquired knowledge” by the banks, that homeownership requires very sound financial circumstances, the banks cut out more than the half of the population from buying a home or keep the home that they already possess. While many, due to job loss, were not able to keep up with payments and found themselves in foreclosure procedures, those that could avoid losing the home right away, are now unable to refinance their homes. With 30% of mortgages under water, this is a fact that will increase the numbers of foreclosures in the future. This will bring prices further down and will create further problems for the market.

As it stands, for the housing market to improve, years will go by. In order to reach levels of before the crisis, people need jobs and banks need to get back to lending. Not only to those that are able to put down 20% of the buying price, but also to those that don’t have the funds for a significant down payment. This can only be accomplished with government help. If the government will not step up and deliver programs for those that don’t have a certain level of wealth, the housing market will have to take the hit and accept the fact that only few can buy and that housing will become a market of buying for the rich and renting for the poor. While this can bring some sort of stabilization for the market, it will not significantly improve the market, at least not for years to come.

What should be done? A program for those that have their mortgage “under water” would clearly relief the market from pressure. This would require the banks to modify or refinance those loans that can be served by the homeowners. While this is not the case for all of the 30% of mortgages under water, it is possible for a big part of it. In the past, so called “Arms” were extended by the banks with very low credit and down payment requirements. While in the mean time the value of the attached homes went down, the accounts are not past due. The owner can’t sell, doesn’t have a down payment and sufficient credit for a refinance and the property is going into foreclosure. There is no reason why such loans shouldn’t be refinanced.

Looking at the misery in housing it should also be considered, as a moral responsibility of the banks, that banks cashed in on tax payers money to save themselves. It is now time to give back and at least save those that have been good and only need refinance, and that is a quite a number of loans. Maybe just a drop, but nevertheless support for the limping housing market. Moving on with none or limited flexibility by the banks will only cause more damage and will create a “walk away” attitude with many borrowers. One thing is for sure at this point, not everything that can be done to soften this crisis has actually been considered. One is wondering about the sense of the bailout. Was the bailout a substitute for lost profits, or was the taxpayers money given to solve a problem?