Tag Archive for: economic crisis

Economic Chaos

I was reviewing the current economic situation with some people at work the other day and it was evident that two things were pretty clear to them: one is that we are in a big mess and two is that most people do not understand how we got into this mess.

Vanity Fair has a really good piece on the cause of the economic turmoil which you can read at length here.

My read of the major causes of the economic chaos from their article:

  • Real Estate: flawed U.S. government policy, or social engineering dogma, that every citizen should own a house
  • Securitized Debt: converting debt like mortgages, car loans and derivatives into securities which made it difficult, if not impossible, to assess the value of the loans
  • Subprime Mortgages: the securitization of mortgages made it possible to take on riskier loans such as subprime mortgages, as long as they were bundled with better risk loans. This strategy worked for as long as real estate prices kept rising and interest rates remained low.
  • Quantitative Analysis and Options: securitized debt was insured by swap options based on the irrational belief that everyone in the market would behave rationally
  • Cheap Money: China had high savings rates and that money was loaned to the U.S. where the money was then used to make bad loans

An Economic Crisis of Historic Proportions

Looks like the economic crisis is going to be long and deep.

Reuters carried a piece yesterday outlining Obama’s perspective on the economic crisis. A few of the highlights — or should I say lowlights:

U.S. President-elect Barack Obama said on Saturday he was crafting a two-year plan to fight an economic crisis of “historic proportions” …

… leaders at the Asia-Pacific Economic Cooperation forum called for a global free trade deal to offset the economic crisis.

Obama said, “There are no quick or easy fixes to this crisis, which has been many years in the making, and it’s likely to get worse before it gets better.”

… swift and bold action was needed to prevent a deep slump, a spiral of falling prices and millions of job losses.

“The news this week has only reinforced the fact that we are facing an economic crisis of historic proportions,” Obama said.

I admit that I get a little nervous when the president-elect of the world’s largest economy, and a person who campaigned on hope, starts saying things like an economic crisis of historic proportions. And more so when Wikipedia dedicates a page to it.