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I have a problem with this...
So, this is it. The financial system has crashed. Now we're finally seeing the Republican's cherished "trickle down" theories begin to work - and with a vengeance- as the damage spreads into the real economy. The basic mechanism for this is the contraction of credit, which is cutting off funds for real economic activity. Goldman Sachs and others estimate that the financial crash has contracted lending by about $2 trillion--and our economy is $15 trillion in GDP. Banks and other institutions are simply unwilling to lend. Here's the results we know of so far:
This paragraph is preceded by a chart of commercial paper (showing a trough in 2003 and growth since, with a collapse in mid-2007) and followed by charts of new and existing home sales and mortgage rates. The implication is that the collapse of the housing bubble is due to the unwillingness of banks to lend [to each other], which is a result of the collapse of the commercial paper market. However, the housing market charts peak in 2005, two years before the collapse of Asset-Backed Commercial Paper which has dried up interbank credit.

We have met the enemy, and he is us — Pogo
by Carrie (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:04:35 AM EST
You get a gold star - the first one to notice, er, at least comment, on that.

I'm not sure if the decline in home sales beginning in 2005 reflects the fact that stagnating wages and earnings were showing up as a decline in home sales that early, or if some regulators were starting to tighten the screws that early. Also, there was Greenspan raising interest rates off the 1.0% floor he had brought them down to after the dot com bust.  I'm not sure of the dates of the interest rate increases, but I think they began in 2004.

by NBBooks on Wed Mar 5th, 2008 at 09:26:17 AM EST
[ Parent ]
Here you go. These charts are in Leveraged Losses: Lessons from the Mortgage Market Meltdown presented to the US Monetary Policy Forum Conference, released February 29, 2008. See the report for a brief description of what you're looking at in each chart. But it is very clear that something in the financial system went sproinnnggg in July-August 2007.

I think what it all reflects is that whenever you let the financial and monetary system leave the real economy behind by running off and doing its own thing - speculating, creating and trading "risk management", speculating some more, trading for its own accounts, arbitraging the "noise" in the markets, etc. - you end up with a financial and banking crisis. Because any and all financial instruments must, in the final analysis, be paid for from the physical production of the real economy. Think of financial instruments as claims for payment. When there is a roughly 1.5 to 1 ratio, things are relatively sane. But when you get to where we are today, where there are $60 in claims of payment to every $1 in GDP, there is bound to be a "hiccup."

by NBBooks on Wed Mar 5th, 2008 at 10:06:49 AM EST
[ Parent ]


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