What do we know about the financial crisis? What are the key questions?

Amidst all the blather about the financial crisis, I believe two things are clear.

  1. We — everybody — have more questions than answers.
  2. We, the American people, are fools.  These events should spark thought about our fitness for self-government.

This post discusses the questions, the details about the crisis.  As usual for this site, let us take this by the numbers.  First, what do we know?

1.  This down cycle has much more to go, still in its earliest stages.

2.  The de-leveraging of US households has just began.  Purging of excess mortgage debt is the first step; credit card and auto loans are next to go.

3.  The full force of the US recession has not yet hit, nor the effects of the global slowdown (perhaps to become a global recession).

4.  Most important, the global rebalancing process has barely started.  It will end when the US dollar has declined so that US goods and services are again competitive on world markets, our trade deficit is positive, and we can pay interest and even some principle on our foreign debt (there are other possible outcomes, but this is the good one).

The US government has changed course, from microeconomic tinkering (band-aids on individual firms) to broad macroeconomic intervention.  Nobody — including our leaders — knows what this will mean.  All we can do are list the questions.  Here are mine.

4.  How far will the government go in socializing the excess debt, moving it from private balance sheets onto the national credit card?

5.  Neither the US government nor the US economy has the funds to fuel this process.  Will our creditors lend us the money?  If so on what terms?

6.  Will our markets recover from the extensive manipulation by the US government?  Midnight rule changes, authorizing falsification of financial statements, it is a long list of efforts to prop up prices.  Participants have not realized this yet, lost amidst the chaos, but this corruption of our market machinery (analogous to a government debasing its coinage) eventually will be recognized and have long-term impacts.  See this for a brief look at these issues.

7.  How will the government use the financial sector, after its nationalization?

#7 is the key question for the long-term health of the US economy and survival of our political regime.  So far we are living in Oz, looking at the city through our emerald sunglasses.  How wonderful is this rescue, how few the long-term ill effects!

Taking off the green lens reveals a few questions.  The financial sector is one of the commanding heights of a modern economy, a key node in the flow of power.

7.  How much of the US financial sector — the banking and financial firms that comprise its machinery — will the US government control when this is over?

8.  How long will it retain ownership?  A short-term fix followed by a quick return to private ownership.  Or long-term ownership?

9.  Control is as important as ownership.  The industry will inevitably be far more regulated.  How much more?  At some point regulation becomes control.

10.  How much wealth will be transferred from the taxpayers to insiders by this process?  The Resolution Trust Company and the Iraq War proved that vast sums can be looted by insiders without public protest.  Those sums might be pocket lint compared to what happens in the next few years.

Please share your comments by posting below.  Please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

Posts about the current crisis

A few of the most important posts warning about this crisis

  1. A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
  2. The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
  4. Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  5. Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
  6. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  7. What will America look like after this recession?, 18 March 208  — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
  8. The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
  9. The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

Originally published at Fabius Maximus and reproduced here with the author’s permission.

5 Responses to "What do we know about the financial crisis? What are the key questions?"

  1. Guest   September 21, 2008 at 7:15 am

    Nice post, sir! There are indeed more questions than answers, yet we seem hell bent on passing the Treasury Secretary’s proposal. You are indeed right that to date the few who created this cesspool of toxic waste have been held accountable.Other questions:Who holds this toxic waste?How will bailing out already bad debt help our future; as in how much do we bail out and where do we stop?It would appear far better to me that anyone who takes public money does so at a high cost to them. How do we know this is the case?Would we immediately nationalize if they cannot take the haircut?Thanks again for provocative questions that I dare say too few of our legislators are thinking about. You point out we are BROKE. This seems totally lost on Congress.I fear the urgency to pass this legislation is tailored more to keeping incumbents on both sides of the aisle in power after November. This happened under their watch and the Senate appears most responsible.Lastly write your elected officials; at least to advise them that you are aware of the fleecing of America under their watch. Do not expect them to raise these questions in a serious manner.

  2. Guest   September 21, 2008 at 9:24 am

    What will the U.S. look like after this mess ?Just ask Henry Kissinger and ask about THE NEW WORLD ORDER. By the way : WELCOME TO ALL

  3. AP   September 21, 2008 at 9:51 am

    Another questionRe: Sec. 8. Review.Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.Who will be the Secretary with such tremendous power?

  4. Gloomy   September 21, 2008 at 12:21 pm

    Here are the choices:1. Foreign governments will eagerly consume all of our debt and keep our interest rates low. For them to do so, they will need to print scads of money, worsening their inflation situation.2. Foreign governments realize that consuming large quantities of our debt will prove inflationary and decline to do so. As a result our cost of borrowing rises dramatically. This is the likely outcome, IMO. And it will usher in the end of the Breton Woods II era.

    • Richard M. Connelly   September 21, 2008 at 10:03 pm

      I hear the printing presses revving up!!! Just like Weimar, is how the US will go. With the deep debt of the USA now around 11 Trillion and growing, our government will eventually declare bankruptcy. The Federal Government refuses to shrink and reduce it’s costs. Eventually, our government will collapse like Weimar and political instabilty will ensue. Thank the Federal Reserve Mafia and the corrupt Congress for this. Hold them responsible. END THE FED !!!