Niall Ferguson: Forget Gloom -- Think Doom!

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  vrsarti09/23/08 Report as spam
  1

  RE: Niall Ferguson: Forget Gloom -- Think Doom!

  Mr. Ferguson is correct in that things will get worse before they get better. In addition to manipulation of oil prices that will further strain the economy and perhaps create shortages, you'll see the Russians mounting more computer hacker attacks for financial gain. They won't be doing it for fun like some people do.
  
  With the collapse of the Russian economy, look for them to make more military moves. They need to give the people something since their economy is failing. And a military victory to acquire more resources might be it.

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  marzanus09/23/08 Report as spam
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  RE: Niall Ferguson: Forget Gloom -- Think Doom!

  Prof Ferguson should be well advised to stick to his forte - history and the past. Gloom and doom always attract more attention than positive indicators and solutions. This is primarily a global financial crisis, and of course linked to the global economy and other global forces, but wise minds know that the underlying world economic forces are sound. Rather look at the dinosaurs - companies and institutions - that should disappear. Some good and necessary pains will happen, but depression can be avoided if well handled by especially the major Western governments. This is what we would expect from prof Ferguson - solutions, not getting onto the scary media-hype for attention.

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  geigersd09/24/08 Report as spam
  3

  RE: Niall Ferguson: Forget Gloom -- Think Doom!

  Would someone please explain to me why it matters if the "credit default swap" market fails? I don't have any money in there!

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  darinp09/24/08 Report as spam
  4

  Don't forget some of the more entertaining conspiracy theories!

  I work in the financial sector and we are constantly defining scenarios so that we can react to them. Niall is hitting on a lot of the concerns that many people who are in the middle of this mess still have. However, he is not talking about some of the theories that I find more entertaining.
  
  For example:
  
  The government is taking steps that can erase much of the national debt and take ownership of the country back from China. While many of the assets that the government is buying up appear to be worthless, they are actually far from it. Even if we hit full-scale depression real estate is still an asset that will never disappear (there is only so much of it to begin with). It will go down in value, but it will never fully depreciate to zero. The bail-out fund would allow the government to put together a reverse auction and purchase mortgages for 20% - 40% of their face value. Will the value of those properties drop 60% - 80%? Not even close. And if we hit significant inflation the base cost will rise of each house, further increasing the government's assets. This is the same ploy that has so many investors buying up pools of mortgages from banks at steep discounts. Banks need to solidify their balance sheets (unleverage them) so they are having fire sales. The government will be competing with those investment groups directly (and the government clearly has more buying power overall). Then the government will make money on servicing of the loans. As each person makes payments on the houses that the government now owns the mortgages for, the government makes a peice of that payment that would have gone to a private servicing company. If the family cannot afford the existing loan (i.e. they were scammed or ignorant when going into a subprime or over-reaching lending situation), then the government can refinance them using Fannie or Freddie's lending authority. Points will be made on every refinance.
  
  The government can make money off of the refinancing, servicing, and after inflation works its magic, on the sale of these mortgages. That should help with the payment of government bonds and T-bills that China bought so that we would keep buying things from China. We can restore some of the lopsided economics that we created through our rampant consumerism and economic bandaids. However, in the short-term we must pay the price for holding back the dam of reality. Economic cycles are natural and we cannot prevent the downturn forever...
  
  What other fascinating theories are out there? I would like to hear more of them.
  
  Darin

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  darinp09/24/08 Report as spam
  5

  Credit Default Swaps

  In simple, plain English you can think of credit default swaps as insurance policies against a borrower not paying back a loan. If bank A loans company X money, it is expected that company X will pay that money back plus interest (the bank has extended credit to the company). However, sometimes companies (and people) don't pay back the money that they owe (they may even declare bankruptcy). If that money was lent without any collateral (e.g. a building or equipment that the bank can repossess), then the loan is far riskier because company X does not have any skin the game, they don't have much to lose if they walk away (other than reputation and a credit hit for a few years that may prevent them from borrowing more money).
  
  So bank A decides that they don't want to shoulder all of the risk of the unsecured loan that they chose to make. (The loans are often secured, but not in this example.) So they find an investor that is willing to 'insure' the bank against company X's default (lack of payment). Investor M and bank A enter into a "credit derivative contract" (insurance policy) that requires bank A to pay investor M a portion of every monthly payment that company X makes to bank A as the loan is repaid. Investor M may take the money that is passed from company X to bank A and then on to investor M and invest that money somewhere in order to make it grow. If the company does not pay the bank (defaults on the credit) then the investor uses the payments plus interest on the payments to pay the bank the money that the company did not pay back. The investor believes that the company is going to make their payments on the loan so they are very comfortable that they are going to make a lot of money and never have to pay it back (at least, not much of it).
  
  Now, there are a lot of smart people out there that have figured out how to use other people's money to make money (leverage). They started selling shares of the "credit derivative contracts" that they had entered into with the banks (swapping them for more money). This passed the risk on to others and made everyone even more comfortable with the risk that they had taken to begin with. No one expected so many companies (and individuals) to stop paying back their loans... Suddenly, the party is over but what are the real losses? Remember, all of the things that have been traded over and over are just peices of paper without any real assets behind them once you get beyond the bank's original loan. As one of these very smart investors, I can simply shut up my office and walk away. No one can take away the lavish lifestyle I led for several years and I probably have a fortune sheltered that I can comfortably live on for some time. If I was completely caught off guard I may be forced to sell the assets I have personally acquired and may be forced to live well below the means to which I had become accustomed, but I have not done anything illegal or truly immoral.
  
  AIG was a big player in the credit default swap/credit derivative contract arena, but they are clearly not the only one. At the end of the first quarter of 2008 the US Comptroller of Currency reported that USD $16,400,000,000.00 (16.4 trillion dollars) of these contracts were in place at the US banks. That is right, just at the US banks... (AIG is NOT a bank and this is just in the US.) If you think the mortgage liquidity crisis has run its course, you are clearly mistaken. Many of those mortgages were insured through these contracts. As those mortgages defaulted and the swaps had to be paid, the dominos started to collapse. We are not EVEN close to the end of the domino effect because there are far more credit default swaps/credit derivative contracts out there than loans themselves, exponentially more. Think of the old shampoo commercials about the lady who used Prell or Breck (I don't recall which) and then told two friends and they told two friends and so on and so on. That is how the risk spread across multiple investors and the dollar amounts grew exponentially.
  
  For more detailed information look at the Wikipedia page (http://en.wikipedia.org/wiki/Credit_default_swap) or the short and sweet definition on the Investopedia page (http://www.investopedia.com/terms/c/creditdefaultswap.asp).

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  susana 34209/24/08 Report as spam
  6

  RE: Niall Ferguson: Forget Gloom -- Think Doom!

  My response to Darin: If there are so many clear theories about this crisis, why any of your Mastermind colleagues are not putting them in practice? And, if there are so many advantages to what the government is proposing, why is it that the administration did not put it in practice during the last 8 years? Theories... yeaaah, that's what got us in this mess in the first place. In second place, the people that just can't have enough...

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  wcgallery09/24/08 Report as spam
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  RE: Niall Ferguson: Forget Gloom -- Think Doom!

  For every miserable state of affairs, there are those that will benefit. Here is where all the scholars will attempt to the "leading expert" in their field of economics, grasping the opportunity to be Monday morning quarterbacks in the hopes of being vaulted onto a national stage. Unfortunately, it is doom and gloom that sells best, and they will certainly try to out doom and gloom each other.

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  scottferg09/24/08 Report as spam
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  RE: Niall Ferguson: Forget Gloom -- Think Doom!

  I just laugh when people have such a high regard for Wall Street and investing, whereas sports betting for a living is immoral and illegal if you try it in the US.... the difference is...??

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  David Hunkins09/24/08 Report as spam
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  RE: Niall Ferguson: Forget Gloom -- Think Doom!

  The discussion below is the only way out of our mess and it has to be done by the average person so please focus on this...this is real stuff.
  
  
  
  ECONOMIC OPTIMISM FOR THE AVERAGE AMERICAN
  
  THE ECONOMIC SOLUTION MUST BE FROM THE BOTTOM UP......YES... THAT IS RIGHT! ECONOMIC SOUNDNESS IS IN THE HANDS OF THE AVERAGE PERSON. THE PROBLEM IN OUR ECONOMIC PICTURE IS THAT MOST MONEY BEING SPENT AND MOST JOBS THAT ARE IN OUR ECONOMY ARE DEALING WITH OVERHEAD COSTS IN OUR ECONOMIC MODEL.
  
  All of the suggested action listed below to improve our economy is fundamentally dealing two interdependent prime elements that control our economy health.
  1) Reducing our overhead costs starting with every individual.
  2) Focusing on Exportable Products and Services that are competitive in the world market to sell as Exports as well as using them here in this country. All other Products and Services are either necessary OVERHEAD or excessive OVERHEAD and both will negatively impact our Global Competitiveness.
  
  Here are practical elements of CHANGE required by each individual to bring about immediate results. These CHANGES will stimulate more lasting improvement features to our Economy.
  1) PURCHASE what you most basically need and save money as much as possible to reduce your personal debt and allow assisting in our National Debt. This step will slowly minimize our Import appetite and our Country?s excessive OVERHEAD economic element.
  2) BUY AMERICAN even if it costs a little more to start with. If there are large differences, then continue to buy the needed IMPORT. Buy quality to maximize the life of a product and minimize the buying/selling activity.
  3) RETRAIN/TRAIN displaced/new workers who were/would be in excessive overhead elements of our society and concentrate the effort on global competitive EXPORTABLE PRODUCTS and SERVICES. If these Products and Services are global competitive, then our society will use them.
  4) EDUCATE the adult public and the children the fundamentals of a healthy economic society. Educate by setting an example of correctness. It is obvious that the vast majority of people do not have a clue about the Import/Export balance or the true impact personal excesses in OVERHEAD have on our Global competitiveness.
  5) Strive to provide accountability of these economic conditions on each Community that is a legal entity such as villages, cities, counties, states and country to determine the health of these interlocking elements that make up the USA Economic Health. This is a good start...no excuses!

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  bhadra kanaiya09/25/08 Report as spam
  10

  RE: Niall Ferguson: Forget Gloom -- Think Doom!

  clearly bailout plan will further deppen the crisis, since unanticipated upward pressure on interest rate will have serious impect on $180 tr derivative mkt and 50 trn debt mkt
  
  bailout will aggrevate the whole situation insted of cooling down.
  
  Cheers
  Bhadra Kanaiya

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  jsargent10/16/08 Report as spam
  11

  RE: Niall Ferguson: Forget Gloom -- Think Doom!

  >He also says the fact that the US has gone 80 years without a depression ???is in itself remarkable.???
  
  Is this fact important or does it still show our economic ignorance.
  
  Maybe I am showing some ignorance but how many depressions have there been in American History and for what reason?