We'd like to remind Forumites to please avoid political debate on the Forum... Read More »
📨 Have you signed up to the Forum's new Email Digest yet? Get a selection of trending threads sent straight to your inbox daily, weekly or monthly!
The worst market crisis in 60 years - Georgr Soros
Options
SilverScooby
Posts: 197 Forumite
Just read this on ft.com.
On first reading, real 'end of the world as we know it' stuff from someone who knows what he's talking about.
So scary, here it is in full.
"The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.
However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.
Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.
Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.
Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.
The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.
Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks' commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.
Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.
Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.
The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse."
On first reading, real 'end of the world as we know it' stuff from someone who knows what he's talking about.
So scary, here it is in full.
"The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.
However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.
Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.
Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.
Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.
The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.
Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks' commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.
Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.
Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.
The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse."
0
Comments
-
Didn't read. He's passed it really, no? Or still cashing in?
0 -
Who did he pass it to?" The greatest wealth is to live content with little."
Plato0 -
Anyone daft enough not to do their own research.0
-
More doom and gloom mumbo jumbo.
What a load of rubbish, cant stimulate the economy anymore? LOL
They dropped teh baserate and teh US dollar hasnt budged, why? because all the other governments are printing money too, esp the chinese.
I have bet strongly against a recession, a slow down yes, and a crash in the property markets yes. A recession, like in history, with mass unemployment (50%ish) and people cueing up for soup queues and rioting. NOT A CHANCE
:beer:
The so called pro analysts peddle this pooo so as to increase trading commisions and to make money from the shorting and eventual picking up from the bargain basement of stocks.
They are liars and frauds.0 -
Quite an interesting programme on Radio 4 this this morning - "The City - is the party over?" Explained the current problems very well, and didn't come over as too gloomy for long-term prospects.
You can listen to it here, it's currently their choice of the day for Tuesday (in the right-hand column)"The trouble with quotations on the Internet is that you never know whether they are genuine" - Charles Dickens0 -
Erm, I think the word you're looking for that scenario is actually DEPRESSION - as in the 1929.I have bet strongly against a recession, a slow down yes, and a crash in the property markets yes. A recession, like in history, with mass unemployment (50%ish) and people queueing up for soup queues and rioting. NOT A CHANCE :beer:
In the 60s, 70s, 80s and even early 90s we had a quaint British habit of having a recession every 10yrs or so. You'd need to be well in your 30's to have experienced the last one - which was really much better than the previous ones as it hit the South much harder than the North as all our industries were more or less gone by then and lead to the last housing crash.
In a recession unemployment is around 10-15% which means most folks are OK but still scared for their job, the unlucky ones just lose their home and end up with big debts with their family in a B&B! Never saw too many Soup Kitchens though!
As for George Soros - ain't he the guy who rogered Norman Lamont good style over the ERM and lead to the 15% interest rates overnight?0 -
As for George Soros - ain't he the guy who rogered Norman Lamont good style over the ERM and lead to the 15% interest rates overnight?
Yes - from Wikipedia: "In British politics and economics, Black Wednesday refers to 16 September 1992 when the Conservative government was forced to withdraw the pound from the European Exchange Rate Mechanism (ERM) due to pressure by currency speculators—most notably George Soros who made over US$1 billion from this speculation. In 1997 the UK Treasury estimated the cost of Black Wednesday at £3.4 billion."
However he's not all bad, as he spent a load of money trying to prevent Bush getting re-elected last time."The trouble with quotations on the Internet is that you never know whether they are genuine" - Charles Dickens0 -
The worst market crisis in 60 years
......or since the 'crisis' he started 16 years ago :eek:
Anyway what was the 'crisis' in 1948 that this is the worst since ??
P.S. We always called it 'White Wednesday' back in 1992....I dunno when it morphed into Black
P.P.S. Please don't quote Wikipedia........it's no better than quoting what some bloke told you down the Pub last night !!!15% interest rates overnight?
P.P.P.S. Actually the 'overnight' interest rate was well into the 40% range at one stage that day...and the equivalent 'overnight' rates for DEM were negative as the world and his 'mutta' was holding DEM and trying to roll it over.
Base Rates were announced to have been raised to 15% at one stage, but in effect they never took effect because GBP was 'floated' overnight and base rates lowered back to 12%'In nature, there are neither rewards nor punishments - there are Consequences.'0 -
Its sad enough that i'm on this site reading. It's sadder still that i'm even posting.
But i aint that sad to read all that garbage lifes way too short.0
This discussion has been closed.
Confirm your email address to Create Threads and Reply
Categories
- All Categories
- 351.2K Banking & Borrowing
- 253.2K Reduce Debt & Boost Income
- 453.7K Spending & Discounts
- 244.2K Work, Benefits & Business
- 599.3K Mortgages, Homes & Bills
- 177K Life & Family
- 257.6K Travel & Transport
- 1.5M Hobbies & Leisure
- 16.2K Discuss & Feedback
- 37.6K Read-Only Boards