Is the American economy too big to fail?
nytimes.com
nytimes.com
Was the world too big to get polluted :)
The documentary divided into twelve parts tells the story of how debt combined with political corruption impoverished a nation that was once so rich that the expression "Wealthy as an Argentine" was once in common use throughout the world.
When the USA took on trillions in debt starting in the early 1980s, did we enter a Dante's hell as Argentina did when it took on its debt under a military dictatorship in the 1970s? Is it only a matter of time before US debts lead inexorably to currency crisis, inflation, and political chaos? The story will strike North Americans as uncomfortably familiar.
Blacklists, whitelists, gatekeepers, keyword vector analysis, are there any architectural approaches to delivering 'news you can use' that haven't been tried several times already?
By which I mean:
Will the price of my food and gas go up? Will I pay more for the rent on my apartment? Will I have to pay more if I want to buy a house?
etcetera.
In more vague terms, it's really difficult to consider how wide-ranging the impacts will be. Banking is actually really important. It allows us to overcome capitalization gaps. In a metaphor that will go over well here: Say you have a great idea, but you need 10, high-quality 2-U physical servers to do it (and the room to put them in). Well, that's going to run you probably around $50,000 - before you have any money. VC steps in and you all get rich.
Likewise, without banking, it becomes hard for you to buy a home because you can't pull the money together. Who cares? You rent? Well, it becomes harder for the person who owns that building you're in to buy it and that causes rent to spike in a way that would seem unimaginable. Likewise, the farmer who needs cash to live on until harvest can't get it and so they have to charge more for their goods, etc.
The price of everything goes up because the cost to cover those capitalization gaps has risen incredibly. Worse, we'd face shortages - large ones.
Beyond that, Banks increase the velocity of money. Basically, the velocity of money is the time it is between when you get $1 in your pocket and when that $1 is spent on something else. At first, this looks like the Republican you should buy to be patriotic argument. That's where Banks come in to actually help. Banks allow you to get that money back into the economy without wasting it on useless things. For example, I inherit $50,000. I could spend it on stupid purchases that I don't want. That might boost things in a very short-term way. OR, I could put that $50,000 in the bank and the bank can then loan the company that needs servers that $50,000 and they are creating real value and growth in the economy. So, banks make the economy more efficient by keeping money circulating even when you have no use for your money. By doing this on a large enough scale (with certain safeguards), banks can guarantee you access to your money while improving economic efficiency (once your server company hits it big, you'll have lots of money you don't know what to do with when I want to remove money).
The issue we're seeing right now is that we got a little too ambitious. We wanted to open home-ownership to people that probably couldn't afford it. Now we're in a bad place where people have deposited money, but where the bank has lent it probably won't be able to pay back - the bank is facing a capitalization gap.
We should all hope that this is just a little blip - and it's unlikely that it will become worse than that. People are panicking right now because there is the potential that we're hitting a, say 10%, gap that can't be covered. When the gap is that small, banks can usually eat it in the long run (rather than go under) because it just isn't enough to kill them. Likewise, the government might help out if it's larger because if the banking system goes under, consumer prices would rise at a rate unimaginable to anyone who didn't live during the gas crisis in the 70s - but this would apply to all goods.
This could be bad, but there is enough strength in these institutions that even as pieces crumble, there is too much good in them to completely die - I hope.
PS - I voted it up by the way because everything else strikes me as spot on.
So, with a good banking system, I can afford a $300,000 home. The banking system collapses and that home is now $200,000. The only problem is that without a good banking system, I can only afford a $50,000 home because without a mortgage, I can't pull together $300,000 or even $200,000. This becomes a problem for renters because the number of people who can afford to become landlords/ladies decreases. Where you had plenty of people who could buy a place with a commercial loan and pay it back over time from rental income, now you need people that can pull together cash.
Something is only expensive if it's hard for me to buy. A $10 dinner isn't expensive in absolute terms, but try selling that to the majority of Sub-Saharan Africa. Likewise, if home prices decrease, but the difficulty of getting a loan increases by more than that, it becomes more expensive to buy a home.
I'm hoping this won't get so bad so don't read this as my money is evaporating. Economics can be a delicate balance though. Very good question!
I think the most likely result is that mortgage loans are going to see stratification in price - borrowers with high salaries and good credit histories are going to see little to no negative change with possible positive change; borrowers with low salaries and poor to mediocre credit will see loans they can't afford.
Partially, this came about because we (and by "we" I guess I mean US politicians) wanted to extend home ownership to more people - specifically historically disadvantaged people who didn't have access to the loan terms that those brought up as upper-middle class have access to. It's a laudable goal and one that we should try again in the future (albeit in a different way).
Since someone will probably ask what other way: One example of that would be to allow double deductability of mortgage interest to a certain mortgage value. So, let's say median home value is 300,000. If you allow a double deduction up to 150,000 in value, people with the median home see no change. People buying lower-valued homes see a positive increase in their ability to purchase that home - and that positive increase is paid for by the rich people in million dollar homes who can't deduct all their mortgage interest anymore.
Macroeconomics is complicated. My best advice is to be prudent yourself, live within your means, and not get caught up in the trends of people who think the economy is collapsing or that golden ages will never end.
The interesting thing though is if Fannie and Freddy fail the rent on your apartment will probably go down, and houses will be worth less. Of course, you will practically need to pay for the house in cash in the worst case scenario. Think permissively inexpensive homes, that no one but the French and the Germans can afford, if that makes sense to you. It is the opposite of what we have had the past 10 years, prohibitively expensive homes that every one could afford. I'm speaking in terms of values and not dollars though.
erm. I _think_ you meant that the people were borrowing more than they could afford to buy overpriced homes. But it sounds like you were saying that everyone was fabulously wealthy and homes, though not cheap, were affordable.
Was the Roman Empire too big to fail? Sortof, in that it so thoroughly changed how people thought and lived that even 2000 years later we are very obviously Roman in many of our laws, habits, and worldview. The key is that the ruling families of Rome are nowhere to be found as such.
So yes, the American economy will probably continue in much the same form for the next thousand years or so all over the world. Our huge amounts of natural resources, talent, and farmable land aren't going anywhere. The real question, the one coded into the title of this post, is "Is America influential enough to take a huge hit without the people who are currently very wealthy having to give up their money bins." and hopefully, for the rest of us who don't have money bins and can only become wealthy through our own work, and thus depend on a fair system, the answer is no.