The Carl Online


Holy Bannanas, Batman! It’s the economy! by Alex Sciuto
October 10, 2008, 3:42 pm
Filed under: Misc. | Tags: , , , ,

Many of you probably know this already, but the Dow Jones Average is down about 100 points right now, and after an early morning panic (The Dow dropped below 8,000 in the first few minutes of trading, the first time it’s closed so low in god knows how long), such a small loss is pretty comforting. This big initial loss seems to have been the market responding to the huge drop in the Asian markets (see graph below for the Nikkei’s 12% plunge in the first minutes of its trading day). That’s globalization for you. America drops, Japan drops, and the next morning America drops.

What’s causing this tanking of the market? Obviously, a lot has to do with bad mortgages that are now as worthless as the credit of those who got the loans, but really, what we’ve been calling the sub-prime mess is only an initial bang in what is becoming a much larger problem. We’re now dealing with the most serious disease a capitalist system can face, a liquidity and credit crisis. America only grows because people are willing to lend other people their money. That’s what allows everyone from huge corporations to make investments in factories to average homeowners to buy a house. No one is lending anyone else money! And that’s not all! A sign of how serious and how frozen the economy has become is that banks are willing to lend to other banks. The London Interbank Offered Rate, the rate that banks in London charge each other to lend money, has increased. It never increases, literally never because banks are such trustworthy institutions. But look below, LIBOR sat at just under 3% for the past three months. Now its inching towards 5%. Statistics in the US are the same.

The answer to this problem is an extreme one and three months ago utterly unthinkable, but the Federal Government is moving towards it. They’re thinking of partially nationalizing the American Banking system. It’s happened with AIG, America owns a stake in that bank. It’s gonna happen with many other banks. Since the government and Federal Reserve are the lenders of last resort (no matter how bad it gets, they’ll be keeping the economy going. If they fail, we’ll have a much much bigger problem on our hands, won’t we!), people will trust them. If owning a partial stake in the banks doesn’t encourage enough trust, the government may move to insure large swaths of lending.

All of this is designed to get people lending other people money.  Whew. I hope you feel as confused as I do, this ain’t simple stuff.

-Alex Sciuto

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2 Comments so far
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hook this cat up with krugman

Comment by daaaaaniel

I want to hook-up with Krugman. He just got a Nobel prize!

Comment by Alex




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