World Financial Blog » Economy

The year after Lehman Brothers

14 September 2009 Sören Zschoche 27 Comments Economy

Luigi Zingales Source:http://faculty.chicagobooth.edu/luigi.zingales/images/lz.jpgI think, it was the most influential and most wide-raging decision the treasury department ever made. Till now scientists can´t agree if the decision of letting Lehman fall was right or not. The scientist Luigi Zingales for examples considers that the fall of Lehman was right, because barley regulated credit institutions have to face the risk of a bankruptcy permanently. Also Mr. Zingales accents that Lehman was a symptom of the crisis and not the cause.

That´s right and of course it´s not acceptable to endow incompetence, but in my opinion letting Lehman fall was the biggest failure the treasury department ever made. It seems like some of these people need to go back for further education to get an accounting degree. I hold this opinion because of several reasons. The rescue of Lehman would have cost the taxpayer 20 to perhaps 40 billion USD. Till the end of 2009 the financial crisis the fall of Lehman triggered and caused the destruction of 10,5 trillion USD. Of course, also without the fall of Lehman this destruction of assets would have been high because Lehman wouldn´t have been the only institution the treasury department had to rescue and that also wouldn´t had stopped the economic downturn. But the whole process of the economic downturn would have been clearly more controlled and the government had won what would have been most of value: time. But instead of that the government had to wave through a 700 USD bailout plan immediately in order to save system from a total collapse.

Lehman Brothers source: http://www.doctorhousingbubble.com/wp-content/uploads/2008/09/leh.jpgAnother point is that the fall of Lehman caused a shock which lead into a collateral situation in which the whole bank lending froze. This situation was extremely dangerous and threatened the international financial system in a massive way. Banks didn´t trust each other anymore and didn´t lend money to anyone anymore because they were afraid that they wouldn´t get their money back again. The danger that the credit flow dried up grew which also had lead into a total collapse of the financial system. So the FED had no choice but to lower the base rate historic value of 0 %. But even this was not enough to stabilize the financial system. Again the FED widened the central bank credit to a incredible extent and pumped 100 of billions of dollars into the financial system.

So in my opinion the way the treasury department saved the financial system was O.K. but it also would have worked in a much much cheaper way for the taxpayers around the globe. But I also think that Henry Paulson knew this but he had no choice. In times of elections it´s not good to endow the incompetence of greedy bankers, also you can´t bring though a billion dollar bailout plan if the financial system doesn´t stand on the total brink. At least we also have to mention that the consultants of Paulson came from the Goldman Sachs faction and in my opinion they were happy with the decision of letting Lehman fall. Also Paulson came from this faction and he and Richard Fuld the former CEO of Lehman weren´t the best friends so this could also have lead to this tragical decision.

Well, to sum up the facts in the end the incompetence of the banking sector had been endowed yet again and in my opinion the world has learned nothing. Stock quotes of AIG, Fannie MAE, Freddie MAC are starting to rise again, when I wrote “Facing a world economic crisis” one year ago I thought the government had decided to choose the quick and painful way to solve the huge macroeconomic imbalances . However instead of choosing this way it seems that the governments decided to solve the macroeconomic imbalances not a bit.

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The recession after the recession

25 July 2009 Sören Zschoche 18 Comments Economy

Within 12 days the Dow has went up more than 1000 points and is now above 9000 again. A reason for this little summer rally could be the banks making gains again, and some signs predict that the economy brightens up again. It seems that the optimism is back. And that’s also my opinion, the enormous cyclical programs are doing their work.

But is this really the beginning of the end of the worst economic crisis after 1929? I don’t think so, because a second recession seems to appear in the year 2010.

But let me explain. The cause of the current crash was the collapse of the global growth model, which was handled by the industrialized countries for years. The model was based on consumption which was financed by credit. Huge current account deficits, a dept bubble and finally the world financial crisis were the results of this model. But the model also had positive affects, for years the Anglo-Saxon consumers had been the locomotive of the world economy. Everybody had a benefit from this model. Developing countries could produce huge amounts of goods and established new jobs for their people and the people of the industrialized countries lived a life in decadence and wastage. Suddenly artists like 50 Cent earned more than 400 Million USD at the stock markets and a company of a 23 year old guy was valued by 15 Billion USD.

But in my opinion this is over now and it won’t come back for a long time. Now the world has to pay the price for the excesses of the past. The governments of the industrialized countries can’t afford to pump more money into the system, solely the USA have accumulated a gross debt of 12.000.000.000.000 USD. However exactly here is the problem: the world needs a draft horse which gives strong impulses when the economy starts to recover in the year 2010, but the governments of the industrialized countries have to darn their budgetary holes by stopping their expenditures and higher taxes. Also the Federal Reserve can’t pump money into the system endlessly and BRIC counties like China or India are just not strong enough to play the role of the draft horse for the world.

Well, to assume the facts I agree with economists like Nouriell Roubini, Robert Shiller or Barry Eichengreen who also don’t believe that this crisis will be over that fast. Even if it seems like the current crisis has reached the bottom, which perhaps might be true. To achieve the growth we are used to, we will probably have to wait many, many years.

The Money Game

20 July 2009 Michael Szumielewski 17 Comments Economy

The Money Game by Scott Moore

Recently, I received a very interesting e-mail by Scott Moore, an artist from California. He sent me a picture of his latest painting called “The Money Game” which illustrates the current crisis and the bailouts and busts which took place. The image includes the key elements of the economic crisis in the United States. Just take a deeper look and you will, for example, recognize the cars representing the auto industry or you will see that the overall structure of the landscape is a chess field, which gives the painting its name.

If you have found yourself a victim of the money game and could use some help to get yourself out of it you could look into getting payday loans.

Also, please leave a comment to tell us what you think about the painting and how you see the current economic crisis!

Lost Vegas – A documentation about the current suffering of Las Vegas

10 May 2009 Michael Szumielewski 11 Comments Economy

18 months ago Las Vegas was one of the fastest growing areas of the United States. Now the economic downturn is hitting the city hard causing unemployment, abandoned casino projects and evicting people from their homes.


The economy collapsed and Las Vegas fells it. This 25 minutes long documentation shows various examples what happens in Sin City. The reporter interviews and joins several people living in the city, amongst them police men who throw people out of their homes. Some people are forced to leave their homes even if they have the money, but rented the place and unfortunately the actual owner can’t pay his mortgage, resulting in having only 20 minutes to pack their stuff and get out. Another example of radical life changes are women once working at mortgage firms and now dancing as a strippers. The city and state is also suffering from budget cuts for hospitals, universities and so on.

I recommend watching the video if you have no first hand experiences to know what’s actually going on down there. People clearly made the mistakes to thing that the boom will last forever and that real estate is a good investment which will always raise in value making it pay for itself.

The Great Depression

15 February 2009 Sören Zschoche 39 Comments Economy

In the book “The Snowball” – a wonderful biography of Warren Buffett’s life and absolutely worth reading in my opinion – Warren Buffett summed up the actual situation of the world’s economy in the last chapter “Coupons” using the words: “It’s a hard time. This is now another world, and nobody knows what will happen to the world.”
But let’s take a look on what happened in the last months. After the fall of Lehman a big shock wave spread over the financial markets inexorably. In the course of that shock wave, the Dow Jones fell from its all-time high of 14,000 Points to 8,000 Points and bank titles such as Bank of America or Citygroup have lost 85% of their former market capitalisation. The former chairman of the NASDAQ Bernard Madoff was able to dupe his investors to the tune of $50,000,000,000. Several personalities of the financial world have committed suicide, including the German investor and multibillionaire Adolf Merckle.

The Great Depression Source: www.tariqnelson.comWhat will happen now? Will we really face a crisis just like the crisis in 1929? First of all, I want to say that nobody can predict the future but the similarities to the year 1929 are really frightening. The crash of 1929 for example had it’s roots in much too high stock values caused by the wide range of credit offers banks offered the people in order to achieve larger profits. Four years after the crash the U.S. government passed a sequence of central economic planning programmes called “New Deal” in order to stabilize the economy and above all regulate the completely runaway stock market. The deal worked and as banks weren’t allowed to spread credits to everyone in order to fund huge financial bubbles, governments did’t have to deal with the consequences of such enormous financial bubbles for more than 75 years – until now. But in the year 2000 bankers had a new exciting idea on how to offer credits to the masses. Instead of giving direct credits to the people like in 1929 they now gave mortgages to nearly everybody. This had the effect of raising housing prices and when the price of your home is very high you are also more creditworthy. But of course this bubble also had to burst and now we are facing a huge credit-funded pile of fragments again. The story of Bernard Madoff has also already existed, albeit in a slightly weakened form: Richard Whitney, who was the chairman of the N.Y. stock exchange in 1929 was sentenced to 5 years prison in 1938 for embezzling millions of dollars from his clients between 1929-1930.

Modern bread line Source: http://mikeely.files.wordpress.com/2008/10/modern-bread-line6.jpg But let’s sum up the facts: The advantage this time around is that our governments know how to deal with recession much better than they did in 1929. Sir John Maynard Keynes developed his theories on fiscal policy and instead of making things more worse our governments know that they have to invest in order to get the economy going again. The disadvantage of this policy is that national debts have to be paid back one day, or governments have to abandon their currency. But the economical supremacy of the U.S.A. can’t be defeated when the government will start to pay back their 14 trillion dollar debt. On the other hand, the disadvantage is that this crisis is a different type of crisis: This crisis has hit the economy at its weakest spot: its banks. The cash flow between banks and companies has been nearly zero for a long time. Many banks have securities which nobody knows how much they are worth – or better said if they are worth anything. Now the U.S. government finally created a “Badbank” worth $2,000,000,000,000 which should release the credit markets from their state of shock. Nevertheless it has to be said that the consequences of this “Badbank” on the international bank sector can’t be predicted yet. Another problem is that people often forget the past in times of crises. The “Buy American clause” for example would in my opinion be the first step into a catastrophe. Because when the first country starts to protect their markets, others will follow and that would have unpredictable consequences in our fully globalized world.

In conclusion it can be said that we are definitely facing a deep deep recession which will either hit quick and painful or slow and painful. Unemployment rates will be very high for a long time and the average rate of return for securities won’t be over 4% for many years. But if the crisis really turns into a depression like in the years 1929-1935 can’t be said, yet. In my opinion that depends on our governments now.

A picture a my lovely sister Maren who just painted it without realizing how well this picture fits in the current time.

Barack’s effects on the economy

8 November 2008 Sören Zschoche 19 Comments Economy

Although I’m not an American I’m really happy to see that now for the first time in the history of the USA a man with Afro American roots became president. I think this decision has improved the image of the USA in the world very much. The image which has suffered under the government of George W. Bush, is now back with a new message “Change”. But what can the U.S. and the rest of the world expect from the new president and much more interesting which parts of the economy will benefit from him? First of all we shouldn’t expect too much from Mr. Obama, although he is a great speaker with fire in the eyes. The President-elect is facing some of the biggest problems the U.S ever had:

  • The national debt has achieved the incredible amount of $1100.000.000.000
  • The war in Iraq swallows up $5.000 per second, that’s $300.000 per minute and $432.000.000 per day
  • The climate is in danger to collapse if the world and especially the U.S. won’t come to grips with their emissions we are in danger of loosing the planet as we know it

To say nothing about the financial crisis, new conflicts with Russia, the Iran or Venezuela or just the fact that we are facing a recession which consequences can’t just be estimated right now.

So above all these points it’s hard to imagine that Mr. Obama is able to spend any money for anything at all. But the promises Barack Obama made don’t have to be mutually exclusive. For example though investments and subventions of renewable energies new jobs can be created. That has the same effect like a stimulus package. Also it’s a good alternative for searching oil in far dessert countries. So I’m sure that Barack will make affords to support renewable energies, he also promised to spend $150 billion in the next 10 years in that industry. But which companies could benefit from that?

I picked out a few companies which could theoretically benefit from his plans, but before you buy these stocks now remember, just because a stock sounds interesting it doesn’t mean that it rises. If you want to buy these watch out for the right price.

The first one is First Solar [www.firstsolar.com (NASD: FSLR)], a producer of solar panels. Solar energy will have a lion’s share at the power supply of renewable energies. So First Solar will be the first address in the U.S.

The second one is Acher Daniels Midland [www.admworld.com (ADM)], a producer of food, fertilizer but also in bio fuels. Bio fuels will be very interesting for the government under Barack Obama because they can create jobs in the farming sector as well as they can make America independent of the so called pariah states.

Other interesting companies could be Repower, Solarworld, Nordex or Evergreen Solar.

The second promise senator Obama made is to make health care affordable for many of the 47 million Americans who are currently not insured. This point will be difficult because large health insurance companies like Aetna or UnitedHealthcare fear that they might suffer under lower profits. Also I don’t know if America is ready for so a social system, yet. Perhaps that’s why Obama didn’t say something concrete about this point, yet. But if a company would benefit from that it would definitely be Community Health Systems [www.chs.net (CYH)]. Community Health Systems provides hospitals and hospitals would be the direct winners of any health care plan. But you can of course disagree with me in this point.

So I hope that Barack Obama will be able to put his plans into practice. However I think many people believe in him and faith can be the beginning for “Change” also when it seems to be very difficult.

What’s your opinion? Do you know companies, that are likely to benefit from Mr. Obama’s plans? Please write a comment and let us know!

The bailout plan

1 October 2008 Sören Zschoche 9 Comments Economy, Politics

I have never seen that the Dow has reacted so strong on a decision of politicians, as it did when when I saw the decision about the 700 billion dollar bailout on CNN on Monday. CNN presented this decision really exciting and I think for many people this 15-minute decision was the most exciting decision of the whole year. Especially it was very funny to see how much the presenters believed in this plan and incredulous they looked when the votes finally were 228 against and 205 for it.

However the only problem is that actually this really was not funny, but I think everybody with a relative sound common sense knew that the house wouldn´t rubber stamp Bush´s funny 700 billion rescue plan so easily, especially in times of election campaign. So Bush has to hurry to find a new ingenious plan, but in my opinion the house of Representatives will be hard to convince because Bush already accumulated debts worth 10,6 trillion dollars. It´s really a bad bad situation but, let´s go back to what will happen to the markets and the economy, while I´m writing this post at Monday the 29th of September the Dow-Jones is 7 % in the red which meas that the wallstreet has lost more than one trillion U.S dollar again while the representatives are still debating if 700 billion could save the economy. So if the representatives don´t agree on something more and more banks will fall under chapter 11 like I discussed in my last post “Facing a world economic crisis” yet. I think after the shock waves are finished in the banking sector they will achieve insurance companies, then hedge fonds and private equity companies and in the end the whole world economy with every participant.

But let´s imagine what happens if the U.S. government would yet again make it the force the bailout through even only in another form?

Of course the wallstreet would leap for the joy and the Dow would probably close with a plus of 5 or 6 %, but does that really solve real problems? In my opinion the the bailout would just distort competition between the banks and in the end bad banks would finally become good ratings again. Also the idea that short sales on banks are forbidden is a very bad one because they short sales are an essential component of the price formation at the wallstreet. In my opinion and remember it´s a crisis of confidence we are facing. So be aware of the rise in the market if the bailout really comes because it won´t be here to stay. In my opinion the best thing the U.S. government could do know is to nationalize or bomb the rating agencies which in my opinion are the main reason for the crisis, because if they hadn´t distributed AAA rankings for incredible bad financial derivatives we probably wouldn´t have these enormous problems now.

So in my opinion we are facing a very very deep recession but despite that I hope that I was wrong with my last post that this crisis would finally end in a world monetary reform, but at the time many things point to that. However as hard as that sounds:

“Sometimes it´s better to burn the sick forest so that new trees can grow on a rebroductive ground.”

The decision Source www.necn.com