The Sinkhole

Reviewing the events of the past five weeks I am struck by how bad the crisis looked looked three weeks ago–when Lehman declared bankruptcy, Merrill Lynch teetered on the edge of failure before Bank of America agreed to buy it, and the government bailed out A.I.G.–and how much worse it is today.  It’s like watching well-built houses get dragged into a sinkhole.  You don’t know how deep the sinkhole is, only that its inexorable settling continues to swallow everything it touches.

9 Replies to “The Sinkhole”

  1. Mason

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  2. maggiemck

    There was an article in the NYT this week about the Federal Reserve of New York’s president and board members’ questionable decisions regarding Lehman Brothers and Goldman Sachs. Apparently Fuld had been trying to turn Lehman Brothers into a bank holding company this summer, which would’ve given it constant access to federal funds. After Fuld made a final plea, they were denied by the NY Fed and subsequently forced to file for bankruptcy. One week later Goldman and Morgan-Stanley were both designated bank holding companies. The article draws attention to the fact that many government officials now working in financial sectors such as the NY Fed are lined with former Goldman alumni. The board of the New York Fed is led by Stephen Friedman, a former chairman of Goldman. Also regulators including Paulson and the president of the NY Fed chose a Goldman director to head up AIG after its $85 billion lifeline was granted.

    It’s difficult to tell if the Fed’s ties to Goldman heavily influenced their decision to make it a bank holding company, but as the sibling of a former Lehman employee and stockholder–I hope their choice to protect Goldman was more an attempt to prevent the domino effect.

  3. techie

    This is somewhat off-topic, and I know there are some people who will disagree with me on this, but I don’t think America is “#1” in anything anymore (except for maybe our government system). I view the issue of American supremacy ending as something that’s going to happen sometime within our lifetime. Decades ago, Americans, compared to their counterparts, were leading innovation and were doing better academically. Now, American teenagers are trailing their peers in math and science and we have serious competitors in the globalized economy. To me, it seems like we keep on deluding ourselves into thinking that we’re the best in everything. We need to get rid of that sort of mentality and start making improvements in our education system so that future generations make better decisions, financially and otherwise, and are better prepared to compete in the global economy. There also needs to be a change of attitude in the conspicuous consumption culture that we live in, which seems to be happening since people now realize that they can’t spend money that they don’t have.

  4. cwlim

    I agree with Techie that the current crisis is somewhat similar to the Panic of 1907 but I cant help but feel that this is the turning point for the American economy. As much as I would like the recovery of the financial system, I think that this would be the end of the American supremacy. The situation only makes it easier for a shift of power to the EU or possibly even Asia.

  5. techie

    I agree with Tommy in that the current situation gives us the chance, and probably forces us, to fix the weaknesses of our financial system. The current crisis reminds me of the Panic of 1907. A number of businesses and Wall Street brokerages went bankrupt, banks were struggling with liquidity problems, and stock market prices plummeted. J.P. Morgan bailed out the ailing economy and the Federal Reserve was created a few years later. We don’t have J.P. Morgan to bail us out this time, but I do think this crisis will lead to better regulation or at least some improvement to the system. I don’t know enough about the economy to make judgments about what the government has done lately, but from what I’ve read so far and looking at the history of our financial system, our government does need to step in in some form or another.

  6. russtang

    Here’s An interesting perspective about the credit crisis we are in that I wanted to present to you guys.

    This sinkhole that you talk about was caused by banks lending out money to buy up risky investments; mainly subprime mortgages. Many times investors would borrow money to purchase these assets and then re-sell the assets at higher and higher rates and many times these mortgages were becoming so overlapped that the person who purchased a mortgage had no idea where it originally came from. As you know, many of these mortgages defaulted, banks lost money on their investments and caused the “sinkhole” we are in now

    Now take a look at what the government is trying to do to fix this problem. Usually our government functions by borrowing money through treasuries, bonds etc. and with the money, it invests in agencies, infrastructure and anything that will be beneficial to our economy. However, now the government is taking the money that it borrows and lending it out to banks across the country. In essence, our government isn’t acting as a government, but more as a bank. It is also starting to create this same overlap of money that caused the subprime mortgage crisis we are in today.

    So will the plays that the government makes help us get out of the sinkhole or drag us deeper and deeper down?
    I guess only time will tell.

  7. Victor Pan

    I like Tommy’s optimistic statement that the inefficiencies have been washed away. After all, we have to learn how to be much more efficient in the way we use energy, natural resources, and money. Our bloated demand fueled through borrowing will finally end, and the rest of the world will also feel it. When’s it going to stop sinking? The moment We’ll all have to adjust in this globalized economy.

    I think the sinkhole you speak of is at a halfway-filled point. The rest of the world will also fall as the largest consumers in the world will decrease spending money it doesn’t have.

  8. tommy

    Why not say that the devastation of the current market could provide space to rebuild and re-regulate a complete new and much better market? Perhaps this crisis is just the pain to accelerate the process of revolution.

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