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New World Market Economic Bubbles; and a Future Economic Reality Difficult to Accept for Most

 

Karla: I don’t know what to think of the economy anymore. Jobless claims are down and new home sales have come up. Could this by an omen of a possible recovery?

Lyla: I am skeptical, meanwhile unemployment remains high demand will be low and the economy will fail to show substantial growth.  Besides the assistance program for new home buyers of $8,000 dollars will end around April of 2010 and that will likely slow down a possible economic recovery.

Karla: Obama’s economic stimulus plan is insufficient. On November 19 of this year in the New York Times Paul Krugman mentioned that “the A.I.G. rescue was part of a pattern: Throughout the financial crisis key officials -- most notably Timothy Geithner, who was president of the New York Fed in 2008 and is now Treasury secretary -- have shied away from doing anything that might rattle Wall Street. And the bitter paradox is that this play-it-safe approach has ended up undermining prospects for economic recovery. For the job of fixing the broken economy is far from done -- yet finishing the job has become nearly impossible now that the public has lost faith in the government’s efforts, viewing them as little more than handouts to the people who got us into this mess. About the A.I.G. affair: during the bubble years, many financial companies created the illusion of financial soundness by buying credit-default swaps from A.I.G. -- basically, insurance policies in which A.I.G. promised to make up the difference if borrowers defaulted on their debts. It was an illusion because the insurer didn’t have remotely enough money to make good on its promises if things went bad. And sure enough, things went bad.”

Lyla: Yes, I remembered reading that article, Krugman also mentioned:  “So why protect bankers from the consequences of their errors? Well, by the time A.I.G.’s hollowness became apparent, the world financial system was on the edge of collapse and officials judged -- probably correctly — that letting A.I.G. go bankrupt would push the financial system over that edge. So A.I.G. was effectively nationalized; it's promises became taxpayer liabilities. But was there any way to limit those liabilities? After all, banks would have suffered huge losses if A.I.G. had been allowed to fail. So it seemed only fair for them to bear part of the cost of the bailout, which they could have done by accepting a “haircut” on the amounts A.I.G. owed them. Indeed, the government asked them to do just that. But they said no -- and that was the end of the story. Taxpayers not only ended up honoring foolish promises made by other people, they ended up doing so at 100 cents on the dollar.”

Karla: Mohamed El-Erian Pimco's director has said that the economic crisis we are witnessing is formidable. It hit the economic core hard and he thinks we are experiencing a sugar rush right now and the markets think that everything is going to be well soon. El -Erian really believes that the slight economic improvement we are experiencing is only “temporal and reversible.”

Lyla: God only knows when the economy will get Better if it ever does. It might improve some, but China is taking away many of our possible new jobs by keeping the Yuan below the dollar and is hard to think that Obama will borrow more funds to give the economy a second jolt since the debt is already huge.

Karla: Many economists believe that there is a bubble in the stock market. The market grew some at first and that was expected since companies’ lay off many workers and improved productivity becoming more efficient. However market growth has continued beyond reasonable expectations.  This could be a new bubble that could crash the economy again. Maybe not as strong as the Real Estate bubble, but powerful enough to cause a Great deal of damage.

Lyla: You are right. Bubbles are showing up here and abroad too. One has only to look at China. The Chinese government has invested over a trillion dollars in their stimulus package. A great deal of the Chinese production won’t find markets for their products. Many investors that are so sure about the Chinese economic rebound could end up empty handed. As central bankers around the world put an end to their stimulus programs a new economic world picture will emerge and it won’t look too nice.

Published Dec 14 2009, 11:53 AM by cartoon
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