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LadyEllen -> RE: Do you think by next spring the economy will be better? (12/20/2008 3:31:32 AM)
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The apparent problem is that the financial system has screwed itself quite comprehensively through involvement in speculatory bubbles that have now burst, but by which they were primarily supporting their existence.
The underlying problem is that there is not enough actual wealth - stuff of real value - to support the existence of so many financial institutions. Whatever a financial institution is, it relies as much on incomes as any other business, and it derives those incomes from three main sources -
- providing finance by way of lending, b2b, b2c and interbank
- speculating on the markets on its own account
- management fees for handling others' monies or assets
The financial institutions have to have sufficient assets of their own in order to gain confidence from those who lend to them (personal deposit account holders and other financial institutions) that there is adequate security for the loan. Likewise for them to be able to trade on their own account in the markets and to secure the management of others' monies and assets. But, there is not enough stuff of actual value around any more to support the required security for all insitutions, unless the nominal value of that wealth is inflated.
When the bubble of such inflation burst, financial institutions were revealed as not actually having sufficient assets that lenders to them might have confidence - the nominal value of the assets was much lower than the previous inflated value. Thus they were exposed in a risk sense, interbank lending stopped and there were follow on events in the real world such as the drying up of credit, the withdrawal of credit, the calling in of loans etc - and this will continue until such time as confidence is restored by way of exposure being reduced to the value of the assets in each case. Or, as our governments are attempting to do, by way of the assets of the financial institutions being made up by the taxpayer to cover the exposure.
Long term however we must face up to the fact that unless there is real underlying wealth, all efforts to stabilise the financial markets shall be in vain. The problem then becomes that in the absence of financing, it is very difficult to maintain existing actual wealth, let alone to generate more to the level it needs to be to support the financial sector.
So in answer to the question, this is going to be a long, hard struggle over a considerable time period before we even reach the bottom of this episode, and likely a longer, harder struggle on the other side to regain what was lost - or rather to build what was found to actually not exist at all.
Next spring we shall not yet be at the bottom, let alone anywhere near to recovery.
E
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