Lehman Deader Than The Dodo

[J]

If you looked at the history of investment banks, you'd know that this is very typical. Investment banks tend to crash hard and fast like a helicopter with little warning to anyone. This does NOT mean that the credit rating agencies are not doing their jobs.

I've known since March that Lehman's was in deep trouble and likely to be toast. After a tip from the folks at another forum, it took me a couple hours of searching through Google & the SEC filings to verify that they were indeed in deep doo-doo. You're telling me that a ratings agency with tens of thousands of employees and access to far more data than myself couldn't do what I did in two hours?

I'm sure that any collateral that investment banks are going to put up for loans is going to be rated accurately. It's not like the lid hasn't already been blown off these collateralized debt structures and groups like S&P and Moodys are struggling to retain their image so if anything they are going to be MORE conservative about these assets.

The rating doesn't matter as the Fed will accept the garbage anyway.

In any case, your thesis that these investment banks can just float a number for their junk assets is silly.

They're already doing that with their existing collateral. Their existing MBS and other securities are being traded with the Fed at a 10-20% discount from the book value claimed by the banks. You're telling me that those subprime MBSs are worth anywhere near that value? Try a 40% devaluation, minimum.

[The Kernel]

I've known since March that Lehman's was in deep trouble and likely to be toast. After a tip from the folks at another forum, it took me a couple hours of searching through Google & the SEC filings to verify that they were indeed in deep doo-doo. You're telling me that a ratings agency with tens of thousands of employees and access to far more data than myself couldn't do what I did in two hours?

What are you talking about? The credit agencies DID recognize that Lehman was in bad shape. Moodys, Fitch, S&P...they've ALL downgraded Lehman multiple times since March.

It think what you are trying to say is that Lehman wasn't downgraded into junk status, but that's hardly a surprise. Junk status for an investment bank means immediate insolvency (they can't exist without investment grade credit ratings) and it was probably the threat of a further downgrade of their credit that sparked their Chapter 11.

The rating doesn't matter as the Fed will accept the garbage anyway.

The VALUATION matters which comes with the rating. And obviously I need to see more analysis of this to know exactly what kind of junk debt they are willing to accept as collateral and from who.

They're already doing that with their existing collateral. Their existing MBS and other securities are being traded with the Fed at a 10-20% discount from the book value claimed by the banks. You're telling me that those subprime MBSs are worth anywhere near that value? Try a 40% devaluation, minimum.

Can you share your source for the 10-20% discount number?

[J]

They're already doing that with their existing collateral. Their existing MBS and other securities are being traded with the Fed at a 10-20% discount from the book value claimed by the banks. You're telling me that those subprime MBSs are worth anywhere near that value? Try a 40% devaluation, minimum.

Can you share your source for the 10-20% discount number?

http://www.frbdiscountwindow.org/discountmargins.pdf
Straight from the Federal reserve bank. It's current as of last week, the new rules resulting from this past weekend's events haven't been added in yet.

Notice the values for various asset & mortgage based products under the column "Lendable Value for Securities or Instruments if Market Price Not Available". That's their term for Level 3 assets; the stuff which doesn't have a market price since it's illiquid and not trading.

[The Kernel]

They're already doing that with their existing collateral. Their existing MBS and other securities are being traded with the Fed at a 10-20% discount from the book value claimed by the banks. You're telling me that those subprime MBSs are worth anywhere near that value? Try a 40% devaluation, minimum.

Can you share your source for the 10-20% discount number?

http://www.frbdiscountwindow.org/discountmargins.pdf
Straight from the Federal reserve bank. It's current as of last week, the new rules resulting from this past weekend's events haven't been added in yet.

Notice the values for various asset & mortgage based products under the column "Lendable Value for Securities or Instruments if Market Price Not Available". That's their term for Level 3 assets; the stuff which doesn't have a market price since it's illiquid and not trading.

Fair enough, but this document doesn't specify just non-investment grade assets, it says anything that's not AAA rated. This is a pretty big spread as stuff that is a notch below AAA is still basically as good as a treasury bond and it's a long ways from a junk asset.

This document seems a little high level; they must be using finer criteria than this. Something also tells me that the aren't going to be stupid and take totally worthless securities that are deeply into junk rating. Of course this is the treasury department we are talking about here...who knows what they might do.

[The Duchess of Zeon]

I think we're basically entering a period like that of Japan in the early 90's--it's the same thing going on, ludicrous real estate speculation and crazed credit levels combined with a complete lack of responsibility on the part of everyone making deals and a manic effort to chase ghost profits. The government drives down interest rates, and then all the news of malfeasance comes out and stuff has started dropping like flies.

Broomstick probably is wrong--this won't be the Great Depression. It'll be a perpetual recession in the style of Japan's "lost decade" of the 1990s.

[Coyote]

I think we're basically entering a period like that of Japan in the early 90's--it's the same thing going on, ludicrous real estate speculation and crazed credit levels combined with a complete lack of responsibility on the part of everyone making deals and a manic effort to chase ghost profits...

Well, as long as business can do as it pleases for maximized profits --knowing the government will bail them out if they misstep-- there'll never be a reason for them to be responsible. As much as I dislike Libertarianism, I have to applaud their willingness to let a mis-managed business fall on its ass without relying on taxpayer-funded bailouts.

As long as success is private and failure is social, we'll keep up this cycle until the USA is a third world shithole.

[Admiral Valdemar]

I think we're basically entering a period like that of Japan in the early 90's--it's the same thing going on, ludicrous real estate speculation and crazed credit levels combined with a complete lack of responsibility on the part of everyone making deals and a manic effort to chase ghost profits. The government drives down interest rates, and then all the news of malfeasance comes out and stuff has started dropping like flies.

Broomstick probably is wrong--this won't be the Great Depression. It'll be a perpetual recession in the style of Japan's "lost decade" of the 1990s.

However, the declining net energy exports issue is totally without precedent on this scale. The energy issue has every bit to do with the economy as bad debt handling and over-extravagance. That is why this is new, uncharted territory we're moving into.

Same with the acceleration of climate change, which certainly hasn't happened before either and presents whole new challenges. Broomstick is fully justified in worrying over these factors combining with an economic slowdown that would have happened without them. Pray you guys get Obama in to at least give some semblance of leadership, because I'll be damned if McCain can fathom anything to do with the economy, environment and energy.

[Coyote]

Oh, hell, if we get Quickdraw McCain as President, we'll be like Japan alright-- Japan about 1934, getting squeezed for resources, and with nothing but a military solution to handle the problem. All we'll need is a "Manchuria" to go conquer (someone whose initials are probably "Middle" and "East").

[Admiral Valdemar]

Last I checked, you were wasting $10bn a month over there anyway. And it ain't on tourism.

[The Kernel]

I think we're basically entering a period like that of Japan in the early 90's--it's the same thing going on, ludicrous real estate speculation and crazed credit levels combined with a complete lack of responsibility on the part of everyone making deals and a manic effort to chase ghost profits. The government drives down interest rates, and then all the news of malfeasance comes out and stuff has started dropping like flies.

Broomstick probably is wrong--this won't be the Great Depression. It'll be a perpetual recession in the style of Japan's "lost decade" of the 1990s.

Unlikely. One of Japan's biggest problems with their economy has always been their inability to make strong legislative changes combined with terrible leadership at the Bank of Japan. The US has no such problems; in fact we are the opposite extreme.

Well, as long as business can do as it pleases for maximized profits --knowing the government will bail them out if they misstep-- there'll never be a reason for them to be responsible. As much as I dislike Libertarianism, I have to applaud their willingness to let a mis-managed business fall on its ass without relying on taxpayer-funded bailouts.

As long as success is private and failure is social, we'll keep up this cycle until the USA is a third world shithole.

As much as I agree with the sentiment, we simply can't allow these institutions to fail. Throw the crooked people in jail, change the laws, bring in much tighter regulation...but you can't put them out of business. If you do, then you really WILL have a new Great Depression as our economy simply cannot function without confidence in the banking system.

[J]

Fair enough, but this document doesn't specify just non-investment grade assets, it says anything that's not AAA rated. This is a pretty big spread as stuff that is a notch below AAA is still basically as good as a treasury bond and it's a long ways from a junk asset.

This document seems a little high level; they must be using finer criteria than this. Something also tells me that the aren't going to be stupid and take totally worthless securities that are deeply into junk rating. Of course this is the treasury department we are talking about here...who knows what they might do.

That is THE chart. I thought it was a little coarse myself when it was first brought to my attention a few months ago so I made a few inquiries to some alumni from my university who are in the industry; they confirm, that's the chart, there's no finer criteria for sorting collateral. It is the first, last, and only word. An MBS from the now defunct IndyMac Bank which isn't worth the paper it's printed on is valued just as highly as a true AA+ rated MBS. And it's not Treasury. It's the Federal Reserve Bank.

[The Kernel]

That is THE chart. I thought it was a little coarse myself when it was first brought to my attention a few months ago so I made a few inquiries to some alumni from my university who are in the industry; they confirm, that's the chart, there's no finer criteria for sorting collateral. It is the first, last, and only word. An MBS from the now defunct IndyMac Bank which isn't worth the paper it's printed on is valued just as highly as a true AA+ rated MBS. And it's not Treasury. It's the Federal Reserve Bank.

Wow, that's just a giant pile of shit then. It's incredible to think that they don't give a damn whether it is investment grade or bottom barrel junk assets, but I guess I've heard stranger things. You have my concession on this point...not sure how this will play out, but the thought of using junk assets as collateral for AAA government debt makes my skin crawl.

And yeah, Federal Reserve, sorry mistyped.

[Admiral Valdemar]

Anyone think the Glass-Steagall Act coming back would help at all now?

[The Kernel]

Anyone think the Glass-Steagall Act coming back would help at all now?

It'd be a tough sell and it isn't going to do anything for this current crisis, plus it's probably overkill. There are good reasons for letting banks offer investment services (and vice-versa) on competitive grounds.

What really needs to be done is to make a firewall exist between the lending and credit sides of the business. Technically this already exists, but the regulations are sloppy and badly enforced; all you need to do is to put better enforcement into place and the problem will be mostly solved.

[Admiral Valdemar]

It wouldn't be as bad if we actually learned from this. I have the feeling that most Americans, and other citizens of Earth, will simply forget their anger after a while, accept the state of affairs, then go back to electing idiots who appeal to their comical fears and not ones with pragmatism built in.

Right now, I'm more concerned about bank runs and losing my job over bloody terrorists who apparently lurk around every corner, some would have you believe.

[Coyote]

As much as I agree with the sentiment, we simply can't allow these institutions to fail. Throw the crooked people in jail, change the laws, bring in much tighter regulation...but you can't put them out of business. If you do, then you really WILL have a new Great Depression as our economy simply cannot function without confidence in the banking system.

I don't see too many people brimming with confidence as things are, though. If anything happens at all, it'll be slap on the wrist stuff, maybe some random guy will be picked as a scapegoat and do a few months, or maybe even a year or two, in prison somewhere, and that's it. Meanwhile, people's life savings are wiped out and houses aren't worth as much as a FEMA trailer.

[Patrick Degan]

It wouldn't be as bad if we actually learned from this. I have the feeling that most Americans, and other citizens of Earth, will simply forget their anger after a while, accept the state of affairs, then go back to electing idiots who appeal to their comical fears and not ones with pragmatism built in.

Well, all this is happening now because we forgot the lessons of the Great Depression, the last time we made the mistake of letting the stupid greedheads run everything, so it's always inevitable that the lessons learned from one disaster by one generation will be forgotten by the next second or third or so. The big question is whether even this generation will learn from this fuckup.

[J]

What really needs to be done is to make a firewall exist between the lending and credit sides of the business. Technically this already exists, but the regulations are sloppy and badly enforced; all you need to do is to put better enforcement into place and the problem will be mostly solved.

Section 23A of the Federal Reserve Act was taken to the curb and shot over the weekend. There's nothing left separating the retail & investment operations of banks.

Excerpt:

The Board also adopted an interim final rule that provides a temporary exception to the limitations in section 23A of the Federal Reserve Act. It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception expires on January 30, 2009, unless extended by the Board, and is subject to various conditions to promote safety and soundness.

[Admiral Valdemar]

Well, all this is happening now because we forgot the lessons of the Great Depression, the last time we made the mistake of letting the stupid greedheads run everything, so it's always inevitable that the lessons learned from one disaster by one generation will be forgotten by the next second or third or so. The big question is whether even this generation will learn from this fuckup.

Too bad most people will overlook the Republicans and their neoliberal bullshit and harp on with the "We need true free markets so this wouldn't happen!".

Remember, it's always better to think you're different to those who fell before you. Because we've got it all sussed this time, so '29 can't happen. Bernanke studied it and we'd never fall into that trap again.

Or maybe not.

[Broomstick]

This is different. I know you don't believe that, but it is.

This is not just a stock market bubble, it's a bubble combined with natural disasters (the Midwest Flood in the spring plus the current hurricane season), rising oil prices (the current dip most likely is temporary) and no safe place left for investments (real estate was supposed to be the failsafe fallback for many). Up until about 2 years ago there was always cheap petroleum to power the economy, that's gone. The late 80's real estate "meltdown" was minor compared to the current one (we didn't need to bail out Fannie and Freddie in the 80's after all), the tech bubble was limited largely to tech and didn't affect other segments, and 9/11, while traumatic, left the rest of the country intact.

So, for example, it's not JUST the spring floods knocking out crops that helped raise food prices it's also greater cost in transporting food due to rising gas prices and also increase demand from those trying to make biofuel. Any one of those factors would have raised food prices, but we have all three at once. That's part of the problem - you can't point to just one thing that's the source of any of a various number of problems, there are multiple factors at work here.

There's ALWAYS multiple factors at work in a down economy. Usually it takes more than a single thing to drive an economy in recession. That doesn't mean that any of these things prove that this will lead to another catastrophe along the lines of the Great Depression.

Don't just take my word for it - in this thread is a quoted Wall Street Journal article talking about how this is the worst financial crisis since the Great Depression.

Oops, right, I'm not an economist, financial analyst, or anything of the sort, I'm too stupid to see the emperor has no clothes. Just watch Wall Street and McCain yammer about fundamentals being strong, don't look behind the curtain.

Know why consumer confidence is in the shitter? Because people are losing their jobs, or getting their hours cut, and prices are rising. Now they seen the Wall Street tycoons scrambling like a kicked-over anthill. You don't have to be a genius to see there is a Problem here.

I actually have NOT said "Great Depression" for any of those other financial crises you mentioned, but I am for this one because, yes, I think it really is that bad. My parents, who grew up during the Great Depression, independently came to the same conclusion. Given that they have nearly 80 years of experience in the real world I assume they have some basis for comparison of financial crisis.

Please observe the U-5 and U-6 columns in this BLS page. The U-5 measure hit 7 in July and continued to rise in August. Do you think with the layoffs this month - including but not limited to Lehman - that will go down? U-6 is already showing double-digits. All measures of unemployed show a rise over last year. Or maybe you're like the pundits who pick and choose whatever stat is most favorable to them?

Did I deny that unemployment is up? However, don't bother to try to argue "marginally attached workers" is all that relevant; it's never been a very useful statistic because it applies to people who are not working and not looking, but might be interested in a job if the right one came along. That's a ridiculous metric to use for unemployment figures as it is highly unreliable (and has been proven so over the past decades which is why the official unemployment figure does not include it).

Currently unemployment is hovering above 6%. Bad to be sure, but it's a lot better than many other developed countries and I wouldn't be worried until it starts getting above 8%.

So, you pick and choose the prettier statistic, and ignore the people who have been forced from full time to part time work, or subjected to pay cuts, or both. Part time workers aren't considered unemployed, so instead of firing half your workforce you force them all to part time, drop their health care benefits.... but it's OK because unemployment hasn't gone up at all! But you don't understand why worker morale is shit and everyone is worried.

Frankly, I'm worried now. Perhaps you find statistics reassuring, but I'm looking around, not just locally but nationally, and there are very, very worrisome things going on.

Even then, you have a long way to go to match the ~25% unemployment of the Great Depression.

So, if 60% of the country is taking paycuts and forced to part time that's OK because, you know, they aren't unemployed or anything really serious? Or, hell, even a mere 25% of people forced to part time work would be terribly serious. But it's OK, because the Official Unemployment Rate is low! Nothing is wrong, folks, because this one stat has stayed low! Just ignore that you no longer have health insurance and can no longer pay your bills because, you know, you're not unemployed, you're "merely" earning only 50% of what you did last year!

We're in a downward spiral here - layoffs and job loss and credit woes lead to less spending which leads to another round of layoffs which means fewer people have the money to spend on anything, which lowers demand still further, which leads to more layoffs....

Of course, there IS a bottom. There always is. It's just a question of how far down it is.

...and you have done nothing to show that this is any different from any other recession.

Oh, so someone finally admits we're in a recession. Isn't that special?

I don't know what you'd accept as proof we're up shit creek, talking to financial types is rather like talking to Fundies - you're so convinced you're right, and that only those within the exclusive club have access to enlightenment.

I remember every recession since the 1970's, and we didn't have mulitple Wall Street firms falling like dominoes in any of them until now. We didn't have dropping real estate values nationwide. I see a lot of financial types trying to tell each other it's OK and it's going to be alright but I don't believe them because every day brings more bad news.

The Second Great Depression need not look exactly like the first to be real. We may not see 25% unemployment, that doesn't mean everything is OK. If everyone ends up like me - earning only 1/3 of what they were the year prior - they might still be "employed" but that would still be a terrible, terrible economic circumstance. We do have safeguards we didn't then, but that doesn't mean it won't be horrifically painful to live through the next few years or even decade.

[Admiral Valdemar]

The banks really are major fuckers.

[Darth Wong]

I don't know what you'd accept as proof we're up shit creek, talking to financial types is rather like talking to Fundies - you're so convinced you're right, and that only those within the exclusive club have access to enlightenment.

Economists like to pretend that their particular field is like science, and that people who don't know its terminology and concepts should just shut the fuck up and not talk about things they don't understand. What they don't realize is that economics is more like social engineering (albeit limited by the weakness of the underlying social science), and while a layperson can't necessarily tell (for example) a mechanical engineer how to do his job, he can tell if his car is running like shit and breaks down all the time.

That's the problem with our economy; it is not working for people. That's what they know, because they're sitting in the car which is broken down on the side of the road. And when economists say that it's actually in fine shape despite large numbers of people suffering, they betray a fundamental misunderstanding not of their own field of research, but of the point of their field of research, which is to improve the prosperity of the human beings living in our society. They're basically saying "You may think your car is broken down, but according to our metrics, it's actually fine. Its fundamentals are strong." It's not only insulting but it's deluded and incompetent. If someone's vaunted "metrics" say that things are fine when the people are having so many problems, then they should look at different metrics.

[The Kernel]

Don't just take my word for it - in this thread is a quoted Wall Street Journal article talking about how this is the worst financial crisis since the Great Depression.

Oh REALLY? Let's have a look at some data shall we?

First GNP (Source: U.S. Department of Commerce, National Income and Product Accounts and US Department of Commerce: Bureau of Economic Analysis)

Depression GNP:



21st Century GNP:



Both of these graphs are normalized inflation adjusted so as to remove any doubt.

Of course, you might argue that 2008 data is missing, but you can see the non-adjusted figures below:

April 2007: $13797.20
April 2008: $14427.70

Not much evidence there huh?

So the GNP doesn't support your case. What about unemployment?

Depression Unemployment(Source: US Department of Labor):



21st Century Unemployment:



Wow, unemployment doesn't work for you either does it?

Next you might argue that the stock market might see the future trends of the actual state of the economy quicker than GNP and unemployment data. Fine, but you don't win on this either.

Since the Dow is not a market weighted index it has limited usefulness, but since I don't know of a market weighted index that existed in 1929, I'll use the relative data on the Dow to show you the market.

Dow during the Depression:



Look at that! The Dow lost 86% of its value! To put it another way, the market collapsed to roughly 1/7th of it's previous value. Do you think that the markets today have collapsed anywhere near this hard? Take a look:



From it's peak, the Dow is currently down about 18%. Nowhere near the crash of 1929 is it?

Oops, right, I'm not an economist, financial analyst, or anything of the sort, I'm too stupid to see the emperor has no clothes. Just watch Wall Street and McCain yammer about fundamentals being strong, don't look behind the curtain.

No, what you are is a hysterical chicken little who thinks the sky is constantly falling.

The economy has a bunch of things wrong with it, but this is nowhere NEAR the level of the Great Depression. For you to say it is with the economic data I've presented above makes you look like a fool.

Know why consumer confidence is in the shitter? Because people are losing their jobs, or getting their hours cut, and prices are rising. Now they seen the Wall Street tycoons scrambling like a kicked-over anthill. You don't have to be a genius to see there is a Problem here.

Blah, blah, blah. Thanks for a series of totally subjective claims. Got anything useful to add?

I actually have NOT said "Great Depression" for any of those other financial crises you mentioned, but I am for this one because, yes, I think it really is that bad. My parents, who grew up during the Great Depression, independently came to the same conclusion. Given that they have nearly 80 years of experience in the real world I assume they have some basis for comparison of financial crisis.

Wow, this is a crisis on the scale of the Great Depression because your parents say so! What a wonderful appeal to (false) authority!

So, you pick and choose the prettier statistic, and ignore the people who have been forced from full time to part time work, or subjected to pay cuts, or both.

I picked the data point that the US Department of Labor uses when they report on unemployment. If you have a problem with that take it up with them.

And honestly, I see no reason to pick a different data point when this is the SAME data point I'm using for Depression era data. At least I'm consistent unlike you.

Oh wait, you haven't actually presented any comparative data on the depression aside from your own subjective bullshit--sorry, my mistake.

Part time workers aren't considered unemployed, so instead of firing half your workforce you force them all to part time, drop their health care benefits.... but it's OK because unemployment hasn't gone up at all! But you don't understand why worker morale is shit and everyone is worried.

That problem has always existed with labor statistics. It's not like it's any worse now.

If you have some reason to think that the partial employment problem is worse now than during other economically down periods in US history go ahead and present your evidence.

Frankly, I'm worried now. Perhaps you find statistics reassuring, but I'm looking around, not just locally but nationally, and there are very, very worrisome things going on.

Bitch, in case you didn't notice, this is SDNet. Maybe you are aware of the rules here about presenting claims without evidence? And no, your subjective bullshit does not count as evidence.

So, if 60% of the country is taking paycuts and forced to part time that's OK because, you know, they aren't unemployed or anything really serious? Or, hell, even a mere 25% of people forced to part time work would be terribly serious. But it's OK, because the Official Unemployment Rate is low! Nothing is wrong, folks, because this one stat has stayed low! Just ignore that you no longer have health insurance and can no longer pay your bills because, you know, you're not unemployed, you're "merely" earning only 50% of what you did last year!

1) Back up these numbers of yours. I'm assuming you are pulling them out of your ass.

2) Assuming you can actually find decent data on this, show how it is any different than the squeeze that normally occurs during a tough economic period and you MIGHT have a point.

Oh, so someone finally admits we're in a recession. Isn't that special?

Don't strawman my claims with this bullshit. Maybe you can show where I've ever denied a recession?

And by the way, I'm being fucking charitable with that recession comment. Indexed for inflation growth has been stagnant, but it has been going up as my data above shows.

I don't know what you'd accept as proof we're up shit creek, talking to financial types is rather like talking to Fundies - you're so convinced you're right, and that only those within the exclusive club have access to enlightenment.

Proof would take the form of actual data to support your argument. Since you have none, I think you need to look in the mirror with that fundie comment.

I remember every recession since the 1970's, and we didn't have mulitple Wall Street firms falling like dominoes in any of them until now. We didn't have dropping real estate values nationwide. I see a lot of financial types trying to tell each other it's OK and it's going to be alright but I don't believe them because every day brings more bad news.

What the fuck does Wall Street have to do with this? Jesus fucking Christ, I can't believe I'm talking to a person who doesn't know the difference between indicators that an investment banker might be interested in (hint: the stock market) and someone who is analyzing the actual state of the economy.

The Second Great Depression need not look exactly like the first to be real. We may not see 25% unemployment, that doesn't mean everything is OK. If everyone ends up like me - earning only 1/3 of what they were the year prior - they might still be "employed" but that would still be a terrible, terrible economic circumstance. We do have safeguards we didn't then, but that doesn't mean it won't be horrifically painful to live through the next few years or even decade.

So far we haven't even seen a period of actual loss of GNP, explosive unemployment or any other indication of something on the scale of the Great Depression. As usual, you've brought nothing to the table to make your case.[/img]

[The Kernel]

Economists like to pretend that their particular field is like science, and that people who don't know its terminology and concepts should just shut the fuck up and not talk about things they don't understand. What they don't realize is that economics is more like social engineering (albeit limited by the weakness of the underlying social science), and while a layperson can't necessarily tell (for example) a mechanical engineer how to do his job, he can tell if his car is running like shit and breaks down all the time.

Your analogy is flawed. A layperson can make intelligent observations only about microeconomic conditions, with only SOME indicators of macro economics.

I'm sure for example you could tell me about the financial health of yourself, your friends and your family. However, this is a purely subjective determination of the state of the economy. If you lived in Flynt, Michigan during the 90's (or much of the rust belt) you might think that the economy was doing very poorly. Jobs were being lost, homes were in forclosure, crime was up, education was down, etc. However, if you lived in Silicon Valley during that period, you would have an entirely different perspective.

Individuals do see SOME macroeconomic indicators if they know where to look for them. They know how much a gallon of gas costs or how much they are paying for tomatoes. They know how much they pay in taxes. They know how much their health insurance costs.

But a spike in any one economic indicator like that can easily be misinterpreted as being the overall state of the economy which is not always the case. That's why economist have to pour over things like the Consumer Price Index, inflation numbers, exchange rates, market indexes, etc...and even then they can barely make any sense out of it.

I will agree with you on one thing though: economics isn't much of a predictive science. It can tell you the state of things today pretty well, and it is very good at telling you why something happened in the past. But when it comes to figuring out the future, the field of economics has a long way to go.

[The Kernel]

[quote="Broomstick]I remember every recession since the 1970's, and we didn't have mulitple Wall Street firms falling like dominoes in any of them until now. We didn't have dropping real estate values nationwide. I see a lot of financial types trying to tell each other it's OK and it's going to be alright but I don't believe them because every day brings more bad news.[/quote]

I misread this, so here's the actual response to this.

If you knew anything about history, you'd know that investment banks die like this all the time and it is always for a very specific reason. Sit down, I'm going to give you a lesson in how investment banks work.

The business model of an investment bank is largely built around the concept of keeping a managed risk portfolio that is highly leveraged. What this means in case you don't know is that investment banks borrow a metric shitload of money (more than 20x their market cap) which they then use to make bets on market performance. This is akin to the margin trading that day traders engage in.

What makes the investment banks so special is that they CLAIM to be able to bring down risk to near nil levels by the use of a concept called hedging. Investment bankers will prattle on about hedging for hours--it's like the holy grail to them. They think they have it figured out that if they spread their bets enough they can make returns that outperform the market, yet are perfectly safe for the company. However, the old adage "you don't get something for nothing" applies here.

There is such a thing as a properly hedged investment portfolio. The trouble is, it's not going to generate the kind of return that investors want to see on Wall Street. They are paying through the nose for these managed investments and they want something that outperforms the market weighted indexes during the good times and performs like Berkshire Hathaway during the bad times. So in order to make their funds more attractive, investment bankers get greedy by both overleveraging themselves as well as overexposing themselves to risk.

When an investment bank dies, it dies hard and fast. It doesn't matter if you are a huge firm with a ton of assets; investment banks are so heavily leveraged that they don't have any hard assets to fall back on when their investments go south. And why would they? They've already borrowed heavily against what little assets they have (up to and including the corporate headquarters) and have borrowed more on top of that unsecured.

What usually kills an investment bank (and I said this earlier in this thread) is when the balance sheet goes south and the credit agencies start downgrading the credit of the institution. This sets of a chain reaction as investment firms are heavily dependent on their credit ratings (as much of their debt is unsecured; it is based solely on the value of their investments) that a credit downgrade will cause investors to make the equivalent of margin calls and you get the mother of all bank runs.

The point I'm trying to make above is that the health of investment banks has little to do with the state of the economy. All it takes for even the largest of investment banks to go under is for them to be overexposed in a certain sector when it takes a sharp downward trend (like the housing market). So why did firms like Lehman, Merrill and Bear Sterns fail? Because they were betting that housing prices would never go down. A single bubble in the real estate market caused a chain reaction of events which cause all of these firms to implode. I could give more information on this chain of events, but I think it's been covered pretty well thusfar in the media.