Need Economics Refresher

[crookedtune]

I've been out of college for a long, long time. I do read the paper, but maybe I'm not getting it.

1- The economy is melting down because (for one thing) too many people are defaulting on their mortgage payments.

2- People are defaulting because they are short on cash, or in debt, from borrowing and spending too much.

3- We're slashing interest rates to encourage more borrowing and more spending, and thus hope to rejuvenate a flagging economy.

4- Wall Street gets all excited because folks are probably about to go shopping. Stock prices go up.

Tell me again. How exactly is this not a pyramid scheme?

[swizzlestick]

I think you have it about right.

Don't forget that our money is not tied to anything -- it used to be tied to gold/silver -- so the government policy is maintain a gradual inflation rate for their own spending advantage. (And other advantages.) Then consider the huge amount of foreign investment in the American dollar and you see that it's like walking a tightrope. The government has to keep it all balanced or it comes tumbling down.

[Innocent Bystander]

Tell me again. How exactly is this not a pyramid scheme?

Well done on your analysis of modern capitalism!

The gentle inflation is useful to fuel the impression of growth. It's great as long as it doesn't get out of control.

It's not a pyramid scheme because there's nothing at the bottom. It's circular. People have confidence because they've been told to have confidence, and when that goes, whoops!

[mutepointe]

I hope to give all of my money to one of those brilliant ceo's who drove their company into bankruptcy before jumping with a golden parachute.

[fearfaoin]

It's not a pyramid scheme because there's nothing at the bottom. It's circular. People have confidence because they've been told to have confidence, and when that goes, whoops!

I don't know, a pyramid scheme, like its less-legal Ponzi scheme brethren
requires that you rob Peter to pay Paul. When it collapses, Peter (the workin'
man) is destitute and Paul (the fatcats with foreign investments) are still living
large. Seems to fit.

I hope to give all of my money to one of those brilliant ceo's who drove their company into bankruptcy before jumping with a golden parachute.

You already are, friend. You already are.

[gonzo914]

1- The economy is melting down because (for one thing) too many people are defaulting on their mortgage payments.

But people are also defaulting on their mortgages because the economy is melting down. Bystander is right -- it's circular.

2- People are defaulting because they are short on cash, or in debt, from borrowing and spending too much.

Some, it's true, but people are also defaulting because their jobs are now done for a dollar an hour in some third world backwater that cannot even make a decent suitcase.

3- We're slashing interest rates to encourage more borrowing and more spending, and thus hope to rejuvenate a flagging economy.

Wrong. We are slashing interest rates so banks can make a higher profit margin to offset the losses from their crappy mortgage loans. Do not expect to see cheaper money for the consumer. This cut is for the big boys.

4- Wall Street gets all excited because folks are probably about to go shopping. Stock prices go up.

And the money goes right back to China, minus, of course, a small honorarium for the stockholders of Walmart and Best Buy.

[djm]

But people are also defaulting on their mortgages because the economy is melting down.

Sorry, but the problem is that too many people have mortgages that should never have been allowed in the first place. That is the core of the current mortgage crisis/scandal, the one that couldn't be passed on to anyone else.

And the money goes right back to China

That is a real fabrication that is being foisted on everyone at the moment. The money stays in American corporate pockets, with only bits and pieces going to China. When China starts making a true profit, their costs will go up the same way as every other 3rd world nation the US has tried to manipulate into being their industrial slaves.

Shouldn't this topic be on the shady board (where the sun never shines)?

djm

[gonzo914]

But people are also defaulting on their mortgages because the economy is melting down.

Sorry, but the problem is that too many people have mortgages that should never have been allowed in the first place. That is the core of the current mortgage crisis/scandal, the one that couldn't be passed on to anyone else.

The problem was festering there even before the current mortgage crisis/scandal (and I like that terminology). Housing prices were artificially high in many areas and were increasing at an obscene rate, driven to some extent by speculators, and this, combined with decreasing real income and layoffs for the middle class, put more home owners at risk even before the morgage guys started waving something shiny in their faces.

And the money goes right back to China

That is a real fabrication that is being foisted on everyone at the moment. The money stays in American corporate pockets, . . .

That's the small honorarium to which I referred. You forgot to take your sarcasm enhancement this morning.

[djm]

You forgot to take your sarcasm enhancement this morning.

I only clue in to upper-case letters.

djm

[Doug_Tipple]

Please stop. The whole thing is very depressing. You would think that there was enough intelligence to organize and control financial systems so that events wouldn't upset things so drastically. As ex-Fed Chariman, Greenspan, said yesterday, there is a lot of hard work and rethinking that needs to be done in order to provide more stability in the financial marketsin the future.

[sbfluter]

And so how much faith do you actually put into this system while you are complaining about it? Most of us rely on this house of cards for every single bit of our livelihoods, including food, clothing, shelter, health care and retirement. How do we get out from under it?

[crookedtune]

OK, well I'll chime in again to say I was playing the devil's advocate a bit. I don't see Armageddon ahead, and I don't expect global financial collapse. My point was merely that there is some element of smoke and mirrors in the workings of global finance, and particularly in the media's presentation of it. I'm cautioning in favor of optimistic conservatism. (i.e. guard your pennies wisely).

[s1m0n]

You would think that there was enough intelligence to organize and control financial systems so that events wouldn't upset things so drastically. As ex-Fed Chariman, Greenspan, said yesterday, there is a lot of hard work and rethinking that needs to be done in order to provide more stability in the financial marketsin the future.

It's Greenspan's fault; you'd think that if anyone had the wisdom to keep his head down at a time like this, it would be Alan Greenspan.

After the depression, a whole system of safeguards was built to keep the disaster from happening again. Greenspan, flush with Ayn Rand's 'philosophy' (which says that the invisible hand of the marketplace will police the economy without need for regulations) preesided over the dismantling of much of these regulations.

With the results you see before us: It turns out that the marketplace can't discipline corporations fast enough to prevent corrupt management from passing the buck to someone else, or cashing themselves out early.

[BillChin]

OK, well I'll chime in again to say I was playing the devil's advocate a bit. I don't see Armageddon ahead, and I don't expect global financial collapse. My point was merely that there is some element of smoke and mirrors in the workings of global finance, and particularly in the media's presentation of it. I'm cautioning in favor of optimistic conservatism. (i.e. guard your pennies wisely).

The financial literacy is lower than the math literacy. Most of the media has a low financial literacy, as do their readers/viewers.

The basic premise of the original post is not that far off, however, the term pyramid scheme is not accurate for these events.

This topic belongs in the rubber room. There are plenty of folks to blame, and who to blame and who to bailout is mostly a political subject colored by political points of view. There are a lot of players, a lot of winners and losers. A lot of folks that made poor decisions, some out of greed, some out of ignorance, some out of foolishness. Some are getting bailed out, some are going under.