links for 2008-08-16

• U.S. May Ease Police Spy Rules - washingtonpost.com
• Rebalancing act - Economist.com
• Dr. Doom - NYTimes.com
• How About the Home Front? - Op-Ed - NYTimes.com
• Fedspeak: Evans on 'Three-Front' Economic Conflict - Real Time Economics
• War, international dynamics and chaos theory - A Fistful of Euros
• Inflated claims - Economist.com

Comments

[Too Much of a Good Thing]

NR...“We have a subprime financial system,” he said, “not a subprime mortgage market.”

Dependence upon loose credit is out of control. A certain amount of credit is necessary to keep a modern economy running smoothly, but too much loose credit can be toxic to the system.

NR...“Once you run current-account deficits, you depend on the kindness of strangers,”

No net domestic savings means total reliance on other nations. This comes at a cost.

[Too Much of a Good Thing]

NR...“A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “

There is such a thing as over reliance upon credit. Credit is a useful tool, but not a wonder panacea that can be endlessly expanded to pump up demand far beyond productive capacity. All we are doing is borrowing an ever increasing quantity of goods/services produced overseas, and consuming them.

The overseas producers really expect to be paid back the goods/services they have loaned, not have the debt inflated away plus loan ever more on top of it. NR is right that this will all end badly for us, unless we change very soon. Debt to GDP of 350%, mostly spent on consumption, cannot be indefinitely expanded to keep the system going.

[wjd123]

Dr. Doom says:

But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”

Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”

The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”

[Cities]

NYT..."...the tens of millions of Americans who are without health insurance coverage; the stunning high school dropout numbers; and a demoralizing problem with violent crime in several parts of the country."

The health insurance issue is directly related to rapidly rising cost.

"In sum, neither government, nor employers, nor the uninsured themselves have pockets deep enough to sustain coverage expansion in the face of rising costs."

Arnold Kling Blog

High crime and school dropout rates are related. Children in high crime areas are terrorized in the school system, and flee at the first opportunity. In turn, the school system in many areas fails to teach children to treat others with respect, which increases the crime problem.

A serious effort to teach children respect for others is needed, and they will continue to do so when they mature into adults. If the current school system in incapable of carrying out this task, it must be replaced, and soon.

[hari]

I've been getting Dr Doom's analysis and predictions since Fed's decision (last Aug'07) - and there is nothing but realism in his conclusions - as evidenced by recent decisions by NY Attorney General Como to force the mainline investment houses to settle their fraudulent CDOs and whatnots in $Billions. The figs are astronomical by any imagination.

Mark may like to follow-up Como's decisions and its impact on cashflow and other constraints in hi fi investment houses.

[robertdfeinman]

I'll assume that since there is a link to the article on increased surveillance this is a topic of (non-economic) interest.

I've been warning of the dangers of a domestic secret police to democracy for years. This was one of the first areas I wrote about on my web site. Here's the link, it still seems relevant: Surveillance vs Civil Liberties.

The essay uses historical examples so as to stay away from current partisanship, but the point is easy to explain. Societies which claim an external threat as the justification for secret policing quickly starting seeing legitimate domestic opponents as the "enemy" as well. Spying, prosecuting and intimidating your political opponents leads to the end of an open, democratic society. Even with the amount of secret policing which is going on in the US that we don't know about, we have seen enough abuses that have been made public for the trend to be troubling.

We have had locking up of demonstrators, or cordoning them off away from political events, blackballing people with differing views from government jobs, putting the outspoken on watch and no-fly lists, and, apparently, politically motivated criminal prosecutions.

[Dickeylee]

Robert, it's just the Democrats that are being pollitically prosocuted, so what's the problem? Oh, and maybe the atheisits. just the Democrats and Atheisits. Well, maybe some darker skinned people that talk funny, just some of them. So the Dems, God haters and funny talking brown people. And the...

[Patricia Shannon]

I agree with Roubini that the large debt burden is a problem.

In addition to problems caused by the debt itself, it has enabled the economy to keep going while income and wealth is transferred to a small plutocracy. This has kept the economy from doing as poorly as it otherwise would. This might seem to be good, but it has enabled the situation to proceed w/o correction, and thus become worse and more entrenched and harder to correct.

Similarly, we are likely entering a natural cycle of global cooling which will mask the effects of global warming at least some. This will be used by climate change deniers to stall corrective efforts in this area, so that when the natural cycle turns things will be much worse and harder to deal with.