House of Cards?

There is some pretty disturbing news coming out these days about the risks facing our financial institutions… and all of us.

I read today that Wells Fargo CEO John Stumpf said: “We have not seen a nationwide decline in housing like this since the Great Depression.”

And this summary of financial news from the Oil Drum strikes me as likely alarmist, but I think there’s little question that a lot more “paper money” is going to go up in smoke before things settle down. The two big issues: guarantors of bonds may not be able to deliver, and accounting rules are going to change to force re-valuation of shaky assets. Buckle up!

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Comments

  • Jim  On November 18, 2007 at 1:27 pm

    The other side of the discussion is linked below. An article by Larry Kudlow, who recognizes the housing problem, but believes the economy has enough momentum to offset this problem. Let’s all hope he is right, and not John Stumpf!

    Hope this link works!

  • Curt  On November 19, 2007 at 2:20 am

    An interesting point here is of course that markets depend on opposing points of view about all sorts of things: valuations, future trends, etc. I think the trick is trying to understand both viewpoints and then judging what is closest to ‘correct’.

    But equally interesting: how much does economic prosperity depend upon an optimistic future outlook? (or the flipside – when does alarmist news become self-fulfilling?)

  • Jim  On November 20, 2007 at 9:09 am

    An even more interesting question on you salient point in paragraph 2 is how much is the “optimistic” or “alarmist” views driven by political agendas?

    Larry Kudlow is a conservative who once worked in Reagans administration. Guarantee you he voted for Bush in ’04.

    I would bet that John Stumpf is a registered Democrat who voted for John Kerry in ’04.

    Maybe this is just my cynicism showing itself, but it would be interesting to find out!

  • Curt  On November 21, 2007 at 3:19 am

    I’m sure you are right about Kudlow. For me at least, his use of the term “Bush Boom” lowers his credibility, since he seems as interested in promoting Bush as in analyzing the economy. And as we’ve discussed, the President can only do so much in terms of influencing an economy of some 300 million people. Yes, Bush pushed tax cuts, which had some effect, as did lowered interest rates, low mortgage rates and low lending standards, higher oil prices, dropping value of US dollar, etc, etc.

    While it may be that Stumpf has a political axe to grind, he also has a financial job to do (and according to him at least, Wells Fargo did not make some of the poor decisions that other banks are suffering from now). But that does not make him necessarily right in his comments. We shall see how things continue to play out.

  • Curt  On November 24, 2007 at 3:18 am

    Here’s an interesting article by Robert Schiller on the psychology of optimism… He writes:

    The psychology of the markets is dominated by the public images that we have in mind from day to day, and that forms the basis of our imaginations and of the stories we tell each other.

    Popular images of past disasters are part of our folklore, often buried in the dim reaches of our memory, but re-emerging to trouble us from time to time.

    Like traditional myths, such graphic, shared images embody fears that are deeply entrenched in our psyche. The images that have accompanied past episodes of market turmoil are largely absent today.

  • Jim  On November 24, 2007 at 10:22 am

    Interesting points, but I think the psyche of a portion of 300 million people in a shrinking world with a population approaching 6 billion people, has little impact on ours or any of the worlds economies. Forces much bigger than that are what effect our economy – war, foreign oil, China’s growing economy, our ability to educate/train our populace in a changing world, etc. etc. etc.

    The road to success is not to worry too much about our internal questions, but to keep the U.S. positioned in the world economy for future success. How to do this? That is the question!

  • Curt  On November 24, 2007 at 12:49 pm

    Indeed, it is a world economy! And if we want future success, we must find ways to produce value that the rest of the world (as well as ourselves) will pay for. To my mind, that means education and creativity and a work ethic. I think too much effort has been spent in recent years in financial endeavors rather than productive ones. Somehow many people seem to have thought that we could all become wealthy simply by selling ever more expensive houses to each other – and now we’re seeing the unwinding of that idea.

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