Worst crisis since Great Depression?
Posted
Sep 18 2008, 01:11 PM
by
Kim Peterson
Rating:
"This has been the worst financial crisis since the Great Depression. There is no question about it," said New York University economist Mark Gertler in the WSJ. Sound a little harsh? Try reading the rest of the Journal article, and tell me you don't want to withdraw all your money and raise cows in Switzerland.
The U.S. financial system is like a patient in intensive care, the Journal states. "The body is trying to fight off a disease that is spreading, and as it does so, the body convulses, settles for a time and then convulses again."
The disease? The unwinding of the massive debt that banks and regular Americans have taken on in recent years. Household borrowing grew at an 11% average annual rate between 2002 and 2006, the Journal says, outpacing overall economic growth. Banks were just as bad. And now, well, the piper is being paid.
The article has a good explainer on credit-default swaps, a game that helped bring AIG down. Basically, the swaps are a way for firms to place bets on whether a borrower is going to default. Sounds like a sick little game, wagering on whether a company can honor its obligations. But it's a way firms get some insurance on their risk exposure. AIG sold lots of these swaps, and buyers thought the insurance giant would help protect them against defaults.
Yet some aspects of the economy seem surprisingly resilient to the financial system's woes. Unemployment isn't as bad as it was in the early 1990s, and companies are still pouring money into marketing and research, the Journal says. Exports are still strong and the government has moved swiftly to address disasters in the making.
There's much more to digest in the Journal piece. Click here to see the rest of it.
(Photo credit: Creative Commons license.)
