3 ms·

Yes, in the industries where the bad investments where made (finance). But that alone cannot explain the withdrawing of investment from other industries.

kingkongrevenge 18y ago
You don't comprehend the macroeconomic scene if you think we're dealing with a "financial crisis." Dozens of sectors are at over capacity. Debt growth has hit its ceiling and households, governments, and businesses all over the country need to repair balance sheets. This is not about banks or financial firms.
potatolicious 18y ago
No sectors exist in a vacuum. Take this very simplistic example: The original source of our financial crisis is the collapse of subprime mortgages. People are getting kicked out of their homes, which has several effects: - There are now a lot of houses on the market, driving prices down and reducing demand for more construction. Construction companies suffer, as do all of their labour and material suppliers (lumber companies, contract labour companies, etc) - Banks have reacted to the defaults by attempting to protect themselves from further risk, meaning that it's harder than ever to get a mortgage. The effect is a similar drop in housing demand, with similar results as above. - As the true scope of the problem unfolded, people began bailing on bank investments, driving prices down, and eliminating wealth that normal people have stored up in the form of mutual funds and such. This loss of wealth amongst "average people" has driven down consumer demand, and thus basically every other industry out there. - As investors realized that consumer spending will be down, they withdraw their investments in these companies, resulting in further depression of the stock. This in turn causes more loss of wealth for people holding these investments, and causes a vicious cycle. Nothing exists in a vacuum.
- cchooper 18y ago
  You have proved my point: that misinvestment alone is not the explanation. You also have to look for secondary effects from the financial collapse.
  - tptacek 18y ago
    No, you're ignoring the fact that every time a desk company tools up a new factory, they are investing, and when those investments track a faulty projection on the demand for desks from financial services companies, they too have malinvested.
- bwd 18y ago
  There's a much simpler explanation: the collapse of subprime mortgages forced people to confront the fact that there is way too much leverage in the economy. Too many people and companies owe money that they won't be able to pay back. The level of production of goods and services was based on the level of consumer and business spending, which everyone now realizes was being fueled by excessive debt. The level of production must now fall to a level that is consistent with businesses and consumers using much less debt going forward, and it will certainly overshoot on the downside because of panic and lack of information. The question that I see being repeated in the media these days is "what are the banks doing with the bailout money, why aren't they lending it?" Perhaps the answer is that there is currently nobody out there who is a good enough credit risk to lend money to. Another possible answer is that the banks now realize that they've lost the ability to quantify credit risk correctly and they are going to need to relearn that skill.

kingkongrevenge 18y ago

You don't comprehend the macroeconomic scene if you think we're dealing with a "financial crisis." Dozens of sectors are at over capacity. Debt growth has hit its ceiling and households, governments, and businesses all over the country need to repair balance sheets. This is not about banks or financial firms.

potatolicious 18y ago

No sectors exist in a vacuum. Take this very simplistic example: The original source of our financial crisis is the collapse of subprime mortgages. People are getting kicked out of their homes, which has several effects: - There are now a lot of houses on the market, driving prices down and reducing demand for more construction. Construction companies suffer, as do all of their labour and material suppliers (lumber companies, contract labour companies, etc) - Banks have reacted to the defaults by attempting to protect themselves from further risk, meaning that it's harder than ever to get a mortgage. The effect is a similar drop in housing demand, with similar results as above. - As the true scope of the problem unfolded, people began bailing on bank investments, driving prices down, and eliminating wealth that normal people have stored up in the form of mutual funds and such. This loss of wealth amongst "average people" has driven down consumer demand, and thus basically every other industry out there. - As investors realized that consumer spending will be down, they withdraw their investments in these companies, resulting in further depression of the stock. This in turn causes more loss of wealth for people holding these investments, and causes a vicious cycle. Nothing exists in a vacuum.

cchooper 18y ago
You have proved my point: that misinvestment alone is not the explanation. You also have to look for secondary effects from the financial collapse.
- tptacek 18y ago
  No, you're ignoring the fact that every time a desk company tools up a new factory, they are investing, and when those investments track a faulty projection on the demand for desks from financial services companies, they too have malinvested.
bwd 18y ago
There's a much simpler explanation: the collapse of subprime mortgages forced people to confront the fact that there is way too much leverage in the economy. Too many people and companies owe money that they won't be able to pay back. The level of production of goods and services was based on the level of consumer and business spending, which everyone now realizes was being fueled by excessive debt. The level of production must now fall to a level that is consistent with businesses and consumers using much less debt going forward, and it will certainly overshoot on the downside because of panic and lack of information. The question that I see being repeated in the media these days is "what are the banks doing with the bailout money, why aren't they lending it?" Perhaps the answer is that there is currently nobody out there who is a good enough credit risk to lend money to. Another possible answer is that the banks now realize that they've lost the ability to quantify credit risk correctly and they are going to need to relearn that skill.