Comment by fnazeeri | Hacker News Reader

Comment by fnazeeri | Hacker News Reader

The three points above all refer to the financial system. I'm not entirely sold on this "it's not just the financial system it's systemic" argument.

The way I see it, the overall setup looks like this:

[capital] <--> [financial system] <--> [projects]

So basically the role of the financial system is to (i) allocate capital and (ii) manage risk. I think it is totally clear that the financial system failed with the latter, but where is the evidence that it failed with the former? With the "subprime loans" were the houses that were built shoddy? It's not like as a world or nation we went out and built some giant white elephant that is now useless. By and large the projects funded remain sound. The problem is that the financial system has seized up.

A few folks have suggested that rather than pumping several trillion of new capital to save the existing disfunctional financial system, we should just pick 20 banks out of bankruptcy, capitalize them and basically replace the existing financial system with a new one (and then distribute the shares in these banks to all citizens so it's not a government run thing).

Bottom line, the financial system is broken, but I'm not sure the fundamental underlying "projects" are themselves broken.

Bottom line, the financial system is broken, but I'm not sure the fundamental underlying "projects" are themselves broken.

In your diagram, you need to complete the loop, to more accurately reflect reality:

[capital] <--> [financial system] <--> [projects] <--> [capital]

It is worth remembering how the financial system itself started breaking - it started with all those massively overvalued housing "projects" for which they lent money started going bad, which then spread to other credit classes like autos, commercial real estate and so on.

Ultimately, the financial system is choking on debt that became uncollectable, because the underlying projects that the debt financed proved economically unviable. In micro terms, household income could not service the debt on the house. None of the bailout schemes so far address that income issue. If they started mailing out checks to homeowners to help them pay their mortgages, they can stop house prices from falling, but at the cost of hyper-inflation. In chess terms, we are at an economic checkmate scenario - all options are bad. The least bad option may not be politically viable, so we have to consider really bad scenarios too. At this point it is unpredictable which of the bad choices will be made.

Here is a nightmare scenario: start to really worry if trade sanctions on China or outsourcing ban on India become a possibility. Such beggar-they-neighbor policies begot the Great Depression. We are not there yet, but how confident are you it won't happen once the US Congress gets "serious"?

I think:

[capital] <--> [financial system] <--> [projects]

better reflects reality in that inflows/outflows of capital to/from projects are funneled through the financial system. For example, investors (capital) are trying to take get capital out of hedge funds (who are in-turn invested in companies) and they can't b/c the financial system is "constipated."

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