Guest Post by Charles Pierce: Financial Crisis and ERE

Tuesday, I posted an introduction by Charles Peirce of his book, “Economics for a Round Earth”. Today, I have another guest post by Charles talking about the current economic situation.

In ‘Economics for a Round Earth’ it will seem that the world economy must be put in some kind of strait-jacket. This is opposite to the prevailing ‘wisdom’ of recent decades, that what the world needs is free-wheeling unregulated free markets. The current financial crisis shows what happens when this ‘wisdom’ is applied to a limited world where the pressure of the limits is bearing down ever more strongly.

The drive for ever more consumption in a world of limited resources gave rise to the problems which formed the economic environment in which ‘Economics for a Round Earth’ was originally written – stagflation, high unemployment, high levels of debt. Now it has given rise to the current financial crisis. Vast amounts of money which can now never be repaid, were lent so that people could keep their consumption levels high and rising. The huge scale of this crisis, and the unprecedented financial irresponsibility that helped create it, are a warning sign of how the world’s limits are becoming impossible to ignore as we have continued to ignore them.

In the current presidential election in the United States, it may be irrelevant which party or person wins, since whoever becomes president will be constrained in their policy choices by the nature of the problems to be faced and the limited range of options available in dealing with them. What will be important will be the nature of the person who becomes president. If Governor Palin were to be elected vice-president and subsequently, by way of a sad event, become president, she is young, energetic, confident, articulate and attractive, which might be more important than her perceived political biases and values. Obviously Senator Obama is a person of similar qualities. Either of them would be as good as the other in this situation.

28 responses to “Guest Post by Charles Pierce: Financial Crisis and ERE

  1. I hope Obama can really make some good things happen, one of the benefits to having a democrat in office is, obviously they are BIG government (I personally dont buy into this philosophy) but because they are big government they give more lending options and make more money available for small business owners through the sba.

    Hopefully the credit crunch will ease up and small business can get back to growing.

  2. Seems like the Republicans and Democrats are both big government.

    As for an economic recovery, if we follow the historic trend, we are going to get recovery in spades next year, but not the healthy kind.

  3. The recent condition is really aweful. Today every price is being changing vehemently that all are confused what is going to happen tomorrow. All companies are showing pink sleeps to their employees to save them, if this persist then the crisis will deepen and the world is going to merge more deeply in this financial blackhole.

  4. anyhow, what can we do to thrive our business, regarding any issue stated above

  5. Somehow I do not think Palin would have done well facing these complex problems. I agree with your economic assessment though. As I write about in my blog, debt is addictive. The entire world has been addicted to debt for years now and we have to start to wean ourselves off it after we have regained economic stability and growth again, all americans need to start saving and the federal government needs to work toward paying off debts.

    Good post.

  6. Jonathan,

    Food is addictive too, but I do not recommend dropping the habit entirely. You just need to eat healthily. That is something American’s have trouble with in many different areas including food.

    Debt is a very important part of a market economy, but it should only be used to acquire tools and supplies for production, not for consumption. That is a key difference that most people miss.

  7. At the time of financial crises we need to come together united and try to resove the prroblems which are responsible to such a hazard. We need to overcome it. IT is meant to bring calm to the population and markets and display government strength and stability.

  8. Of course the way that countries take up loans is not healthy, but they had to do it. The way the world is these days, it is really the growing debt that is funding a lot of countries. Now, you would think that a country like the US would manage without the loans and actually be one of those who lend out money. But they are not. This tells us that the US economy is far from where it should be at the moment. And it probably will be for some time, because the kind of debt that the US has isn’t exactly payed down in a day.

    However, the change of president brings new hope. His plans seems to be just the thing needed, not only for the plans itself but also because it brings hope. And with hope comes more business for American corporations..

  9. I work directly in fixed income corporate finance and first of all, the financial markets have not virtually frozen up and there is still plenty of CP and bonds being sold. The main securities being affected are those held by those specifically in the residential sector, primarily mortgage backed securities and other asset backed securities. Ratings for these companies do not at all affect the credibility of other issuers. The impact on fixed income corporate finance has been minimal at best.

    It has mainly been caused by the issuance of subprime mortgages (people with bad credit given terrible mortgages with bad terms) and other adjustable rate mortgages. These loans were made to many different people, not illegal aliens. These mortgages did not have fixed interest rates. When you have an ARM (Adjustable Rate Mortgage) your payment goes up after the teaser rate period ends. Needless to say, many people did not understand their mortgages when they signed up for them and when their payments went up, they were unable to make them which lead to foreclosures.

    The lesson to learn, you need to deal with lenders and financial advisors who have the heart of a teacher and will take the time to help you understand. Also, we need to educate ourselves so that we can make decisions on our own that we can trust.

  10. It’s always a help, to think about what Jesus said: “Look at the birds of the air: they neither sow nor reap nor gather into barns, and yet your heavenly Father feeds them. Are you not of more value than they?” 🙂

  11. I agree with you, a world of “free markets” has benefits the big monopolies and oligopolies,with the aim of sustaining a few countries life standards. If everything is open and free market then there will be less and less differences between quality of life all over the world.

  12. The prevailing situation is a total disaster. Company’s removing there employees and reporting loses. even the big time companies are feeling the heat. which we even never dreamt off. I hope President Obama can recover the country from this situation. By the way nice article Luke. Interesting read. Cheers

  13. Trade Credit,

    This article was written by Charles Peirce. So I will pass the complements on to him.

    As for the “never dreamt of” comment. I started warning people of this back in 1998. It has been a long time coming and no one should be surprised by it.

    Bush and Greenspan did an amazing job of delaying it six years, but ultimately stuff like this has to happen to remind people what risk is really about.

  14. I agree on your comment Luke. This was long time coming. Such a sad story that no one did anything about it even after they were educated. Now we are in huge trouble. Convey my compliments to Charles too. And thanks for posting this.

  15. Thanks, that was a very interesting read. The history behind the facts…

  16. Thank you for elucidating some difficult financial concepts. I enjoyed reading your article

  17. Its shocking how the lenders and banks only considered their bottom line profits. In the UK they were lending to people with a 5 month payment break at the begining of the term and then packaging and selling the the debt on before the borrower had to make any repayments basicly selling before the risk is uncovered. Now look at the trouble we’re in!

  18. That’s a really good article. Good work Charles and thank you for posting it Luke. Considering the current situation, I hope President Obama can pull the country out of this economic problem.

  19. Got to hand it to you. It’s one of the best articles I’ve read regarding the Financial Crisis. It’s kind of a sad situation that such a powerful nation is having a financial issue. But we need to fight and get over it. It can be done.

  20. Nice article. Stumbled across it randomly. Interesting discussion though. The most important aspects in a financial system needs to be worked on to get out of the current financial turmoil we are in now.

  21. Really good article. The current global economy scares me though. I have hope that the economy will return back to normal. But I also have doubts about it. A ‘what if’ thought. Let’s hope for the best and see I guess. Nice work Luke and Charles

  22. ‘The drive for ever more consumption in a world of limited resources’…this is a very valid statement. I fully agree with the author, Charles. Nice post dude.

  23. This tells us that the US economy is far from where it should be at the moment.

  24. good article to read for economic now, thanks

  25. I located your blog on google and really appreciate your posts. I have added you to my Google News Reader. I really look forward to reading more posts from you.

  26. I know Obama is trying very hard to make good things happen, actually within 100 days of being president, he has done a good deal of works. He is very sharp and strong, I like to watch him giving speech or answer questions, I know that he is the one who would be able to help us!

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