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Wednesday, December 12, 2007

Unexpected Metaphor of the Day

posted by on December 12 at 17:15 PM

Regarding the international banking crisis precipitated by the US mortgage crisis:

In an unprecedented move, which the City [of London] said revealed how serious the problems in financial markets had become, central banks offered huge sums of money to commercial banks in an attempt to get them to start lending to each other again.
“The [central banks] have gone out and constructed a great big turbo-charged plunger to flush out the clogged credit markets,” said Stephen Stanley, analyst at Royal Bank of Scotland Greenwich Capital.

(Footnote: The Bank of England is in the City of London, on Threadneedle Street, on top of a Roman temple. It is known as The Old Lady of Threadneedle Street or The Old Lady.)

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Credit is the ultimate double edge sword. On one hand it makes it possible for people to start businesses, invest in new ideas, by houses, etc. One the other hand it makes it possible for people to buy big screen TVs, Cadillacs, and fancy wine.

the trick is to balance interest and availability such that good investment is encouraged while bad investment is minimized. Unfortunately thatís not what we have done.

For the past while consumers in the US have been spending more than they earn racking up massive debt in the process. This has resulted in an over leverage market that is not sustainable in the long run.

Perhaps most unfortunately, industry had grown in response to this increased activity. If we were to cut back to more reasonable levels of purchase that would result in a reduction in demand and a therefore a shrinkage of required labor and outlays. The problem with that is that it would result in layoffs and the termination of small business creating unemployment. The people unemployed would then be unable to make the payments on their debts further exacerbating the financial problems.

Hence a recession only made worse by its delay.

Posted by giffy | December 12, 2007 5:59 PM

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