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Thread: Financial and Economic Crisis

  1. #196
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    Quote Originally Posted by BrooklynRider View Post
    Are you saying that no one is to blame? The no executives who were steering the companies that drove this mess should be exposed and dealt with harshly?

    I actually think that the general population is dealing with this rather calmly. Even if we do characterize it as panic, dismissing it as an overaction seem to indicate poor observation abilities.
    Quite the contrary, BR. What has happened in the past month or so is a quintessential panic. It started in the US, and spread quickly to involve every country in the world that conducts international trade on some level.

    I think it's poor observation to dismiss it as something not quite so serious. I don't think you have any idea how close we came to having global commerce literally ground to a halt. It would have altered every sphere of life.

    This isn't an issue of the "markets" as our propagandized news portrays it. This loss of points on the stock market equals money invested and missing. The loss of value on home is money invested and missing. Even the repeated false claims of insolvency in Social Security is money invested and now missing.

    Where has the money gone? We're talking about $120billion to cover AIG, which insured - and is still liable for - assets with value.
    Or, look at it the other way: not where the "money" disappeared, but where it all came from in the first place. The answer is that large sums of it came from nowhere. In other words, a "bubble".

    We are dealing with a pandemic of criminal fraud in the same vein as Enron. The country and much of the western world is now in the same shoes as those Enron employees left high and dry. The more one follows this the more complicity we discover between government, big business, and political parties.
    That's an extremely questionable analogy, IMO. You can't blame something this big on a a bunch of executives being greedy (like they always are). This crisis is evidence that the existing construct of the global financial system was infinitely more fragile than most people (or those in charge, anyhow) expected. There's going to a be a broad-based reform and realignment of global finance once this settles down.

    As others have pointed out: In China, those responsible would be executed; In 18th Century France, the guillotine was used to cleanse the nation. It's not hard to see who was responsible for this.
    If we were to follow through on that, millions would have to be executed.

  2. #197

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    Quote Originally Posted by pianoman11686 View Post
    I think it's poor observation to dismiss it as something not quite so serious. I don't think you have any idea how close we came to having global commerce literally ground to a halt. It would have altered every sphere of life.
    I completely agree with the entire post. I think people tend to underestimate the impact of the credit-market on the Economy, because there isn't the same tangible symbolism as the equity market - the DJIA, or the relationship between what is happening to a corporation and its stock price.

    Simply put - the world economy can't function without free-flowing credit.

    A note on the example of Enron: What transpired at Enron was maneuvering by company executives to inflate the corporation's stock price, while masking its internal financial problems, It was a crime against its employees and shareholders.

    Compared to what's now unfolded, it's a drop in the bucket. Sure, we'd like to toss that arrogant Fuld, who quibbled that his own parachute was somewhat less than $400 million, in jail; but it's not like we can swoop up a few dozen people and say it's all their fault.

    It's a bitter pill we're all going to have to swallow. And no one wants to talk about credit card debt - ridiculously high credit limits, people carrying tens of thousands of debt, the card companies happy to charge 18% on the balance.

    Since 2003, American credit card debt has increased by $200 billion to almost $1 trillion.

    Credit Cards at a Tipping Point

  3. #198

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    The credit markets may very well still grind slowly to an excrutiating halt.

    Michael S. Rozeff has been succinctly pointing out the problem with the conventional view of credit as a function of liquidity which may be manifested by cash injections. Here is a particularly pithy remark:

    Liquidity is an effect, not a cause. Illiquidity is the effect of people who have money not wanting to lend that money. When they refuse to lend, then the credit markets lack liquidity.

    People have plenty of money to transact. The money supply has not dropped at all in this whole episode. Wealth has dropped. Valuations have dropped. There is not less money. For every seller, there has been a buyer. Money changed hands. It did not disappear. The trades were at lower prices. Wealth disappeared. Assets were marked down in price.

    ...Stock markets of course are still trading high volumes and are liquid. It's the debt markets that have become illiquid, and it's not for lack of money. The money in t-bills and in money market funds is very large.

    ...They have money, and so they don't need the Fed to add more money. They are not lending that money, and the Fed should not attempt to take their place and become a lender of first, last, or any resort.

    The problem is CREDIT. It's a simple fact... that a lender will only lend to a borrower after assessing the credit-worthiness of the borrower. That is done, in part, by learning what the borrower's assets and liabilities are. One of the biggest problems now is that the lenders cannot ascertain the actual values of the borrower's assets and liabilities. The financial firms are carrying junk assets with unknown values. They are carrying liabilities in the form of insurance guarantees like credit default swaps that have unknown amounts and values. Nobody will lend to a borrower whom they are so unsure of. The market needs transparency. Bailouts make matters worse because they hold up the weak banks rather than letting them fail. The potential lenders have a harder time telling the good from the bad. Furthermore, banks are connected in many ways in loan markets. Keeping the bad ones alive and running only weakens the stronger ones that they are connected to. Lenders are then more afraid to lend to any of them, good or bad.

    It is the job of the markets and investors to sort the bad from the good and the beautiful. It is the job of the markets to shift the capital that is there away from the incompetents to the competents. This is why bankruptcies should have been allowed to happen from the start. This is why the market dropped sharply on the bailout bill. I learned yesterday that when the bailout bill was first broached, the volatility index (VIX) immediately rose, and it rose again when the bill was passed. The market took it as a signal that the downside risk had just increased.

    Officialdom has continually been making matters worse for months.
    (Rozeff revises his criticism of Rogers here). He closes:
    The Fed and Treasury are basing hugely important and expensive policies on a misunderstanding and socialization of money and credit.
    The same dynamic takes place when mark-to-market rules are abandoned and firms are able to make up whatever valuations they believe will make them creditworthy. The lack of truth and transparency will have the opposite effect.

  4. #199
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    Those are some excellent points, Zippy.

    Your observation on the credit market is especially right on. It's been deteriorating ever since last summer, but at a substantially accelerated pace since post-Lehman bankruptcy. The reason we hadn't seen a stock market crash until last week was because most people hadn't priced in the impacts of a dramatic reduction in credit.

    The numbers are staggering, and to understand their implications, you have to think about how banking works:

    If Bank A has to write down $20bn in its assets, it must reduce the amount of credit it provides companies/individuals/governments by approximately 10 times that amount. That's how fractional reserve banking works. Now, banks worldwide have written down somewhere around $.5tr - that means, at the least, there is pressure to reduce lending by an aggregate 5 trillion dollars. (That's staggering. Think about it in terms of global GDP, which is about $50tr. Taken to the extreme, that means global GDP could decline by ~10% - a full-blown global depression, in other words.) Of course, it's all doubly complicated by the fact that even if Bank B didn't have to write down nearly as much, it may be a major trading partner with Bank A, which suddenly looks unhealthy. This cuts off interbank lending, which has the incredible effect of making short-term rates of borrowing undeterminable. That means even healthy banks will restrict their credit, so the above scenario of depression gets even worse.

    Given that the entire economy functions on a combination of short-term and long-term lending (with short-term amounts far exceeding long-term in scale and importance), you can then justify why investors started selling off nearly everything they believed would lose value based on a rapidly slowing economy. That's why stocks were off some 20% last week alone. Investors finally realized the gravity of the situation.

  5. #200
    Forum Veteran TREPYE's Avatar
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    Quote Originally Posted by ZippyTheChimp View Post
    Compared to what's now unfolded, it's a drop in the bucket. Sure, we'd like to toss that arrogant Fuld, who quibbled that his own parachute was somewhat less than $400 million, in jail; but it's not like we can swoop up a few dozen people and say it's all their fault.
    Fuld is a personification of abuse of the redistribution of monies that preceeded this crisis.

    The question that I keep having that nobody brings up (or have noticed) is did these high level excutives have to give themselves the type of exorbitant compensations that they gave themselves??? Couldn't those billion and billions of dollars used in compensation/bonuses distrubuted throughout the years have gone to say...a cash reserve fund in that would safeguard the probability that alot of people where going to default on their mortgage payments and thus provide the liquid capita needed during a worse case scenario. This way the company would not be ina muribound state and the federal goverment would have to defribillate its credit arrest with a shock of cash to save it.

    Thinking about it this way makes me think the govent cash inflow to these financial institutions was a way to fill in the void left by the distribution off disproportionate bonuses thoughtout the past few years.

    In that case, cant some prosecutor or class action lawsuit lawer go up to these executives that created these voids and charge them with the misappropiations of funds that led to their companies demise and sue them to recouperate in some part this money??
    Last edited by TREPYE; October 13th, 2008 at 12:48 PM.

  6. #201

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    Pianoman, that is a great argument against fractional reserve banking.

    It's no wonder the economy suffers from bubbles when price distortions in a single asset class can have such a multiplied cascading effect.

    Needless to say, this is a concept little understood by the public.

  7. #202
    Disgruntled Optimist lofter1's Avatar
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    George Soros, in an interview he gave over the weekend, made an observation (he has probably made it before): What led to the current situation is Market Fundamentalism, whereby the True Believers who run our economic institutions operate as if The Free Market Is Always Right and Self-Correcting.

    Anyone with eyes and a brain now knows that Market Fundmentalism (aka Reaganomics / Thatcherism) is based on a False Premise: That ultimately an Unfettered Market is Good and Fair and Helpful To ALL.

    BS. The unregulated Market does NOT self-correct, but rather it sucks money and then eventually crumbles when left to its own greedy games. How come none of these big Money Boys want to finish playing under those rules, but instead now want the rulebook to be re-written?

    Because they are FALSE and HOLLOW.

    It's been posted here (a few posts back) that the Implosion of the Market has been coming for months, yet the True Believers kept telling the investors (ie: The Public) that everything was OK. Even as the collapse of the Market was taking place we were told that the Fundamentals of the Economy are Strong + Sound.

    Of course those Believers will say they told the public this "false truth" in order to avoid a Panic (more likely they were trying to calm themselves; as BR pointed out, the Public has really remained quite calm -- although very concerned & disturbed -- while it's the Pros + Pols + CEOs who are going a bit crazy and doing foolish things).

    Surprise: They LIED. The full-blown Panic came anyway once the Reality became inescapable: The Bubble was bursting (or as GWB put it: "The house of cards" was about to collapse).

    Now we have the inevitable Credit Crunch. Why inevitable? Go ask the pros, who now say the Crunch was, of course, the only way this could have played out, seeing as how it was based on NOTHING.

    So let's put the blame where it lies: On these Experts & BS Artists who created this mess and now have No Trust in each and will not back up each other's loans & deals & games.

    Could this be because the Experts & Bosses now see in each other the very Crooks + Thieves that they see when looking in the mirror?

    And how ironic is it that the followers of the True Believers are currently crying & fretting over the possibility that Barack Obama will usher America into a new & evil era of Socialism? It is actually the Neo-Cons & True Believers who are nationalizing the financial systems. It's they who are establishing government involvement to a much further degree than any Left-thinking American, even in their wildest expectations, could ever have dreamed possible.

    Oh, well ... So much for principles and glories of Small Government. The Emperor is as Naked as a Jay Bird.

    The whole gang: Liars & Cockroaches.

    The cherry on top of this pile will be the moment when our one true leader pats Henry Paulson on the back and says "Good job, Paullie."

    Pogo was definitely right.

  8. #203
    Chief Antagonist Ninjahedge's Avatar
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    I thought it was a marshmellow......

  9. #204

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    The Dow Jones just posted its biggest one-day point gain ever, nearly 1,000 points.

  10. #205
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    Quote Originally Posted by Jasonik View Post
    The credit markets may very well still grind slowly to an excrutiating halt.
    I acknowledge the risk is still very real there. I think that the developments over the past couple of days among the G-7 leaders have finally at the least made it clear to everyone that they will no longer rule out any measure - no matter how radical it seems - to preserve the financial system. They've glimpsed the dark side, and they don't want to see any more of it.

    In a somewhat ironic sense, all this new unity between the US, Europe, and Japan on what - until a few weeks ago - was derided as a uniquely American problem, suddenly puts the US in a relatively good position. Here's why (and no one's really talking about it much):

    Since financial services have expanded into such incredible scale, and since they now pretty much have a safety blanket provided by their respective home country governments, it'll be quite a thing to witness if investors in government debt begin to have a "run" on a certain country's bonds. This will start with the countries with the highest debt-to-GDP ratios (Italy comes to mind as I believe it's over 100%). Ratings agencies have already put several sovereign ratings "on watch." What it could mean is one country having to step in and help another avoid bankruptcy (think Russia helping Iceland), except on a much larger scale in the case of one of the G-7. Britain's also at risk because of its oversized financial sector. The US gov't, on the other hand, has a relatively good debt-to-GDP ratio of around 70% I believe.

    The same dynamic takes place when mark-to-market rules are abandoned and firms are able to make up whatever valuations they believe will make them creditworthy. The lack of truth and transparency will have the opposite effect.
    Jury's still out on MTM, I think. It's definitely exacerbated the problem, and the solution, IMO, lies in arriving at some sort of balance. It obviously makes no sense to keep something on your books at a value that you "expect" after a best-case recovery scenario 5 years down the road. It also makes no sense to keep marking assets downward, if you're a healthy bank, just because other unhealthy banks are so pressed for cash that they dispose of their assets at fire-sale prices - giving the illusion of a market price that is almost certainly too low.

    Quote Originally Posted by Jasonik View Post
    Pianoman, that is a great argument against fractional reserve banking.

    It's no wonder the economy suffers from bubbles when price distortions in a single asset class can have such a multiplied cascading effect.

    Needless to say, this is a concept little understood by the public.
    It's funny you say that, Jasonik, because I think we're in at least a broad kind of agreement on this.

    I look at it as a necessary evil that bubbles do occur, they do bust, and in today's day and age, they have the ability to spread farther and quicker than ever before. The solution probably lies in upping required reserve ratios, although I have no idea how high is high enough.

    It'd be wise for someone to develop a new model that can better predict bubbles and thereby give central banks advance warning of an impending bust, because the beauty of a central bank is that it certainly can slow down the economy through monetary policy. It can therefore also slow the expansion of asset or debt bubbles.

    Of course, you and I both know that this can be done "in theory;" whether people get it right in the end is no guarantee. Therein lies the problem.
    Last edited by pianoman11686; October 13th, 2008 at 04:26 PM.

  11. #206

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    October 14, 2008

    Goldman Sachs Seeks New York Bank Charter

    By LOUISE STORY

    Goldman Sachs Bank USA is coming to New York.

    The financial company long known for investment banking has applied for a New York State bank charter, Gov. David A. Paterson announced on Monday.

    The announcement does not mean a move for Goldman Sachs, which has been based in New York City since it was founded in 1869. But it does provide glimpses of Goldman’s roadmap as it repaints itself into a commercial bank, as it decided to do when its stock came under siege in September.

    Goldman’s state charter, if approved, would set it apart from its direct competitors — Morgan Stanley, Citigroup, JPMorgan Chase and Bank of America. Those banks operate under a national banking charter, allowing them to open branches across states without separate applications. Goldman’s decision could indicate that the firm is not interested in national consumer-focused business — which will differentiate it from its peers. Goldman is expected to focus on managing assets for high-net-worth individuals rather than providing retail banking services.

    The bank would have $150 billion in assets, making it one of the largest regulated by the state, along with the Bank of New York Mellon and M & T Bank. The state’s banking department is reviewing Goldman’s application and business plan and did not release such details as whether Goldman would offer savings and checking accounts.

    Richard H. Neiman, the state’s superintendent of banks, said Goldman’s decision throws support behind the state banking system, which has fallen into question in the last decade as large banks applied for national charters.

    “There’s been some concern as to whether the dual-banking system is alive and well,” Mr. Neiman said.


    Copyright 2008 The New York Times Company

  12. #207

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    The Real Great Depression

    The depression of 1929 is the wrong model for the current economic crisis


    By SCOTT REYNOLDS NELSON
    The Chronicle of Higher Education
    From the issue dated October 17, 2008

    As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.

    When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.

    In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.

    The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.

    But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.

    As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.

    The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.

    As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, "economic organization crumbled with some primeval upheaval." Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms "tramp" and "bum," both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York's Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania's coal fields in 1875, when masked workmen exchanged gunfire with the "Coal and Iron Police," a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.

    In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.

    The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustablerate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.

    If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)

    The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.

    In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read.

    Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin' Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).

    Link

  13. #208

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    Market Summary Dow8,577.91-733.08(-7.87%)Nasdaq1,628.33-150.68(-8.47%)S&P 500907.84-90.17(-9.03%)
    Yes it can get worse.....the last two days wipe out Monday's gain's

  14. #209
    Chief Antagonist Ninjahedge's Avatar
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    Some humor:

    http://www.guardian.co.uk/business/2...king-useconomy

    And, quite honestly, I think I would have done the same in his position!!!!

  15. #210

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    Updated On 10/21/08 at 05:34PM

    New York market slated to be among first to bounce back, report says

    The economic downturn will drag down the real estate market, but New York City, along with other 24-hour coastal cities like Seattle, L.A., Boston, San Francisco, and D.C., will be among the first to recover, beginning in 2010, according to the Emerging Trends in Real Estate 2009 report released today by PricewaterhouseCoopers and the Urban Land Institute. The report predicts that among most property types throughout the country, vacancies will rise and rents decrease in 2009, and lending problems will spread from the residential to the commercial markets. Of the various property types, the report predicts that only the apartment rental market will remain strong, as people who are unable to purchase homes will continue to rent, and industrial, business, hotel and retail markets will take a beating. TRD

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