The stages of the current crisis

The current crisis originated from the subprime problem.

Stages:

1. Subprime problem

Loans approved to those that cannot afford. Rise in housing price created wealth from nowhere. Market fundamentalism. Once it is unsustainable, the problem compounds just as how wealth is compounded.

2. Systemic problem of financial system

Fall of Lehman Bros and Bear Stearns. Bank panic. Lack of information due to moral hazard and adverse selection caused the financial system to fail. No one trust each other.

3. Credit Crunch

Letters of Credit, the essential for trade, becomes crippled as banks' credit rating diminishes.

4. Consumer Crisis

I argued back then that consumers were not affected yet.

This crisis consisted of increasing unemployment and the unsustainable use of credit cards usage. Taking a perspective of a company, if it spends more than it earns, it will be in trouble. Same for consumers because of sky high interest expense of 24%. Bad debts will rise.

This major sign is in the process now with increasing ongoing redundancy. Companies can save cost on salaries and wages but in the long run, if consumers do not have money, how are companies going to earn? When the velocity of money slows, deflation will be in cards.

5. Vicious cycle

The crisis will spiral deeper if government does not intervene. Decrease in aggregate demand decreases capacity needed, more joblessness.

Way

Long term - improve infrastructures and spending on research and development that aids mankind, not on the study on Alaskan Crabs' mating behaviour.

Short term - Follow Bush and encourage everyone to live the American Dream, go to Disney Land and enjoy all you can. It is but a dream, idealistic but not realistic.