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Originally Posted by Strange Famous
Ok... so the root of the current crisis is an asset bubble that burst (in housing): but is this more than just the usual violence of the invisible hands of Adam Smith? I can only speak for the UK, but there was a weekend when it was touch and go if 3 of the 4 main banks would be able to open on Monday morning before the govt poured in billions of taxpayers money.
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I don't agree that there was an asset value bubble burst at the root of the current crisis. In the US housing market what we had was speculative building/development in a few areas of the country (granted big areas, but generally limited), if we adjust national data taking out places like South Florida, Nevada, Southern California, Arizona most US real estate value is still relatively high on a historical basis adjusted for inflation. I would also argue that speculative value is illusion and that when speculative value goes away and you are left with real intrinsic or economic value that the change was needed and that rationally looking at intrinsic value we may find there was no real decline. The greater fool theory holds that the greatest (or the last) fool is the one who gets burned and that this is more a commentary on the foolish than the market.
Then there is the issue of liquidity. currently due to over building and limited access to new credit we have about an 11 month inventory of houses on the market. Until this inventory shrinks it is going to be difficult to sell a home anywhere in this country. The banking crisis is in part due to leverage that causes any drop in housing prices to be magnified many times over in the accounting records of banks. With pressure on reserves and to meet reserve requirements some banks ran into a shortage of cash which caused them to either need to sell assets at distressed prices or to stop lending. Reserve requirements are a regulatory issue and has little to do with fundamental economic strength. Regulators could assign a reserve requirement of 10% on banks or they could lower it to 5%, or make it 15%, given the smae bank with the same records, and given those three reserve requirements the bank could face going out of business or being able to aggressively loan new funds to customers. I would argue our current plight is not a failure of capitalism but a failure of centralized banking controls.