Sunday, February 1, 2009

Weekly Discussion Question

In his column on the economic collapse, David Leonhardt of the New York Times writes:

“Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns…”

What do you think he means?



30 comments:

Henry B. said...

What i think David Leonhardt means is that our bad economy happend gradually overtime and is not something that appeared out of the blue. It will take time, patience, and hard work before all is back to what it was before

CoreyN said...

I feel like Leonhardt said exactly what he meant, "Panics can lead to long, deep economic downturns..." Right now we are in the bubbles stage of this crisis, once those bubbles inevitably burst it is going to cause panic. Once panic hits then its all down hill.

Anonymous said...

I think he means simply that the state of our economy happened gradually.

Emily said...

I think what David Leonhardt was getting at was that ten years ago there was a boom in the morgage/loan market. He says "people decided that real estate...had become a bagain. At the same time, Wall Street was making it easier for buyers to get loans." People were taking out loans that they really couldnt afford. I can see that as being the "bubble" he talks about. At some point those loans become harder to pay off. People move out of their homes, leaving unpayed money to the banks. This is where the "burst" probably happend. Suddenly alot of people are leaving their homes and not paying loans all at once, money to the banks gets lost at a fast rate... panic insues. Now banks don't have money. At least they have a significant ammount less then they had expected. Hence why getting a loan is harder to obtain. If people can't get money from the banks, they can't spend. If we can't spend, businesses suffer. Now we are facing a huge economic downturn. In order to see any type of change, annalysts say we have to see the rate of housing foreclosures plateau, which is not happening right now. Its acutally getting worse. But until the banks stop losing massive ammounts of money, we can't expect anything to get better anytime soon.

Mel T. said...

It's basically analyzing the foolishness of the people who took out mortgage loans and how they played a big role in this whole thing. With mortgage loans, time comes when you have to pay them back and you keep putting it off the bubble gets bigger and bigger. The bubble here being not only the economy but also their own debts. Enough people get into debt, the bubble grows. We're still in the bubble stage but it's getting pretty dang close to the busting.

GoDsGirL said...

OK.

So, it took me a while to post my answer to this week's topic, because I wanted to think about it on a deeper level than exactly what those two sentences say on the surface level.
I had to find a deeper meaning at least for myself to comprehend the statement given.

"Bubbles lead to busts. Busts lead to panics, and panics lead to long economic downturns..."

So what is a "bubble"?
From the many definitions I found for the term, the one which most pertained to the context usage of this word is this:
"A sudden small temporary change or divergence from a trend; an inflated speculation."

What is a "bust"?
From the same idea to search for a definition that fits the context of the term, is this:
"A sudden decline in the economic conditions of a country, marked by an extreme drop in stock market prices, business activity and employment; depression......To ruin financially; to go bankrupt."

And lastly, what is a "panic"?

In this context, "panic" can be defined as "a sudden widespread alarm concerning finances often resulting in a rush to sell property; sudden overpowering terror or fear."

Thus I put it all together.

The ("bubble") sudden change in the economic stability of the US market sparked by the sub-prime loan crisis and the fall-out of AIG and any other financial institutions alike, led to a ("bust") sudden decline in the US economy.
This decline was reflected in the ("panic") sudden fear and widespread alarm of investors who rushed to sell their stocks & property, resulting in devastating drops in the stock market, tightening and losses in the job market, spikes in unemployment and the bankruptcies of many businesses and banks. This summed up is America in grave financial ruin.
Furthermore, it's this decline/recession of the American economy which now has us as a nation walking a long slow, road to financial recovery, that is going to take years to repair.

In essence, that is what I believe the statement above is saying in those two sentences.

I just pray that the long economic downturn is one we will recover from, and sooner than later.
I have faith in the Obama Administration!!!!

Let's keep hope alive!! :o)

-Alexis

Primal Pants said...

I think what David Leonhardt is talking about is the chain reaction that lead up to the current state of our economy. It obviously is the result of a lot of things happening. It's all a trickle-down effect. This problem began small like a "bubble" and just got progressively larger and more serious.

dr said...

I feel like we've gone through the bubble and now it's burst and all we have to look forward to is the economic panic.

Dan Rendine

Unknown said...

Many things act in a cyclic fashion, the economy is no different. To a certain extent, what goes up must come down and as it has proven time and again, will likely go up again. The expression, "the bigger they are the harder they fall" comes to mind in this instance. Since the boom was so great initially the fall seems that much worse and many people are not prepared. Ill-preparedness leads to panic, which will lead to a rash of poor decisions that will only set people back further, thus the deep economic downturn. Over time, as people get back on the right track, things will turn around and fix themselves, which will properly set us up for that bubble to burst again, and so on.

Unknown said...

if there is a bubble blown up, there is only so long before it will pop. this bubble that is being spoken about is the property bubble. the economic crisis that we are in right now, of people losing their jobs therefore losing their houses, would be the bust leading to the panic. the panic is people stopping buying things, and the economy going down the tubes, and its all a vicious cycle.
-Emily Sherman

Sarah P said...

I feel that this statement is pretty straight-forward. I think everyone had a really overly optimistic outlook on how the war was going to turn out. Most of us didn't expect it to last this long, and we also didn't expect to have to pour this much money into it. Once we realized how hard it was going to be to bring our troops home and end all this, the bubble started to burst and the economy started to spiral. Once the economy was rapidly headed in the wrong direction, people started to panic, and things got worse. Often, when we panic, we don't really think clearly (or at all in Bush's case) and make irrational decisions. Like pouring A LOT of money into our failing economy and have it make no difference. And then go on to do it again

Samantha A. said...

I think what David Leonhardt is trying to get across is relayed by a metaphoric chain reaction. In other terms every outcome is due to another. Hopefully with our new president, and the different ideas to restore our economy will succeed tremendously to get us out of this depression.

Anonymous said...

What I think Leonhardt meant by that statement is that all of the events which took place to cause this crisis were the "bubbles". He said in his article that "all these investments, of course, were highly risky." People on Wall Street knew there was a possibility that they would fail, or pop just like a bubble, which they did. If this recession gets any worse, if the unemployment rate continues to fall it could lead to panic. People tend to make irrational decisions in moments of panic, which could lead to long-term damage.

Ryan C said...

I think there are a few messages hidden in David Leonhardt's quote. First I believe he is noting that America as a whole had been in a bubble for a long time. It is clear the government wasn't doing enough to regulate spending as evident by the problems in the insurance industry (i.e. AIG & Merrill Lynch). He is saying America was ingnorant and wasnt concerned until the situation became inevitable. Our bubble burst when government began bailing companies out of debt and wall stree began a free fall.

He's saying now that the bubble has burst, we are beginning to panic. He says this state of panic has reprocussions.


I feel the big message here is not to rush things. Leonhardt sounds as if he thinks that a rush job will only make things worse.

I agree with Leonhardt's view. I feel that rather than developing a quick fix for the economy, law makers need to develope concrete idea's that will hold up in the future. The new package proposed by Obama has some good ideas such as investing in education, however I feel the package needs to be throughly combed through and address the future.


- Ryan Crowley

Vera said...

Bubbles are very fragile. They float and any minimal confrontation causes it to burst or bust. If our economy could be summed up to a very fragile figure like a bubble and that bubble busted, leading to panic, then the citizen's in a panic would try to hourd their money...expecting the worse. It's difficult to bounce back from an economic collapse when no one is making money or spending it. That is my interpretation of David Leonhardt's analogy. -Veronica Pacheco

Anonymous said...

I think he meant that we store things up, ignore it as much as we can and then eventually it just blows up. Since we weren't aware or worried about the problem since we just shoved it aside, we don't know what to do with it which leads to panic because when you don't know what to do with something or yourself, you panic. Then, panics just go on and on because no one ever thinks clearly, which in turn causes the problem to continue.

- Caitlin R.

MikeQisgod-like said...

I believe that Leonhardt was talking about how when you ignore a longstanding problem, or let it go for a long time it forms into a bubble of problems...while the problems are continued to be ignored the bubble bursts, and in this case it had mostly to do with financial problems. So once the bubble burst everyone who was in the water decided to get out while they still had some money left showing the panic that ensued. To me the panic was shown by the investors moving quickly to retrieve some of their money and by the government creating a bailout plan that overall has failed thus far.

Kate Petronelli said...

If a person lives their life in a “bubble,” meaning they are naïve, ignoring the advice and warnings of others, then that bubble will eventually bust. This is exactly what has happened with the banks and mortgage companies and what ultimately lead to the housing crisis our nation is facing today. The banks and mortgage companies were constantly lending money they didn’t necessarily have to people who they knew could not afford them in order to make a “quick buck” (or in many cases millions of bucks)! They were living in a bubble for the last decade and now that bubble has burst, which has in turn lead to panic and a deep economic crisis.

Leanne said...

A bubble whether literally or figuratively at a certain point is bound to bust. Which in this case stands for the loans/mortgages people were taking out that they couldn’t really afford, now the “bubbles” are bursting all over the nation and causing houses to go into foreclosure day after day. When homes go into foreclosure causing banks to be left to pick up the tab money is lost. When money is lost people start to freak out, when people freak out and try to be more frugal with their money the economy takes a hit. It’s all once big vicious cycle we live in.

Katie L said...

This is quite the comment. The way the money in this country was handled poorly for so long. This in essence formed the bubble. When the bubble burst was over a series of months and one may argue years. The information given to America was skewed and questionable. The security that they had was now flipped onto its head. Its like somone ripped the security blanket out of America's crib.

Nikki said...

Throughout the article, Leonhardt talks about the real estate problems in our economy and how they are now giving more loans to those who need them but with higher interest rates. Granted they are getting help with paying off the mortage with these loans it will be just as difficult to pay those back and just as long, thus forming the bubble. By doing that its hard to escape that bubble because it then leads to the panics and stress that people get from not being able to pay these loans back before getting foreclosed on and that can turn into the deep economic downturns with all of our money going into the mortgages and not into businesses fast enough.

Nicole Agnew

Pete W said...

I think that David Leonhardt is making the comparison of our economy to a fragile, pop-able, bubble. Right now our economy is in a fragile state. I don't believe the big bubble has popped yet but probably a few smaller ones have. For instance, the auto industry bail out represents a bubble that has busted. As does the state of the real estate market. And it seems to be true that as a result of these busts people are beginning to panic. When people panic, in terms of the economy, people stop spending which leads to an even less stimulated economy. However our economy hasn't completely failed yet. The big bubble isn't completely busted. And, even though we seem to be in an economic downturn, if things begin to improve under our country's new administration people's panic may begin settle and things might get better; the unemployment rate might decrease, people might start spending a bit more and thus our economy could get re-stimulated. There is hope that our economic bubble might stay in-tact yet.

Zach said...

It looks like he meant that too many problems have happened in the past. Metaphorically speaking that the bubbles being the state our country has been in, it seems now we're approaching the panic stage, people losing jobs and not spending money,etc.

-Zach Hynes

aefflandt said...

“Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns…”

I think simply that investors got themselves into a risky market. The Market was the bubles that could only stay bubles for so long.For example the people who could not pay there mortgages. It was only a matter of time before those bubbles burst and people did not have the money. Investors paniced and wanted their money. The investors pulled out and caused the deep economic downturns. Because banks were not getting paid they cut back on giving loans and the economy has come to a major stop.

Unknown said...

Well first off the bubble he was referring to is the housing/real estate bubble that economist having been foreseeing for sometime now. America has had such a rise in demand for real estate throughout the past decade that eventually supply would outweigh the demand. The mindset for far too long was the real estate will never lose it value, which we have come to find out is very wrong. I believe that the houses and properties never lost their value we just need this downturn to show the true value of these properties.
The reason why the bubble burst was because of greed. Too many people tried to get rich quick when they saw people in similar situations as themselves be able to buy a house and then “flip it” for twice its value or maybe even more in a very short time. The problem that comes from that situation is that you can take a $100,000 buy it, fix it up, and then sell it for $200,000. The next owner buys the home for the same reason, but this person buys it for the $200,000. Goes through the same cycle and now turn around and sells it for $400,000. Eventually that house original house priced at $100,000 is now on the market for $800,000. A person buys it for the same reason however the value of the home has hit a ceiling and there is no one else in the market that would buy a house for $1.6 million. Eventually that last person is stuck with a mortgage that this person never had the intent to have for say 30 years. Chances are this person got a variable interest rate, which makes their payment fluctuant which they won’t be able to pay and will default on the loan.
When a person defaults on a loan, the banks don’t get paid. If the banks don’t get paid then the investors in the bank don’t get paid. If the investors don’t receive any payment they in turn cannot go out and purchase items. With many people slowing down their shopping habits, stores cannot make payroll. With everything in this economy so intertwined like it is, where one card is pulled out of the house of cards, it can truly have the structure collapse. And what happen in this situation many hands started to pull many card of out the house at the same time, which was the panic, and now we see what the downturn has become and foresee that the worst is still yet to come.

BlueAzul said...

So many of my classmates have hit the nail on the head via varied persectives.

But looking beyond the article and thinking outside the box - in this case bubble. One thought that came in mind while reading the comments was the movie "The Boy in the Plastic Bubble". I think Americans in general lived a bubble for a long time. Traveling to Dominican Republic allowed me to experience the difference in lifestyles. I also saw how many things that we become acustomed to as normal is a luxury to those living in a 3rd world country.

We were living this wonderful lifestyle without regards to those who might not be so fortunate. Now that we are getting a taste of something different, panic is arising. But this is only the beginning.

Going back to the bubble. In the article Leonhardt mentions that "the top executives...and majority of American homeowners - decided...home prices nationwide had never fallen before." That is the protective bubble we were in. The untouchable Americans. Let's run with this and get bigger than we already are. Let's bring home values way up, buy suv's...etc etc.

Then the burst. The article states "Many of these bets were not huge, but so highly leveraged that any losses became magnified."A former banker says, "“If anything goes awry, these dominos fall very fast.”

Ahh...followed by panic. People can't make their mortgages, car payments, credit card payments, utilities, etc. What do we do now? Hurry hurry, I need money. But then what? How are we avoiding this in the future. It goes deeper than money, we need a balance of short term and long term solutions. If not..."Bubbles lead to busts. Bust lead to panics. And panics can lead to long, deep economic downturns..."

-Blue

Chris Buonanno said...

My favorite quote dealing with the economy comes from none other than RR... "Recession is when your neighbor loses his job, depression is when you lose yours, and recovery is when Jimmy Carter loses his."

This quote seems much more technical and seeks to define a chain reaction that the American economy has just experienced.

If we look at the literal definitions of these words that he uses, we can see the chain of events.

A bubble is something that is not very solid. Usually, it rises very quickly (espicially when a little kid is blowing them through one of those circular plastic things). Economically, a bubble I guess is something that is not very stable, but rises quickly. People who are fortunate, and get out on time make much money. But no bubble lasts forever, and eventually it busts or bursts.

A bust to me, is something that is not working. "The refrigerator is busted" means that is malfunctioning. My grandfather favored this word as opposed to the more formal "broken." Once the bubble busts, it is no longer. People lost the money that they put into that bubble because the stock devalued rapidly and they lost their investment.

When something happens like this, people lose their cool, and start to sell everything, which triggers the panic. They figure they should cut their losses and get out of everything. They in turn lose their faith in the market, and refrain from investing again, thus making it difficult for the economy to rebound. This is the deep downturn that he speaks of.

He is right. People who just lost their shirt in one way or another, whether its in mutual funds, oil futures, real estate, or even their 401k's, will be very hesitant to re-invest in this market for fear that they will lose again.

Hopefully, a new administration has the answers as an administration did the last time this happened in the late 70's and early 80's.

Unknown said...

When economists refer to a market "bubble" it's a euphemism for "artificially inflated" prices and demand. Whether it's predatory mortgages, or web technology, or tea, or beanie babies, bubbles are irrational and unfounded trends in the perceived value of goods.

In the current collapse, billions of dollars worth of criminal mortgages (which have been chopped and buried in other investment schemes) have turned out to be worthless.

The "panic" is also a symptomatic failure of the market system. When they economy looks bad, the banks lock-down on their funds. Wealth becomes more consolidated and as capital stops circulating, those of us on the receiving end watch as our income decreases and our expenses increase. Demand shrinks for manufactured goods. Business can't rely on income to purchase new materials, or get loans from banks to improve production.

The idea of the first bailout was to reverse this trend by injecting capital into struggling money lending firms like banks and credit services. The banks have taken this money from the government and rather than turn this wealth into productive capital, they are locking it down in the vault until the market fixes itself. And they didn't hesitate to pad their own pockets while they were at it.

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