Wealth Destruction 2

How bubbles destroy wealth.

Category:

Education

Tags:

• bailout
• paulson
• credit
• crisis
• bernanke
• bubble
• housing

[mmoore7]

Well, i'm sure purchasing all those marked down assets, and getting them off bank balance sheets should get lending (money creation) back on track. It's true though, no matter how they're financed, once money is consumed, the opportunity cost (investment) has been paid. Unless you're running some kind of socialist state where people can't buy luxuries that's always going to happen. I'll take our system over that any day, I love my Playstation and Lakers tickets.

[khanacademy]

Nothing wrong with consumption when you know its consumption (and an argument could be made that it makes you happier which is the best return).

[bryandunn0214]

Hi Sal

Given the governments measures that seem bound to fail, how long do you see declines playing out? And what factors will bring about the bottom to this market. i.e. when will we know know that its safe to buy again?

[khanacademy]

I assume your talking about real estate? If that is the case, you should wait until inventories stabilize (stop growing) for a few months. If you're talking about the stock market, we could see some rallies but stocks tend to over-correct relative to fair value implying that we could see some significant downside over the next 1-3 years (punctuated by sharp rallies).

[cbot141]

The Wealth Destruction topic and the mark to market comments earlier have an embedded inconsistency. If housing loans were based on rent/cash flow model the values supporting loans would have been less frothy.

If MBS values were priced on preforming cash flow model values would be less battered. During highly volatile periods lightly traded, unique assets are more accurately reflective of value when modeled. In WD you note the market mispricing upward, but resist doing so for downside of MBS.

[khanacademy]

I'd also add that there is no shortage of sophisticated investors with 6-10 year time horizons with cash so there is probably good reason for them to be taking a pass on this stuff. Its also hard to know what the underlying assets look like/are worth.

[evilsidd]

did no one notice him going through puberty between 2.20 - 2.30

[Ntone606]

The credit freeze isn't the crux of the issue - it's the solution. The issue was the massive credit bubble originating in 1980.

[OnlyWay93]

Sal, you need to endorse Ron Paul!

[abvmoose87]

So the lesson is don't take home equity loans?

[PunjabiSikhRajput1]

He learned this from Peter Schiff

[tIs4gatorbait]

its not like money spent on consumables is thrown into an incinerator, it goes to those providing the good/service who then in turn spend it on something and so on. in all likelihood it is invested at some point. ive so far failed to see the problem

[tIs4gatorbait]

@evilsidd

I thought I was the only one. The audio is messed up a bit

[mjaeger311]

@MrBipBipp It goes to the service economy. It does not go towards production of anything, rather it goes to a contractor who is probably getting rich in these boom cycles. That's fine, that's capitalism, but Sal is saying that 500k loan would have been better utilized by a new medical startup company that would employ people for example. I'm pretty sure that new countertops do not boost GDP numbers.

[mjaeger311]

Like Peter Schiff says, once China realizes they don't have to make our crap anymore and turn their production inwards towards their own consumption, China will be the new global superpower and frankly won't need the USA for anything.

[mjaeger311]

Awesome assessment and good points re: government. You must be a Ron Paul fan!

[frother]

@gillian2301

yeah we know we just watched the video

this isnt a review box