The Trillion Dollar Meltdown
From the Financial Times of London
The problem is solvency, not just credit. In other words a hell of a lot of the world is broke. The time right now is called a Minsky Moment, that moment in time where borrowing (leverage) on an asset that starts to decay begins to bite real hard and the lenders want their money back. But.....it's at this point where "schemes" begin to fall apart around the world. When this starts to happen only government(s) intervention will "save the world." This has to happen in order to protect the "good borrowers and lenders" from world wide financial collapse.
This from George Magnus one of the great actual financial gurus, who called the current crises at least a year ago. Remember, credit card debt (nobody knows how much debt that is), car loans, appliances and other big ticket items, and business borrowing will all be caught up in this and the aggregate sums are so large and so widespread that only central banks can move on the situation.
He says that our treasury is doing what has to be done, the Bank of England is starting, but the EU has done nothing, which he says is actually the Bundesbank in drag. He looks for an EU rate cut in April. While the current interest rate cuts are necessary, it doesn't solve the entire problem because it's not just interest rates (credit) that are the problem. Solvency and balance sheets are the problem and the solution must be legislative. Rate cuts cannot solve the housing crises, nor can they do anything to stop asset devaluation.
He also says that a homeowner bailout in the U.S. (a lender bailout) is in the cards and cannot be avoided. The situation is far too serious for this drastic step to be avoided even though it amounts to a taxpayer bailout of banks who loaned money recklessly. And here's the rub. The Dems are a cinch to take over the presidency (maybe) and both Hillary and Obama have indicated that they will address the problem. However if we wait til Congress recesses in October there could be disaster. He recognizes that this intervention involves "changing the rules" and involves much more regulation, but he sees no other solution. LTCM, (Long Term Capital Management) the Mexico peso crises, even 9-11 were big but containable. This is not the same and not containable; it's world wide. This crises is about solvency and not liquidity and the damage is so widespread that no one central bank can possibly contain it alone.
The entire interview is on the Financial Times website HERE. If this link doesn't work, the Big Picture has a link HERE.
My opinion: we have the result of "markets taking care of everything" as a philosophy and a policy. Free Enterprise has one huge drawback: the criminal element that is allowed to run roughshod over the systems. If you look at what has been happening over the last decade it seems that "markets" cannot defend themselves against themselves. Their lending methods had at the bottom a quest for more and more commissions for more and more freeloaders. This entire epoch is over.
For a complete rundown on our situation from multiple sources, go here for at least an hour's heavy reading. Every sector is under pressure. WARNING: snort a line of coke or drop a few pills before going over there because this is a total downer.
5 comments:
people who do not want to pay back their borrowed money will always yell - the system is going to implode if you do not gived me debt forgiveness.
Guess what - the ssytem is more likely to implode if you do not hold people to their promises (moral hazard) than if you do hold them to their promises.
What is a housing chrises? Some people will not get to keep homes that they purchased with zero down on an option (buy if goes up run if goes down) basis. It is all just an excuse for the government to direct more dollars, and directing my dollars is as good as owning them since I can;t direct them
You misunderstand the problem. We have a solvency problem and an asset devaluation problem neither of which can be solved by lowering rates. Let's say you bought a $350K house and four years later you find it's market value is a little over 170K. You ask yourself why pay? The bank won't (can't) renegotiate the mortgage size or the interest rate so many people are just walking away. This could easily spread to auto loans and credit cards.
Never mind the philosophy part, it's the complete collapse of the world solvency. This is a very dangerous time, my friend.
I don't misunderstand, I disagree.
I bought many a stock at 45 ($450,000) only to discover it became worth 4 ($4,000). No end of the world. If everyone who is stitting on unrealized fictional value of their homes has to recognize actual value, including the lenders, well so be it. My money is in Treasurues and FDIC insured CD's plus stock (where I take the risks whatever they are.
YOur chicken little is too little. Let the house specs take a hit they were speculating.
....and yet, even as this stormfront enters its 6th (?) month of foreplay, the markets continue blithely on & up.
you're warning of doom; so are a lot of other financial guys; recently the WSJ ran articles on how supposedly ultra liquid 'auction' bonds can't be sold because there are no bidders, housing/credit/bonds are in the toilet or headed there .... and the market's gone *up* 600 pts in the last 6 weeks.
WTF? is everyone just doing bidniss as usual? hoping that rearranging the deck chairs will keep this titanic afloat?
You pays your money and you take your choice...This is a confusing time but also a lesson: nobody can trade on fundamentals because there are so many of them. Trade technically if you must but there's a hundred shoes on this centipede and many more to drop. Or not.
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