The Current American Financial Meltdown

1 - I can do better 2 - Jury's out 3 - Pretty darn good 4 - Splendiferous 5 - Awesometastic by 0 people | Log in to rate

Ranked #2,721 in News, #226,537 overall

Welcome to The Current American Financial Meltdown

I've been watching the current Economic Meltdown move glacially for about 2 years now. As it has been crawling forward it, it's been picking up speed, and growing in size. This Lens tracks my thoughts on this issue over the past year, as blogged on

(If you're hungry, take a look at my other Squidoo Lens)

How Did the Current Financial Crisis Begin? 

The crisis began with economic policy.

1. The US and Japanese central banks kept interest rates artificially low, encouraging speculation. In the US, the interest rates were pushed as low as 1%.

2. Cheap interest made new mortgages more attractive than old mortgages. This was the start of the housing boom, as people moved to new houses, to take advantage of the incredibly low interest rates.

3. To keep the housing market moving,the bar for new home ownership had to be lowered. This allowed folks who were not traditional home-owners to buy homes, albeit with sub-prime (more interest than the "best borrowers could get) interest rates.

4. Finance Wizards on Wall Street figured out a way to recycle these "sub-prime" mortgages, by slapping a layer of insurance around them, and convincing Investment ratings services to give them AAA ratings. The insurers gravely underestimated the default rate for these sub-prime loans.

5. These repackaged sub-prime mortgages were became available on the financial markets, as Collateralized-Debt Obligations, which are bundles of repackaged loans.

6. The Federal reserve began raising the short term interest rates, significantly slowing the housing bubble. The resulting excess inventory in the housing market caused a 15 to 30 percent drop in the value of homes. When the housing bubble burst, homeowners holding adjustable rate sub-prime mortgages faced doubling mortgage payments, defaulted on their mortgages.

7. As the default rate rose, the rating agencies dropped the ratings on formerly AAA rated CDOs down to the junk range. The current holders of the CDOs found themselves holding investments poisoned by defaulted sub-prime loans, and were unable to find buyers to take them off their hands.

8. The debt market felt a sudden tightening of credit, and then, to appease accounting standards, banks and investment houses began to "mark to market" the value of their assets. For CDOs with no market, all that could be done was to make a smart guess. In 2007, the trickle of financial institutions marking down CDOs, turned into a veritable tsunami, with guesstimated values falling nearly every day.

9. As the "investment" portfolios deteriorated, financial houses found themselves under capitalized. Writing off the bad debt decreased the assets they owned, with which to capitalize the company.

10. Investors began to smell the fear in the air, and began selling stock in the financial institutions left holding the CDO bag. Banks started mistrusting each other, reducing the amount and frequency of inter-bank overnight loans.

11. Freefall begins with the failure of IndyMac, a leader in subprime lending, followed shortly there after by Countrywide selling itself to Bank of America, to avoid insolvency. Bear Stearns failed, and the FDIC performs a shotgun wedding of JPMorgan Chase and Bear Stearns.

12. As the plummet continues, Fannie Mae and Freddie Mac are taken over by the government, and placed into a conservatorship, leaving the taxpayer as explicit guarantor of the mortgages these two owned, or insured.

13. As mentioned in 8 above, the lending markets tightened down, and by September, interbank lending had dried up almost completely. Despite large influxes of cash from Central Banks around the world, most of it was kept on hand by banks waiting to see if they would need it to rescue themselves, rather using it to get the economy moving forward again.

14. Washington's attempts to calm the water did nothing to instill confidence in the financial market. Lowered interest, tons of money flooding into the markets, and the rescue of Freddie Mac and Fannie Mae, all were frantic moves trying to instill confidence.

This is the progression from an overheated economy, to an economy that's faltering, trying desperately to avoid a heart attack.

WaMu Banker's Pen Stampede Causes Collapse, JP Morgan to Buy the Remains 

reprinted with permission from All That's Evil

Shareholders and bondholders are likely to be wiped out.

The FDIC seized and simultaneously brokered a sale of virtually all of Washington Mutual to JPMorgan Chase & Co. for $1.9 billion.

FDIC Chairman Sheila Bair on a conference call said WaMu "was under severe liquidity pressure". WaMu stock had fallen to $1.69 at the close Thursday, after a 52 week high of $36.47. Standard & Poor's downgraded the bank's rating Wednesday, which was seen as a sign of imminent collapse.

WaMu was the largest savings and loan in the United States with $307 billion in assets. The customers of the Seattle based bank are unlikely to be affected, as the account holders are guaranteed by the FDIC up to $100,000. JPMorgan is absorbing at least $31 billion in losses on troubled mortgages and credit loans.

JPMorgan Chase acquired Bear Stearns last March in another shotgun wedding arranged by the FDIC. They will be taking charge of all of WaMu's deposits and branches, creating a banking giant second only to Bank of America. They plan to shutter 10% of the 5,400 branches in 23 states, and will raise $8 billion in a common stock issue, to pay for the deal. JPMorgan announced in a statement that they will not be acquiring any of the senior unsecured debt, subordinated debt, preferred stock of the WaMu banks, or any assets or liabilities of the Washington Mutual Inc. holding company.

No mention was made of the WaMu banker's pen.

This is the largest bank failure in history, far larger than the 1984 collapse of Continental Illinois Bank and Trust, which was the opening salvo in the S&L crisis in the mid '80s.

How Serious Is This Financial Crisis? 

reprinted with permission from All That's Evil

I had someone ask me how serious I thought the current fiscal crisis is, yesterday. I said, "it depends. How big is your garden? How full is your freezer? Did you pick up that backup generator?" And his answer was "Why? Do those things matter?"

Here's the thing. The last time the economy was in this kind of shape, around 70 years ago, we were a mostly rural population, with small family farms. That meant that when there were no jobs, you still had your crops, and your livestock. You may or may not have had electricity, but you probably had a fireplace, and a acre or two of firewood growing. Your farm equipment mostly could be pulled by a horse, or a mule. If you were in the city, you were likely in a manufacturing job. If you had money, odds were fair that at least some of it was tucked under a mattress. If you heard about the problems soon enough, you could get at your money, in the bank%u2026

Today, the population is urban and suburban, with very few people having as much as a garden, much less livestock. Your money is so many binary digits, in the memories of the computers at your bank, mortage holder, credit card companies, etc.

If the economy tanks, like it did in the Great Depression, if you don't have a garden, you may not eat. If you don't have a generator, you may not keep that freezer running long enough to eat the food in it. If you don't work in manufacturing, you may not have a job.

When everyone is scrabbling to feed their families, with no grocery stores open, no gas stations open, and no electric or Internet, what are YOU going to do?

What are you going to do, when the have-nots who have guns, come and take what you have, because you don't have a gun?

What's that? You don't think it could get that bad? Well, Mike Cane thinks so, and the case he makes is very persuasive. This is why we need some bailout package, and re-regulation of the financial markets.

Because without a bailout, the economy doesn't just faint, it dies in its tracks! When the machines that hold the electrons that represent your money have no electricity, you have no money. And if no-one has any money, its going to be a barter economy, for those who have things to trade, or skills to trade. Of course, with no Internet, those elite web mastering skills may not count for much.

Mike Cane makes 16 points that should frighten you, and help you to see why some bail-out package is essential, even if the current bail out package isn't an acceptable solution.

In 1929, They Were At Least Good Enough to Jump off Ledges 

reprinted with permission from All That's Evil

Not ask for another hand-out.

The more things change, the more they stay the same. Take away economic regulation, and let "conservative" financial players run things, and you wind up with over-extended, over-leveraged economies, just waiting to collapse. Add in the Fed keeping interest rates low to fuel the housing bubble, just to convince everyone that they too can become rich in the superheated housing market.

The only problem with superheated markets, is people get burned.

People got mortgages that they couldn't afford, just to put money into the hands of the mortgage brokers, the investment bankers, and the credit rating agencies.

When the housing bubble cooled, it started to collapse under it's own weight, and the people least able to own their own homes, were the first hurt by it. The fast shuffle to make those sub-prime mortgages look like some hot new derivative helped to offload some of the pain overseas, but now our trading partners can't trust us anymore.

And now, since we can't unload the "sub-prime" debt packages, the investment bankers are stumbling, collapsing, dying of corporate heart attacks down on Wall Street. The government has been forced to step in and rescue those companies who have made the riskiest deals while those who tried to maintain some level of sanity were left to fail, and burn-out on their own.

So let's look at this planned bailout.

The gentleman who's come up with the bail-out plan is Treasury Secretary Henry M. Paulson Jr. He's an investment banking insider, who left Goldman Sachs after over 20 years to serve as the 74th Secretary of the Treasury.

The Paulson Rescue Plan is receiving flack from both parties, while the Fed Chairman is pushing hard to get it approved as quickly as possible.

The plan would spend between $700 billion and $1 trillion (on top of the $600 billion already spent in the past year) to avoid the ongoing meltdown of the US financial system.

The Treasury, rather than creating a new government entity to manage the recovery, plans to seek additional authority to deal with this crisis.

Paulson's plan calls for "temporary asset relief" to take bad mortgages off the books, by having the treasury department buy them from ailing and failing financial institutions. And frankly, speaks of granting the Secretary of the Treasury unbelievable carte-blanche to take whatever actions he feels are necessary, with no other government oversight.

Senator Richard Shelby of Alabama fears that the Bush administration is basically just "%u2026lurching from one crisis to another%u2026" and said the administration doesn't "%u2026have a superplan to deal with this. %u2026 We want to see the plan." He indicated that the Paulson bailout package isn't a done deal yet, but recognizes "%u2026there's a crisis, there's stress, in the financial markets we haven't seen in, say, 70 years."

Senator Jim DeMint told the Los Angeles Times "What is missing from it and the recent string of bailouts is a committment to return to a free enterprise economy%u2026 What we need now is not what could be nearly a trillion dollars in new taxpayer bailouts, but pro-growth policies that allow our markets to correct and start growing again."

That all sounds fine and good gentlemen, but frankly without some regulation on all those pro-growth policies, we'll be in the same mud-hole, again, in short order.

I personally can't see where a bail-out without fiscal responsibility, and seriously scaled back escape clauses for the corporate Pirates (uhm, I think the word is CEOs?) who caused this mess, will not do anything more than funnel more and more money into the hands of those who willingly, eagerly, caused this economic nightmare.

Regulation versus Risk 

reprinted with permission from All That's Evil

Why Not Bail Out Lehman Brothers?

First, in the past two weeks, we have seen Freddie Mac and Fannie Mae get nationalized by the government, as they became more or less insolvent due to the sub-prime mortgage mess.

We've seen Bear Stearns receive a subsidized takeover, where the government helped another company to bail them out, once again, because of fallout from the sub-prime mortgage mess.

We've seen the government nationalize insurance giant A.I.G. again, for insuring other companies and getting caught in the tar pit that is the sub-prime mortgage mess.

But, the most interesting of these recent corporate downfalls, is Lehman Brothers. It's interesting because not because the government didn't bail them out, but because of why.

In all of the previously mentioned cases, the corporations were rescued by the government, because they had played a high-risk position in the markets, which if they hadn't been bailed out by the government, when they failed, would have rocked the global economy to the core.

But Lehman Brothers, while also a victim of the ever-growing sub-prime mortgage mess, stayed away from the riskiest positions in the derivatives market, where the others played fast and loose, with their own, and other people's money.

By exercising a modicum of reasonableness, they wound up in a position where the government didn't see the economic sense in rescuing them, and due to the billions in losses, came to the end of their rope.

Why We Are In This Mess, To Begin With

The answer is simple. It all comes down to a blinkered conservative view of the economy, where the assumption stands, that getting government regulation out of the way makes the financial markets run better.

The problem is%u2026 if you get rid of the regulations, and it all goes in the toilet, then you have to have that self-same government, that is no longer regulating that industry, bail out the players, one by one as they go into the toilet, to prevent global economic chaos.

Floyd Norris at the New York Times put it this way "If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated. The regulators need to know what risks are being taken, and by which institutions, in time to act before a crisis develops."

Regulations have been done away with, over the past dozen years, which had they stayed in place, would have prevented this entire catastrophic financial system melt down.

Because of the lack of regulation, the markets are forcing regulators to choose which companies to save, based on how damaging their failure would be to the global economy, and which companies just didn't screw up big enough to really break the global economy.

At this point, we're down to two remaining financial giants on Wall Street, and we can only hope that the regulatory arm of the government can begin putting in place rules to prevent further economic upheaval.

I've been watching the organic development of this problem for years, and only about a year ago, suddenly realized what was going on.

The commentaries I've written here have played out more or less accurately, and once again, I'm going to strongly recommend that you keep yourself in a solid, cash strong position and keep solvent, for your safety, and as the economy eventually starts to turn around, to be able to cash in on the bargains that will develop as others sell off, to stave off financial ruin.

The Economy - Circling the Drain... 

reprinted with permission from All That's Evil

Before we start, let me apologize. This article is convoluted, and complex. Economic conditions are rapidly devolving %u2026 as I've mentioned before the economy is stumbling into a long delayed recession.

I've pointed out the symptoms leading up to this ranging from zero interest loans, for cars and other durable goods, as well as the no payments for 2 years deals furniture places are offering.

I pointed out how the dollar has fallen against competing currencies (yes, this trend continues, apace) and even reported on Wall Street recognizing the coming recession.

I was wrong in my estimate that gasoline would top $4 by Christmas, but we're now hearing expectations of $4/gallon gas by the summer travel season.

We even reported that the AEA predict a severe economic downturn, that should last at least 18 months to 2 years, with negative growth expected.

Well, today we're going to look at some further issues, and their impact. In a previous article I wrote about how the dollar is always in a constant state of flux, changing in relative value to other currencies.

Well, that works both ways%u2026 or to be completely correct, 143 factorial ways (there are 143 different currencies, all of which can be traded and exchanged against each other, leading to 143 factorial relationships between all the world currencies - that's 143*142*141* %u2026 etc etc %u2026 *3*2*1, which is a frighteningly large number, which is best expressed as 3.85 x 10^247).

Now, when you consider that each of those 143 different currencies is also in flux, both because of trade patterns, and concious decisions by central banks, to make trade with the parent country look more or less favorable, when compared with other economies.

As Benn Steil of the Council of Foreign Relations said at a recent meeting (as reported by the Washington Post), "The United States is exporting inflation worldwide", by forcing other sovereign nations to print up mountains of their own currency, with which to buy dollars.

This is a definite consequence of using dollars as the "float currency" of International trade.

An example of how this is used would be to slash the cost of borrowing dollars, then turning around and offering to lend US banks $60 billion in 28 day loans, every 2 weeks - it forces other economies to play follow the leader, by giving them great incentive to help cart off our cast-off inflation.

Ben Steil wrote in Foreign Affairs, last May that moving to a single Global Currency would remove currency crises, currency speculation, the need for foreign exchange reserves, and Global currency imbalances would also be eliminated along with all Balance of Payments problems.

Perhaps we've found the real reason for all of this World Class fiscal mismanagement?

Could it be that we're being set up for a major economic collapse, to clear the way for a single world currency, to help rationalize global economics, and lead us one step closer to a "One World Government"?

If that's not the plan, I'd be surprised. But enough of the global picture, at least for a few moments.

While we're looking at the impact that tumbling dollars have on our economy, petroleum prices are the first place we saw an effect, but the same effect is happening across the board, with wheat, sugar, and other comodities prices rising.

The consumers aren't seeing the effects yet, but wheat prices have more than quadrupled.

We can expect to see food prices moving upwards, with at least doubling in some cases. This could be the start of some very hard times indeed, if people suddenly find their grocery bills doubling or worse.

Some frightening data points include the fact that foreign purchases of US debt bonds have been trailing off, for about three years.

This leads to the conclusion that our trading partners, most especially the Gulf Cooperative Council (middle eastern oil rich nations), are looking to strongly move away from the US dollar as a float currency.

If this happens, it will cause the whole house of cards to come tumbling down.

If the world leaves the dollar, it could very well end the United States status as a First World nation.

The inflation we've exported for years would definately come back to haunt us, at that point, as we'd no longer have the economic clout the threaten our trading partners with.

While it sounds like this may be just a U.S. problem, it's not.

Gold prices have shot up from around $670/ounce to the most recent price of $970/ounce.

One meaning of this is that the actual value of dollars has decreased by roughly 29%, by this one measure.

And if that's not enough, I'm trying to follow up on the rumors that our government has been using federally held lands (all those "Federal lands" out west) as collateral for the increasing mountain of debt we've been accumulating.

The interesting part of these rumors is that if they're true, and we are about to lose our economic clout, I could see the debt holders calling their loans, and claiming the collateralized resource rich areas, for their own economic development and enrichment.

Who might these debt holders be?

Think about growing economies, with a significant trade imbalance against the United States, who are currently becoming more agressive in their search for resources to help fuel their growth.

Still can't figure out who? Well, what country exports recyclable waste papers from America, in the empty shipping containers they ship manufactured goods to America in? And then recycles the paper, producing the majority of paper needed to run their economy.

If you still haven't guessed, that trading partner is China.

As I said, these are just rumors that I'm following, trying to find proof. But these rumors, taken with all of the rest of the economic situation I've outlined, do not look good for us.

So, finally, remember, the economy is faltering, recession is almost guaranteed, and depression or worse is not unthinkable. Keep yourself out of debt, strengthen your cash position, and keep your wits about you.
And in the words of Yuki Saito, head of foreign-exchange sales in Tokyo at Societe General SA (a Unit of France's second-largest bank) "It's crunch time for the dollar!"

Blog Posts from Google 

Russian cinemas forced to close as economic crisis bites | News ...
Russian cinemas have been hard hit by the global recession with 43 out of the country's 1700 closing down in the first six months of the year.
Obama's Challenge: America's Economic Crisis and the Power of a ...
ReviewRichard Parker on Obama's Challenge Richard Parker is the author of John Kenneth Galbraith: His Life, His Politics, His Economics. He is an.
Economic crisis opens new doors - Vietnam Business Finance
The latest news about Vietnam dong - VND, banking, finance, real estate - property, industry... Information for Successful Investment in Vietnam.
Czech Senate to reduce spending, staff over economic crisis ...
Prague, Aug 20 (CTK) - The Czech Senate plans to reduce its expenditures and staff as an austerity step in reaction to the economic crisis, it ensues from information CTK has received. It is not clear whether the Chamber of Deputies ...

New Guestbook 

Like this lens? Want to share your feedback, or just give a thumbs up? Be the first to submit a blurb!

by ZenOfJazz

Technologist, Food Geek, Security Specialist, Hacker, Father, Blogger. These labels are mine, and I embrace them, but I am so much more than the labe... (more)

Favorited By

Create a Lens!