Well, the news isn’t getting any better, is it?   We hear that the Asian markets have lost 7%, that the German market is off 10%, and around the globe, it seems as if the news isn’t any better.

The problem is, in a word, “Chicken Little”.  Before the bailout received all the publicity, before the news media started screaming that the sky (or in this case, the Stock Market) was falling, there was some semblance of sanity in the market.  Companies that were being beat down went down, because they were being beat down. Now, we’ve got media talking heads telling people to “Get Out Before It’s Too Late!”, which of course, is causing the panic.  

Now, the markets are falling on every piece of news, because it’s all about the emotions, all about the media stirring up sensationalism.

It might surprise you to know the answer to that question.  The common understanding is that We, the People do, but that’s not anything like the truth.

America’s assets are owned by foreigners.  Lots of Foreigners.  The Chinese have $1.4 trillion (that’s $1,400,000,000,000) in foreign assets, and nearly 70% of that is held in U.S. Dollar denominated assets.  Whether it’s in conservative, low-yield instruments like Treasury notes and federal-agency bonds, or showy, high risk stock equity deals with American companies, China has a very large stake in our economy.  

How has this come about?

During a conversation Tuesday, I mentioned in passing that I thought Monday’s bailout vote, and resultant 777 point fall in the Dow was purely political theatre. The person I was speaking with asked me what I meant by that.

I explained, “It’s simple.  1) They vote down a horribly crafted bailout plan, 2) the markets stumble, 3) everyone panics, and agrees to support the next bailout (even if it’s obviously worse than the Monday plan).” 

Well, we’ve seen exactly this scenario play out. The senate took the same basic bailout plan, added some perks to make it “more acceptable” to the Republican leadership, and changed it from a $700 Billion plan, to an $800 Billion plan.

Our senators, here in Tennessee both voted for this new package, and this morning, the new package was rolled out in front of House of Representatives once again. The house passed the newer, bigger, bill 263 to 171.  The thing to understand is that both of these bail out bills are several hundred pages long, and that they were brought up for a vote sooner than anyone could have possibly read the entire thing.

  

Secretary of the Treasury Henry Paulson after talking with Congress, last Thursday.

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.

Welcome to what’s become a regular topic around here.  We’ve been watching what’s going on to the economy for a year now, and thus far, our predictions have borne out. 

You will be able to find all articles on this topic under the category “The Economic Beat“. Today we look at what’s been going on in the financial world, and consider what it all means.

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.  

To paraphrase those sage wits at Hee Haw:

“Gloom, despair and agony on me,

Deep dark depression, excessive misery.

If it weren’t for bad luck, I’d have no luck at all

Gloom, despair and agony on me”

Seems the former head of the Federal Reserve; you remember him, that nice chap who kept interest rates low, so that the the housing market could get overheated, and balloon up into that nice housing bubble that burst? Well it seems that he’s declaring the economy has been knocked askew, into a “once-in-a-century” economic crisis.  

Before we start, let me apologize. This article is convoluted, and complex. Economic conditions are rapidly devolving … as I’ve mentioned before (see The Economics Beat) 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.

CBS Marketwatch is reporting the American Economic Association members see the recession coming, and predict it will be severe, with Prime Mortgage losses in the $400-600 Billion range.

Further, they’re predicting that growth for at least the first two quarters of 2008 will be zero to negative.