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Diane Francis

Diane Francis

Posted: September 30, 2008 11:49 AM

America's Blown it, Bring in a Global System


My take on the situation:

America's political dysfunction and its economic crisis intersected catastrophically yesterday in the House of Representatives which failed to pass a bailout for Wall Street's mess.
At issue was politics but mostly President Bush's lack of credibility. As commander in chief he exaggerated the threats in Iraq in order to launch a needless trillion-dollar invasion. Now, as America's CEO, nobody's listening to his description of the situation as "dire" and "dangerous" as he pulls the fire alarm over Wall Street's mess.

To many, it's a case of fool us once, shame on you. Fool us twice, Bush, shame on us.

A deal must be struck in Washington but in the vacuum the world's central bankers are doing their thing which is why markets recovered somewhat today. But there is blood in the trenches already, for instance:

-- Advertising is drying up for media companies. The financial sector, auto sector and consumer goods sectors are following the real estate sector in terms of no-shows in newspaper columns and eventually television commercials (less reactive since they are often annual contracts).

-- An estimate by an auto trade organization said that the number of car dealerships in Southern California will plummet to 1,500 from 5,000 in a matter of months.

-- One $10-million financing involving improvements for a chain of retail outlets cannot find any investors or banks because "the cost of capital" is unknown at this point. As the entrepreneur said: "Who knows what the return on investment will be when we don't know what interest rate we will be charged or whether it will be variable or locked in? It's impossible to do financings now."

-- Several condo projects in Toronto have had their banks pull out, at early stages, because of uncertainty.

-- The world's biggest leveraged buyout involving $35 billion, of telecoms giant BCE in Montreal, was to be financed by Citibank and that's unlikely. Other deals will be put on hold, iced or canceled.

-- A flood of money into U.S. T-bills has driven down the "spread" to less than 1% which is the first step toward hiding money under mattresses. Some are people and businesses unwilling to put money into bank deposits due to the anticipation of hundreds more failures unless an action plan reverses the situation.

-- First mortgage rates are up dramatically if buyers want to lock in for a period of time which will further drive down real estate values, the root cause of much of this catastrophe.

Most frightening was Jim Cramer of CNBC's "Mad Money" on Monday who parked his usual mania and described the failure to rescue as bringing about "the nuclear winter of the financial system" and possibly "20% to 30% unemployment."

The world is very nervous because America's political rigamordis means that 25% of the global GDP cannot be repaired or even managed. More huge commercial banking bailouts are rumored. There's an estimated $42 trillion in toxic derivatives to be written down worldwide, about the size of the annual global GDP.

Until something happens in Washington here's what will happen:
 More ad hoc rescues and shotgun marriages around the world to save financial institutions from going bust. Governments will extend bank deposit insurance up significantly, even as high as $2 million to prevent runs and mass withdrawals, both of which make borrowing more difficult if not impossible.
 Central banks are trying to liquefy the system.
 If this doesn't work central banks will use moral suasion to get commercial banks to lend to one another.
 Central banks can also chop rates in concert to try and stop the deflationary death spiral.

If Washington does nothing hold on to your hats and your gold stocks.