Anatomy Of A Panic
The global financial markets have just begun to recover from a financial panic that has driven some 43 stock markets around the world down over 20 percent a piece from their most recent all-time highs. In the parlance of the financial world, that means that there are 43 "bear markets" in stocks occurring simultaneously around the planet, including a bear market that's mauling Wall Street.
The financial market pressure was so intense over the last 48 hours that the Federal Reserve, our nation's famous central bank, took the nearly unprecedented step of slashing short-term interest rates by three-quarters of a percent, the largest single one-day cut in over 20 years, with a promise of more rate cuts to come ... possibly as early as next week.
Equally dramatic and surprising is that the cut came just 10 days before the Fed was scheduled to meet in Washington, where and when it was expected to make those cuts anyway.
The plunge in the global markets reflected a very real and palpable fear that our real estate recession and associated "credit crunch" will drive us into a deep and lasting recession, if one hasn't started already.
The story of the financial crisis we are witnessing is mind-numbingly complex, if told in the words of Wall Street. The global credit crisis, that erupted from the collapse of the U.S. sub-prime mortgage market, takes an extraordinarily circuitous route from Main Street to Wall Street and back again, and then on to the rest of the world's financial markets. Unlike the virtuous circle of prosperity that we have seemed to enjoy, the world over, in the last seven years, it appears that a vicious cycle of calamity be unfolding before our very eyes.
It began with the bursting of the bubble in residential real estate here in the United States. It quickly spread to other hot real estate markets around the world. Complex debt instruments that were linked to sub-prime mortgages, both here and abroad, imploded in value. The credit collapse spread by waves of delinquencies, defaults and foreclosures in sub-prime real estate, caused a contagion effect in other highly complex credit derivatives that were sold by Wall Street as safe bets to presumably savvy institutional investors around the world.
If your eyes are glazing over, it is entirely understandable. Many of the financial engineers who created these highly complex, and highly levered, investments didn't fully understand how the structures would behave, themselves, particularly when stressed in unanticipated ways.
But that never stopped them from creating more and more financial products with complicated names like "Collateralized Debt Obligations," (CDOs), or "Credit Default Swaps," (CDS) or "Asset-Backed Commercial Paper Programs," (ABCPP), that were built around highly risky sub-prime mortgage securities or other flaky investments, and then leveraging them to the hilt.
By the way, there is no more dangerous or incendiary combination on Wall Street than taking newly engineered financial instruments and using loads of borrowed money to boost their returns. These highly leveraged bets make investors tons of money when times are good. But, when times go bad, it's look out below!
Billionaire investor, Warren Buffet, very famously referred to these derivative products as "financial weapons of mass destruction." As always, the "Oracle of Omaha" was right. Unlike our experience in Iraq, we found our WMDs on Wall Street, or more accurately, they found us, with potentially grave consequences for the global economy.
There are some $750 trillion worth of credit derivatives trading on global markets. That compares, rather unfavorably, to the $50 trillion of global economic output, or GDP. As we enter a phase where these financial WMD's implode in value, they imperil the health of the global financial system and threaten to bring, not only our economic activity, but the vibrancy of the world's economy to a crashing halt.
Hence, the Federal Reserve, which has come very late to the rescue, slashed interest rates by a record amount on Tuesday. The Fed, and other central banks around the world, however, need to do much, much more to create an environment of calm and eliminate the possibility of further catastrophic "WMD" events, some of which may be getting ready to explode as I write.
The Fed let far too much time pass watching this crisis unfold over the last 11 months. The Fed fiddled while our homes burned. They can still put out the fire, but they need to use every tool at their disposal and get their counterparts around the world to do the same.
While their efforts to stave off crisis Tuesday were virtually unprecedented, they were not unwanted nor unwarranted. We can only hope they will finish the job they started so sheepishly, so those sheep who, in great herds, bought overvalued homes and followed the markets blindly over the last several years, won't be led to the slaughter.
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"There are some $750 trillion worth of credit derivatives trading on global markets. That compares, rather unfavorably, to the $50 trillion of global economic output, or GDP."
15:1? There is no way (within the laws of physics) this can work ... unless you make the currency worthless, thereby making the debt meaningless.
This economy is doomed. Good thing we got lots of cheap plastic Chinese crap for it! All they got was our manufacturing base.
Pure capitolism doesn't offer stability necessarily, and it leads to a rich getting richer and poor getting poorer system, which doesn't work in the long run as we are seeing. Combine that with the credit crisis as we all try to stay a part of the "middle class" and you've got trouble. Pure socialism doesn't work either, because you still have too much power concentrated in one place. It's a combination of principles that will lead to a truly vibrant economy where all can thrive. And a major part of the problem comes down to individuals who are preyed upon by the banks and lenders, promising affordable rates and monthly payments--and then the fees start stacking up and the rates change (without them having to inform you) and soon people are overwhelmed, which leads to defaults--and when this process and problem becomes epidemic, we have our current economic problem.
Sadly this 600 to 1200 dollars is just about enough to allow many people to pay their current obligations for another month. The interest rate reductions are great too, although only a small percentage of people who really need the help will most likely be qualified to receive the benefits of the rate change.
Personally I've written my congressmen letters concerning these abuses in the industry with no replies. This in itself suggests how indifferent and detached many congressmen must be. People wonder how individuals allow this to happen, when the underlying truth is that our world is changing and incomes and job security are becoming things of the past while the debt instruments are provided by old crony ideas and contracts that have always benefited from people who lose their shirt.
One good thing about the Fed's panicked move: I can now move my positions out of equities and park them in a safer haven before the drop starts again. The goal is not to *make* money, now, it is to prevent loss of capital in the coming months.
And I do believe the stock "recovery" is very temporary. It was due to the emotion of a big rate cut, not on fundamentals. It did nothing to address the real problems (subprime fiasco, softening consumer demand, max'd consumer debt, stagnating wages, the whiff of increased unemployment ...)
Ask yourself: If the "economy" is so strong, why did they cut *75* basis points? That is huge. And why are there rumors of more cuts to come?
Because something is broken and they know if they admit it, things will begin to hit the fan immediately.
When the market tanked, I had the sinking realization that I was too late -- paper losses ahead. I should have gotten out 4Q07. But, wait: A Reprieve!!! A temporary "recovery" which provides a big red EXIT sign for those with eyes and the opportunity to lock in gains-to-date.
All my subjective opinion, of course. I make no guarantees, blah blah blah; past performance is no indicator of future sucess, etc. etc.
As for me ... Later guys! I'll see you again around the "trough" when the pickings will be tasty for anyone with cash.
I call 'em "worthless paper," but the biggest financial impact from banking is not in the stratosphere; it's on the ground.
It's pawnshops and title-loans; payday advances at nine THOUSAND percent interest.
It's "creative bookkeeping" by your own bank as it fiddles with the timing of posting-behavior to its own advantage. (One well-known bank netted $14 BILLION from this fraudulent practice, just last year! It's on their annual report!)
It's usury.
In days of yore and in some countries it would cost you your hand. ("Whack!")
We have just about everyone in "power" to blame for our financial woes:
Years of a GOP dominated Congress with uncontrolled earmarks, spending and tax cuts to the wealthy followed only by a change in political parties.
A President who spent like a drunken sailor by swelling the ranks of government, had little interest in regulating the loan industry (amongst many others), talked instead of acting on foreign oil addiction and then chose to spend an unplanned expenditure of a trillion dollars on a bogus foreign adventure.
Individuals who either did not understand, or chose to ignore, the risks of taking out mortgages they might not be able to afford.
And now the President, Congress and the Candidates battle to see who can inject the economy with more money we don't have, a legacy we can pass to our kids to pay back, and the Federal Reserve drops the interest rates so we can all borrow more, faster. And so much for the GOP mantra of "let the markets managed themselves" of course until the wheels fly off the tracks and crush us all.
What ever happened to "earn your wages and manage your budget"?
Seems that a recession is the only thing we are all truly earning.
Here, but a mere ordinary, but mind is wondering WHY NOT LET THE MARKET ITSELF TAKE CARE OF ITSELF ?...If it goes down, yeah, there are indeed those that will hurt, but then too, it will go up as well but perhaps more stabilized by the self correction rather than just putting off or trying to gloss over the reality of so much. Know the "in" thing has been buyouts and conglomeration, globally and domestically and each buying out each other and then dividing again and truly, the ones that DO carry the true debt load are "the consumers" who are told NOT to woory, just be happy and grateful and spend as much as they can ...Yadda, yadda a bit and more...LET the market "sink"/self correct for a real reality check...What goes down does usually go up and it would indeed give some real breathing space to better configure it all !!! (thinking the Feds are merely out to assist their insider cronies, not really the path for the real greater common good and consequently, NOT a true fix to the problems "they" allowed to be manifested...!!!)
Welcome to HuffPo Ron.
I admit, I am easily confused. Firstly, I see the vanishing of virtual dollars that never existed anyway, and wonder why is it so?
Australian stock market dived 7% and then recovered 4, yay. But we still have the same amount of iron ore, uranium etc. So, how are we worse off -- is this wag the dog?
Canada still has the majority of oil that goes to the U.S.,, never mind the Middle East as the main source.
The fundamentals are still there, never mind the leveraged games of banks and brokerages. Let them sink! What am I missing?
A sub-note in the sub-prime lending story:
If you could have seen my husbands and my faces the day we went to the closing table of our 1st home. We got a loan based solely on our credit scores. At the time we started the loan process, he was the guaranteer. The day we reached the closing, his credit scores had dropped below mine. So I was deemed the sole guaranteer of a $106,000 mortgage while only earning $12,000 a year! We were flabbergasted. Next to my name, every place in the documents was the term "married woman". Like this was some guarantee that I was less of a risk. With the divorce rate over %50 in this country, thats hardly a premise to determine a promise to pay. Lucky for the bank we are still married, employed and paying.
The myth that is perpetuated by Wall Street oracles that the Fed can somehow undue the swindle of unjustified lending coupled with the gross mismanagement of our trade and budgeting misleads the investor and results in the citizen misjudging the seriousness of the disaster.
Wldnswmmr and good ol' Hale Stewart are right: Corruption, criminality and incompetence can not magically be put right simply by using all the tools of the Fed.
The only sensible solution is to let the entire system collapse of its own bankrupted weight, then begin a new economic, monetary system as if we were starting a new Country. This radical solution would own up to the dismal truth that the present capitalism system has brought our present organization to destruction and a coming of terrible turmoil and danger.
A new beginning would provide a rational direction out of an otherwise untenable dead end of catasthrophe and ruin.
"Neather a lender nor a borrower be"
What'll happen with the Fed's move is that you will see a million different 'refi now' ads. This will make a lot of homeowners refinance their loans; it'll also provide a short-term income spike for the mortgage industry. This will be a boon on paper, that is all.
Why will the Feds reduction ultimately fail us? You cannot 'reset' an economy without an increase to the domestic production base (meaning hardcore product) and the new jobs that go with it.
The Orwellian nature of the mega rate cut by the Fed last Tuesday is utterly astonishing. The easy availability of credit is the reason for this impending, once in a lifetime disaster in the first place. How does easing credit further make it go away? And we continue to spend $2.5 billion a WEEK on just one project - the disastrous war on Iraq!
I really have to agree with wldnswmmr - did I get that right?
And I don't mean about Stewart's post.
There are a number of poignant observations in this post.
But, to criticize the FED as waiting too long on the sidelines - ummmm, to do what, exactly?
Why didn't you offer them any monetary-type advice?
My own characterization of the problem is that we have been gorging ourselves on capital - any flavor of capital. Imported, exported, organic, fluffy or dopey.
Too much cheap money.
WAYYYYY too much debt.
The BUBBLE !
The funny thing about debt is that people, as in corporations and foreign governments, want to be repaid for what they create and give to you.
So, what is the "payment" due on the debt we have taken out over the past say six or seven years, or better yet, twenty?
And, how, pray tell, are we going to expand the American economy with the use of that debt sufficiently to come up with that payment?
In my book, the FED is NOT the solution.
The FED is the problem.
A cheap over-abundance of money (credits) created by a bunch of freaks with no cause to care for the pitfalls of their largesse.
Our monetary policy is broken, if we have one.
And, when things get bad, where do we turn?
To the CANDIDATES!!!
So, Mr. candidate, how big of an economic stimulus, or stimulii, would you call for averting what appears to be a coming recession?
"A hundred billion or two should help somewhat...
How about this question?
Mr. candidate, eerrrr Ms. Candidate, can you please explain to us how we are facing an unprecedented economic and financial shock to the American economy and how you think we can work our way out of this problem.
You really have to know the cause of the problem, not the symptom of the problem, in order to come up with the right cure.
A Sound, Stable Monetary Policy, and the tools to implement it.
Throw the money-changers out of the temple, again!
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