We're not in Kansas anymore! (c)

[acvelonius]

Causes

Government's role... fiscal irresponsibility driven by the political ambitions of Congressmen and empowered by a lack of accountability as voters snooze

• More than mortgages...A decade of deficit spending leaves the country impoverished and dependent on borrowing from China, Japan and India to keep it solvent.. expenditures out paced income by two to one National debt has grown from $474 billion to $11 trillion (with honest accounting entitlement contractual obligation bring that total to close to $20T)
• The politically-driven Fed led by Allen Greenspan printed money and lowered rates to add to the binge by opening the spigot of risk capital for speculative, investment and plunging the value of the dollar...
• In 1999 Congress and Clinton Administration initiates a push to loan to households who do not have the means to cover debt service... Later "The Community Reinvestment Act" forces banks to make sub prime loans to the cheers of the congress... "vote for me"Fannie Mae and Freddie Mac are politically pressured to buy sub prime loans, to guarantee them and to sell others mortgage backed securities without regard for the fact that they will default in rising interest environments and sub prime grows from 2% to 30% of all debt... "poor people... vote for me"
• Mythical assumption justifying a foolish thesis: Forever rising home prices and permanently low rates on adjustable mortgage interest are guaranteed... No clue as to market volatility

U.S. Citizens' role... unbelievable lack of functional literacy, unbridled materialism trumping common sense and benign neglect as to reigning in a Government also drunk on debt

• The U.S. represents one of the highest rate of functional illiteracy in the industrialized World which fed the sub-prime applicants' claim, "I did not know what I was signing."
• Lowest world wide savings rate and highest household indebtedness fueled by unmatched materialism where owners have borrowed on the equity of their home to buy boats... "raising prices who can loose"
• Unfounded, infantile and silly notions that housing markets only have one direction ... Up
• Disconnect between voters knowledge of what public officials are actually doing - starts with a democracy with a voting percentage of less than half of its population
• More apathy... Prior to crisis, the Nation is in deep financial despair with a balance sheet that looks like a bankrupt corporation... no equity and projected to owe over $50T in a decade including entitlements (heath care and social security) contractual obligations... nary a peep of the problem on the presidential campaign or demonstrable voter outcry
• Citizens lack of effective recall charter to reign in financially insane congressmen in a timely fashion... NO ACCOUNTABILITY
• Citizens preference to blame elected officials, Wall Street Cooks and everyone else for their problems that they themselves created and then expect a different result in the future without strategically addressing the underling causes... "We have met the enemy and he is us" ... Famous comic character, Pogo
  
  
  

Regulators Role... politically pressured they limited restrictions which prospered the greatest era wealth accumulation for a a few financiers since the era of the "robber barons" in the late 1890's

• Appointment of Congressman and glad hander Christopher Cox to head SEC signals a "hear no evil - see no evil" regime with little practical experience to tackle obvious developing problems of a unregulated $532T derivative market
• Regulatory and Legislative denial continues in the face of Warren Buffett, George Soros, and a host of well-respected business leaders in the early 2000's that call derivatives "financial weapons of mass destruction carrying dangers that are potentially lethal"
• Allan Greenspan told the Congress in 2003, "What we have found over th·e years is that derivatives have been an extraordinary useful vehicle to transfer risk ... "We think it would be a mistake to more deeply regulate the contracts" he added.
• The unregulated special interests and lobbyists "soft money" industry continues to boom... "Soft money" is money donated to political parties in a way that leaves the contributions unregulated. Campaign adds, congressional office expenses, general office funds, party building funds all escape clear transparency and meaningful regulation. Example-Fannie and Freddie spent $175 million on lobbying in the last decade and gave over $5 million though PAC's in direct contributions... "Follow the money"

Capitalism's naturally greedy role features insurance companies, banks, hedge funds and the trading arms of investment banks in a scheme to create financial products that masked risk and promised great profits

• Technology shift on Wall Street flattens profits as electronic trading means bread and butter trading business is turned into a marginal return and capital intensive business therefore incentive to take on riskier strategies builds
• Investment Banks and Hedge Funds create the "shadow economy" forging securities called "special purpose vehicles" (SPV's or SPE's) designed to proliferate "off-balance sheet financing" where the profits accrue to the owner and the liabilities are hidden & unregulated
• Trading houses take to packaging yield enhanced sub-prime mortgages into complex derivatives such as collateralized debt obligations (CDO's)
• These financial hybrids were then made safe by insurance process called credit default swaps (CDS) from companies like AIG and market to highly leveraged hedge funds
• Eventually with a 30 to 1 leverage factor (no margin for error), investment banking houses owned these products along with hedge funds, pension funds and endowments
• Like all markets/ housing prices declined and the underlying mortgages went "poof," the insurance went "poof", all investment banking firms went "poof" and so did global finance
• Long and short of it is no one knows what these trillions of dollars of face valued obligations are worth and whether the banks are solvent enough to make loans

Effects

The great crash of 2008..thawing out the credit markets worldwide becomes a survival necessity as stock prices crash

• World crisis develops and US rescue plan delayed in a quagmire of complexity, pork belly politics and election year politics stumbles across the finish line... too little too late
• U.S. plan reinvented as a partial direct capital infusion into banks in exchange for nonvoting
  equity ... a faster move as the crisis worsened with days of Congressional hesitation ... no time to figure out asset values... $250 billion earmarked... banks nationalized
• European countries including Britain, France, Germany and Spain announce aggressive plan to guarantee loans, take ownership in banks spending 10 times as much... $2.5T taxpayer funds on a smaller universe of banks
• Stock prices crash worldwide worst week since 1933 ... trillions of dollars of market value evaporate overnight many millionaires are no more ... floods of margin calls.... getting worse globally
• The test is in the after shock of credit restriction and devalued assets... expect wide ~5% swings in the US stock market indexes as the World turns on uncertainty, fear and a little greed
• Whatever happens to short-term credit availability in the next year will determine the course of the market and global economies for some time to come

 What next?

In the near future - significant de-valuation of asset values, massive U.S. consumer and governmental debt forges instability, credit freeze amputates economic growth, business failures coupled with layoffs lead to massive unemployment

• The US consumer still drunk from borrowing continues to over borrow... credit cards... the next crisis will be followed by the "too big to fail" and U.S. Government's has to keep borrowing just to stay a float.. The very solvency of this nation is called to question... only time will tell
• Short term credit freeze effects throw the world into a deep recession immediately... payrolls, consumer financing inventories, receivables, depositors, creditors, suppliers, employees business halts, defaults explode, layoffs rise and the commerce ceases until the answer for short term credit is found... "For whom the bell tolls, the bell tolls for thee"...
• Surplus capital exporters with ample liquidity like Japan, India and China set the future course of the Global economy at an accelerating rate... the first question becomes will they continue to buy treasuries and why, if they do?
• Asset values continue to plunge... The World has been forced to de-lever overnight and by the very nature of that phenomenon asset values devoid of leverage to support their hyper valuations tumble and the supply of troubled assets for sale multiplies... values from even todoy's levels face further depression until a consensus of a new era of value is established at much lower levels ... New order is then restored but only though the passage of time

Longer term - the business model adapts to changes.
Forecasters call for somewhere between a "rough road" and an "Era of Apocalyptic Economic Conditions" ... new business model will emerge

Do we hear echoes of the Great Depression or just a blip on the road to US prosperity?

• In the Great Depression, unemployment reached 25% ... we are at 6% heading to at feast 10% and maybe much more
• Substitute mortgages for assets and the similarity becomes eerier
• Substitute CDO's, CDS, SIV's and derivatives for "investment trusts" and you have a match"
  To date the difference in eras is the massive global governmental investments to stabilize... "The OZ Strategy"
• Many argue the last decade of stagflation in Japan is the model that the US will follow... the huge difference in that Japan was internally financed with a surplus capital (liquidity) and the U.S. is externally financed at the mercy of other countries
  

A new global business model will evolve

• "Natural Selection" The credit freeze will lead to a new financing paradigm where corporate staying power and highly selective credit availability will become the driving determinant of success and the deciding factor in the survival of the fittest
• Banks are essentially nationalized and now will find them selves in a industry which is being rationalized by governmental intervention, "investment banks" are no more and advisory boutiques will emerge
• The days of U.S. supremacy ... economically, militarily, and financially, as "The World Power" are numbered... the U.S. either learns to live within its means or it implodes financially... "remember the Russian Story"
• Asset values find new levels... Housing gets an artificial bridge but decades of the effecst will linger, Commodity prices will be highly unstable as demand is downsized, stocks and bonds face a decade of decline, speculative derivatives become a chapter in a book, currencies gyratf and the dollar ultimately takes a pounding, emerging economies become more self sufficient and their capita.' markets grow to accommodate financing internal growth opportunities.

Longer term - the US Congress faces a voter revolt
"We have met the enemy and he is us" (c) Pogo
Days of US voter apathy are numbered and growing anger demanding the reform of the legislative branch is a real possibility

• The U.S. system of checks and balances has one check that has repeatedly failed the test ... the Legislative branch (along with its regulatory "off spring")
• Misery leading to anger has always lead to adaptive change in America as the strength of the country lies in the flexibility of its governmental design
• A major reduction of the standard of the living in the next decade in the U.S. seems to be more of certainty than a possibility and faced with profound loss voters will drive change in inevitable in ways that none of us can fully foresee today
• Days of Voter Apathy may be numbered! It would be a mistake to underestimate the impact of the presidential campaign in the respect of the advances in the technology of direct communication to the citizens of the country and to expect the office of the President not to capitalize on the opportunity to poll and "vote" by congressional district on issues that matter. The era of voter accountability by a more informed population determining congressional behavior is a distinct likelihood. Imagine the issues in a bill being presented in a non partisan fashion outlining the costs and benefits in executive summary, presented to each congressional appointees constituency, electronically voted on by the voter representatives constituency then published for all to see and when and if the elected official deserts his voter preferences media pillaring would be common place. The power of transparency and an activated population could lead to diminish the prevalent abuses of power unbridled political ambition, malfeasance, and trump partisan loyalty.