Save the Banks
Every time I hear someone give a reason the U.S. will not have a recession, their theory is blown out of the water in a matter of weeks, if not days. It's all starting to sound a little desperate. Denial has been the reigning champion of the stock market for quite some time. The refusal to admit we have been digging ourselves into a deeper hole of debt cannot trump the reality. To be fair to those in denial, the last two decades have served up financial conditions which had the capability of turning ugly. Through the Federal Reserve's intervention and the relaxing (or just cutting) of certain rules and regulations, we were able to avert a crisis. Why can't the same thing happen this time? Let the government bail out the financial institutions, listen to the grumblings of "moral hazard" and class warfare, and just get on with life and an ever higher number on the Dow! It seems people are saying "In this new world order, why should we have to deal with a bear market? We had a 10% drop, time to move on!" Why should this time be different? Because the size of the potential losses trumps anything we've seen before. One could write a novel about what is happening right now, and I'm sure someone will, but let me briefly point out just a few of the things we are up against here. Complicated investment vehicles were created to enhance investor returns. Everyone wants bigger and better, right? The foundation of these investments rested on the ever increasing price of real estate. Since most people believe that the value of homes always goes up, these investments seemed like a great idea. And they were, until the housing bubble burst. Overbuilding, inflated prices, and very risky home loans came together to produce mortgage defaults and an increasing inventory of homes on the market. Housing prices started falling and those investment vehicles went with them. Banks have a two-fold problem here. Not only do many of them hold (in one way or another) these investment vehicles, they are suffering from the actual defaults on loans. Banks must maintain a certain amount of capital to remain viable, and we're starting to see that capital ratio being threatened by the enormous losses they are suffering. Home loan defaults are not the only problem, either. Auto, personal, credit card and construction loans are defaulting or becoming delinquent at ever increasing rates. Bank solvency is the issue here now. Everything else is "noise" and the consequences of having reached these levels of debt have only just begun. Our society is more debt laden than ever, and to believe that business is going to continue to do well without consumers...well, that's the most backward thinking I've ever heard. Consumers are laden with debt, flat to falling wages and disappearing home equity. Businesses are battening down the hatches by buying back their shares, reducing expenses and their workforce. Global growth is slowing and inflation is growing. Only by some divine intervention will our economy be unaffected by the major loss of capital we now face. I won't hold my breath. ***
|
 |
 |
The subprime mortgage problem morphed into a credit crunch, which quickly turned into a full blown financial crisis. The government and the media have been doing the best job they can to prevent panic in the streets. It seems this financial problem we've gotten ourselves into is much bigger than anyone wants to admit, but the genie is out of the bottle: our banking system is in a crisis. Perception goes a long way in the markets and the government certainly doesn't want to scare anyone by acknowledging the depth of the problems. They want people to talk about subprime mortgages going into default, and then they come up with a plan that seems to alleviate that concern. SIV's, asset-backed paper, CDO's, et.al., comes into the public lexicon, and people hear that major financial institutions stand to lose billions because of them. No need to worry, though, because banks and Treasury Secretary Paulson have a plan to save the day. Economy slowing down? That's OK, we will export more goods to those thriving countries overseas, (forget the fact that other countries are having their own growth, inflation and housing problems.) And consumers will continue to spend, because they really want to, they must, and besides it's Christmas!