posted on Jan, 22 2008 @ 05:42 PM
First i'm sorry for the long post, if anyone doesn't want to read my analysis of the future in the economy just skip this post
I think that the ability to just allow a recession and have the peace of mind things will work out is a luxury that is no longer available
The reason for this is the absolute Dominance that the Financial Sector of the economy yields on all other aspects.
Almost all the growth in the united states in the last few years was due to extending debt further, that includes more and more mortgages written and
higher and higher insurance (house, medical, auto..you name it )revenues generated. Alot of the financial world took advantage of the deregulation in
markets that allowed investors to wield very high levels of leverage which translated into high rewards but also risk. The early years of this game
saw very low defaults and thus risk, because house values kept rising and more buyers were willing to jump in at what they saw was a great investment
and low rates made lending very easy *(but low rates get too much blame) it was the greed combined with desperation that will result when a flawed
economic structure has to rely's on constantly growing debt that is a structural problem* These low default rates led to "wall street greed and
math geeks" developing complex strucuted investment vehicles i.e CDO's SIV's MBS, ABS and the like which they though lowered risk but only because
that was based on the 3 year period where defaults were historicaly low.
Now in leveraged markets risk is greater and combined with structured finance vehicles with false formula's (due to inaccurate default imputs) we
are witnessing a massive unwind of credit because normal market falls (although this housing unwind and credit unwind is relatively large) are
greatly MAGNIFIED due to the LEVERAGE of the debt that was engineered.
Again this leverage was necessary to provide the growth that a economy largely dependent on debt needs) so the 2 big reason for a bigger FALL is the
fact that Finance dominates the economy much more than in the past, and that normal financial gyrations are magnified in a highly leveraged
enviornment and this becomes a very high risk when models are developed based on false assumptions of deault risks.
the fall in house values translate into defaults and foreclosures combined with the fact that rating's for certain bonds are not matching the
quality with which they are labeled. As these tremendous differences in the value of their worth become apparent people are stuck holding the bag
because the genius of these investment allowed the risk to be spread out everywhere. Nobody wants to have to sell these products because they know
(like bear stearns found out they will barely get 25 cents on the dollar) . taking a 75 percent loss on investmets is very destructive for any
business. now couple that with the biggest bond insurer's MBIA and AMBAC going under and what you have is tons of uncertainty and fear that bonds
could become worthless and counterparty's will default in payments and no insurance will be there to cover losses. Until the gov't steps in and
bail's out these monoline's the uncertainty and market fallout will continue.
Also the economy is so dependent on consumer spending that the falling home values are hurting people's spending psychology and ability's. Also cost
of living prices are increasing many times faster than any wage increases which is stretching the consumer's out at the same time a small perecentage
of these consumers also get to see their house payment's double (or reset) and this leads to missed payments and foreclosure. The big secrect is that
this problem has spread well beyond subprime mortgages, many folks with prime mortgages are in trouble.
So we have a 1-2 punch which leads to Banks being very UNWILLING to LEND! it doesn't matter if the Fed lower's fed funds rate to 1% ( a market
that continues to fall should underline that). The reason this statement is true ultimately is the idea that what the heck would a bank borrow money
at 3.5 percent for instead of 4.25 when they (the lender) question wether they will ever be paid back? why lend in this enviornment, guess what you
The Federal Gov't needs to step in and Bailout or takeover and cover the policy's written by the mortgage insurance company's MBIA and AMBAC .
This will provide some certainty to the investors that they will be reimburesed somewhat for losses.
Next House prices need to stabalize otherwise consumer's will not feel as wealth and will owe more than they own and not be able to continue the
housing as atm charade. The only way to do this is to provide so much money to low and middle income families that not only do they spend most and
save/pay off some but the total inflation which this handout generate's will raise the rate of inflaton and thus stop the nominal prices falls in
housing (thru inflation of prices) *note their values won't stop falling) , just their house price's should (this is considered monetizing debt)
this usually comes at the expense of devaluing the currency greatly , BUT as today showed The Global economy is spooked, and other country's may need
to take similiar steps that the u.s have (such as the European Central bank cutting rates) as well as other foreign country's picking up some of the
slack and buying up U.S debt to help support the dollar for their own stability (one of the perks of having the world reserve currency). I don't
think the dollar can be allowed to collapse, yes it can slowly lose more value, but it will be orderly.
Also any handouts and stimulus (even if 2400$) or roughly 3 times bush's current plan, will be temporary and housing prices may stop falling (best
case scenario) but costs of living will continue to increase so people will have trouble making payments because as housing falls and jobs are lost
people will spend less and unemployment will rise. This IMO will need to be stemmed by creating More jobs in some way. The answer may be new mass
employment. Where this employment will come from i don't know, Perhaps the military will grow tremendously as well as an increase in "green tech"
and the sneaking feeling i have that more jobs and man power will be needed to create a changing landscape where alternative energy's are utilized
much better. There is still a very legitimate chance unemployment could get way out of control.
Thus banks are unwillng to lend out money to consumers's who are more and more likely to default. Also these banks have lost their fair share of
captial and are in need of Soveirgn Wealth Fund injections or really SWF taking a chunk of the ownership in exchange for Hoping to keep them afloat.
Next commerical real estate lending has slowed dramatically. And this will have it's own consequences.
We have a number of reasons to fear the worst is ahead and that this will not be a normal recession either in duration or depth, and i strongly
believe there is NO WAy around this turmoil leading us to adopt a lower standard of living for the long term. And this is with The gov't bailout's
and intervention described above in the form of Job creation, taking over mortgage bond insurer's, stablizing home values though (moneterizaton of
debt) w/ the help of foreing country's continuing to support the dollar to stave off a panic which a currency crisis would do, and likely a nice
little check to consumers which will buy the economy some time to make the above changes, so that spending continues and unemployment doesn't get out
lastly i would like to say that since i have been trying to grow my small business the ability to stay neutral with my beleifs and predictions of the
future have been very tempted to be biased toward future growth (because i want to believe i will make more money and be safe!) and i think if i had
the success before i had a neutral unbiased beleif toward the economy my predictions would be VERY compromised. Again i thnk this causes many people
to label bad preditions as "doom and gloom" so they don't lose their peace of mind.
[edit on 22-1-2008 by cpdaman]