Soup kitchens, bread lines, Hoovervilles. Ah, the good old days.
This current crisis is serious, folks. Take a minute to read this to see what's really going on, and why I think we're headed into uncharted territory, and a return to Hoovervilles. I truly hope I'm wrong.
Despite all the bank write-offs, market volatility and the $700 billion dollar bailout controversy …the worst is yet to come. Yup, I think the United States is going to go bust. I don't profess to be an expert on economic matters, but I'm enough of a realist to see that the repeated government "solutions" are not doing much good.
I've become a quick study and have spent a considerable amount of time trying to figure out how this complex mess is going to play out. If you look past the talking heads on TV and the pronouncements from financial experts, you can see a major crash of the U.S. economic system not too far on the horizon. Believe me: I hope I'm wrong, but from the research I have done, this is what I've learned and what I think is going to happen.
Remember that stimulus package? The tax rebates? Foreclosure "forgiveness"? How about the Bear Stearns / Fannie Mae /Freddie Mac / AIG bailouts? What about pumping billions of freshly printed cash into the system?
How have these "solutions" worked out? These remedies were supposed to save America from going into a death spiral...which is what's happening with the current crisis. In my opinion; it's too little, too late, and just puts off the inevitable reckoning that the U.S. is headed for bankruptcy.
The reality is this: politicians talk a good game when they try to "fix" problems they simply can't fix and make promises they just can't keep. These are multi-TRILLION dollar problems. It took us a long time to get into this mess, and it's going to take an awfully long time to get out…and it ain't going to be pretty.
Once upon a time, Banks lent out money; lots of it, to people who couldn't pay it back. Last year, an average of 50,000 homes per month went into foreclosure. Don't think that a bailout will stop this. Property values will continue to fall, and more people will lose their homes. I think home foreclosures will continue to soar over the next year…bailout or no bailout. The reality is this; people simply can't afford their mortgages in the current economic crisis as the economy free-falls into the death spiral.
While the housing market was going bust, millions of Americans could no longer use home equity as a personal ATM to pay for all the toys essential to the living good life...the "American Dream". You know about these essentials, the giant flat-screen HDTV's, souped-up entertainment systems, computers, electronics, flashy cars, SUVs, exotic vacations, and so on. Things people simply couldn't live without. When they couldn't afford them anymore, they turned to their credit cards to keep up their standard of living.
Credit card debt in the U.S. has approached $1 trillion dollars! This alone is more than the $700 billion tied up in bad loans that is bringing the financial system to its knees. If that's not bad enough, piles of other consumer installment debt have piled up…you know, installment payments…layaway plans…tons of credit schemes. With that, you can tack on another $1.48 trillion dollars. That's $2.48 trillion dollars in consumer debt.
To put that amount in perspective, that's more than China makes in a year. It's more than the entire GDP (Gross Domestic Product) of the United Kingdom, Italy, France, Canada, Spain, Brazil, or even Russia. Only they're making that money. We just owe it.
As prices and debts continue to rise, people will cut back more on spending, and even try to pay these debts off, consumer spending is going to decrease… SIGNIFICANTLY. This is more gasoline that is thrown on the bonfire. Less disposable income will have a major ripple effect (like Hurricane Katrina) on the economy.
What about personal savings to keep the economy moving? The "rainy day fund" needed for bad times? Are you kidding me? 60% of Americans don't even have more than three months of savings socked away. Americans are tapped out and deep in debt, choking off the consumer spending which is the lifeblood of the economic system.
This decrease in spending leads to the next bust on the horizon that could be even worse for banks and stocks...and devastating for the U.S. economy. No matter how you slice it, "no shopping" is a big economic problem. I'm talking about a complete crash in commercial property, another nail in the coffin.
You see, the banks didn't just lend billions to unqualified homeowners. They also shelled out billions to build "big box" stores, strip malls, fast-food shops, movie theaters, office parks, warehouses, parking garages...and a whole network of businesses that sprung up all around the country. With the current financial crisis, and the US consumer spending less, these businesses are going broke. You think the problem is bad now with crashing home prices? Just wait and see how things get when commercial real estate goes belly up. Not if…but WHEN.
Just like defaults on mortgages, defaults on consumer credit payments are also going to soar in the coming year as the economy continues to tank. With this, expect more bank failures and more turmoil in the markets in the coming year when consumers start to default on their debt. Only this situation is going to make the current economic crisis look tame in comparison. Why?
Just as they did with mortgage debt, banks and other credit card issuers have packaged up all those credit loans and sold them back to Wall Street. Wall Street then repackaged them again as "safe" debt and sold them as "assets" to the very people who run your retirement funds. Yeah. How does your 401K look now? Get used to the taste of dog food in your golden years. Social Security, you say? Keep dreaming…that's already long gone. These lousy "assets" bring us to the final nail in the coffin….
Brace yourself for the continuing fallout from accounting rule FAS 157. This is the regulation that says banks can no longer hide what are called "level three" assets on their balance sheets. What's a "level three" asset, you ask?
Stocks, bonds and all investments you hear about that are traded daily on the stock market are called "level one" investments. They are relatively stable and adequately valued by Wall Street. (For now) The "Level two" assets include the less-traded mortgage-backed investments that blew up late last year. The biggest brokerage houses and banks (Citigroup, J.P. Morgan Chase and Bank of America) have over $4.1 trillion of these level two assets alone. But that's not the biggest problem.
At the top tier are the "level three" assets. Here are the hidden investments that almost never trade. These are the huge private investments and contain enormous slices of the mortgage market and debt-securities. Banks don't like to talk about them. The CEO's and Wall Street analysts don't want to put an actual put a price on them. They get about as much attention as a step-child at a family reunion.
No one really knows what these "level three" assets are actually worth. The only way for accountants to figure out what they're worth is...to guess. Yup, just give a ball park figure of what you THINK they are worth.
It's called "mark to market" pricing. It means each firm can basically set the value of its own assets, using its own formula. Kind of like you deciding exactly how much your bank account, your car and your house is worth, but without asking anybody to check your math. Just make up a figure and people will take your word for it. Hey, shoot for the sky, man. Make yourself worth quite a bit. It looks good on the balance sheet.
And that's exactly the problem. Financial firms like Goldman Sachs, Morgan Stanley, Lehman Brothers, Bear Stearns and Merrill Lynch all pretended those hidden assets were worth plenty. But with FAS 157 cracking down, this shell game is becoming harder for financial institutions to hide these toxic assets, and they simply can't continue to hide them forever. They keep playing the shell game, but the clock is ticking. It's just a matter of time before the jig will be up.
The scary thing about these "level three" assets is NO ONE, and I mean NO ONE, knows exactly what they're worth. When the shell game is up, and they finally sort them out and discover their worth; you're going to see more bank failures…BIG ones.
That's the ticking time bomb, folks. These hidden "level three" assets are based on failing subprime loans, the collapsing lenders, and the increasing slice of default consumer debt. How much? Once again…no one knows, and no one dares to guess. It would just cause panic, which would just add more gasoline to the fire.
I personally think it's a WHOLE LOT MORE than $700 billion. After all, the financial wizards have been so accurate in predicting economic conditions thus far. Do you think financial institutions will level with Wall Street and tell them how much crap is on their books? Keep dreaming. The shell game continues...but not for long.
So, you think the politicians can save the day? Don't bet on it. The powers that be that got us into this mess are desperately trying to cover their asses. Just look how much success they have enjoyed so far. Who really think another bailout will solve the problem? Do you? Really?
To save us, Fed chairman Ben Bernanke is killing the value of U.S. currency by printing billions of dollars in funny money. They're just cranking out more and more "Monopoly" money to solve these problems. The printing press at the Fed is working overtime, and the confetti, I mean money, is just floating into the market like a ticker-tape parade.
Just think of how much new "money" is floating around the world due to the creation of "credit" as the Fed bails out insolvent banks and investment houses. Hell, the Fed just cranked out $680 Billion yesterday…and no one batted an eyelash. That's almost as much as the $700 billion dollar bailout everyone is bitching about. You think that will work? Really?
By throwing piles of cash onto the bonfire, this is the only way the Fed figures they can prop up the markets and U.S. economy. As we continue to build up this fragile house of cards, (the value of the U.S. dollar) a big wind is brewing.
Ask the Germans how this strategy worked out after World War 1. With the plunging purchasing power of the U.S. dollar, everything will cost more...LOTS more. (However, it will look nice as wallpaper when the dollar collapses)
Treasury Secretary Hank Paulson is looking to save his banking buddies on Wall Street with more bailouts. That's like curing an alcoholic by giving him a year's supply of booze. Give the greedy idiots who got us into the mess the tools to "save" us? Please. They've done such a bang-up job so far. Plus, he claimed if this bailout didn't happen IMMEDIATELY, the system would melt down in "days". Guess what? That was almost two weeks ago...still no meltdown. That speaks volumes about how much he knows.
Barack Obama and John McCain refuse to face the truth on the campaign trail and won't explain how this crisis will alter their promises. Unless they address the pain we are going to feel, and outline the unpopular measures they HAVE to take, don't believe a word of what they say.
Besides, either one of them is destined to be a one-term President, anyway…after the chickens come home to roost. They'll be forced to do some painful things, and will pay the price. (Like Dubya's dad paid for the sins of the Reagan years) Don't even bother asking Sarah Palin, she'll just ramble on about "job creation".
Congress is just looking to get re-elected, and continues to grasp at straws with these "solutions", rather than make the tough choices to get us out of this mess. From the vote this Monday, partisan bickering proves that politics trumps solutions. Oh yeah, they're set to adjourn for the year. How nice. Job well done.
If you feel that this is a hopeless situation, here's the silver lining. This crisis which we're going through now...Japan already went through almost 17 years ago. Japanese property value fell as much as 90%, and their stocks tanked even after they lowered interest rates to zero. The government also offered "bailouts" and flooded liquid assets into their market to no effect. They've just recently emerged from their crisis. 17 years later. I think we're in this for the long haul folks: a two-decade economic correction that will change our way of life.
Maybe I'm wrong. Maybe these "bailouts" will work. Maybe time will prove Bernanke and Paulson as geniuses. Maybe the stock market will roar back as the American economy stages a surprise comeback and house prices soar through the ceiling. Maybe these "level three" assets regain their value. Maybe…
Then again, maybe you'll just win the lottery and none of this will matter.
How bad do I think this will get? Pretty bad.
Brace yourselves for tough times.