is finished, washed up, kaput. Foreign investors and central banks
around the world have lost confidence in US markets and are headed
for the exits. The dollar is sinking, the country is insolvent,
and its leaders are barking mad. That's bad for business. Investors
are voting with their feet. They've had enough. Capital is flowing
to China and the Far East in a torrent. It's "sayonara" Manhattan
and "Hello" Tiananmen Square.
advice? Learn Mandarin.
fell another 2 per cent last night, gold soared to US$840 per
ounce, oil topped $98 per barrel, General Motors reported a $39
billion loss after the market closed on Tuesday, the real estate
market continued its downward slide, and the major investment
banks are marching in lock-step towards bankruptcy.
is all bad. The nation's economic foundation is in shambles. US
credibility is shot. Bush and Greenspan have put us on the road
to ruin. Now their work is done. We're flat broke.
of fiscal ailments now facing the country is too long to list.
We'd need a ledger the size of a small encyclopedia. There's been
a stampede away from the dollar even though it's already lost
over 60 per cent of its value since Bush took office and even
though central banks around the world will lose their shirts if
it collapses. They don't care. They're getting out while they
the vice chairman of China's National People's Congress, announced
yesterday that China would continue to diversify its $1.4 trillion
reserves away from the dollar to "stronger currencies" like the
euro. "Strong currencies"; isn't that Paulson's line? Siwei's
comments ignited a firestorm in the currency markets triggering
a big blow-off of the greenback. The poor dollar has no place
to go now but down, and it's on a greased pole to the bottom.
With consumer spending paralyzed by the decline in home equity
and frozen wages, and the banks "stuffed to the gills" with over
a trillion dollars of mortgage-backed sludge; the prognosis for
the hobbled dollar is looking grimmer by the day. The bulging
trade deficits and dwindling foreign inflows haven't helped either.
The greenback has suddenly become the global pariah; all it needs
is a leper's rattle and a tin cup.
is no better in the real estate industry either, where the nation's
biggest builders are reporting record losses and inventory is
backed-up 11 months. Sales are off 22 per cent in one year alone.
Foreclosures are skyrocketing, jumbo loans (over $417,000) are
impossible to get regardless of one's credit history, 40 per cent
of all mortgages (subprime, Alt-A, piggyback, reverse amortization,
interest-only) have been eliminated, and entire projects in Florida,
Arizona, Las Vegas, and California's Central Valley have stopped
nation's economic foundation is in shambles. US credibility
is shot. Bush and Greenspan have put America on the road
to ruin. Now their work is done. America is flat broke.
thousands of unoccupied homes across the Southwest have been reduced
to ghost towns. Nothing is selling. The building boom, that began
when Alan Greenspan ginned-up the Fed's printing presses in 2002,
has turned into the biggest housing bust in American history.
On top of
that, the banks are tightening lending standards and shunning
potential buyers just when the economy needs a boost in demand.
Loan originations are down and bankers are spooked by the gathering
storm in the credit markets. That means that home sales will continue
to be sluggish, prices will correct more quickly, and the anticipated
"soft landing" will turn into a full-blown crash.
construction has accounted for two out of every five new jobs
created in the last five years. Most of those workers are either
delivering pizzas, cleaning bed pans or are lining up at the soup
kitchen. The BLS's numbers on employment are bogus. It's just
more government bunkum. They're predicated on a "birth-death"
model that creates millions of fictitious jobs out of whole cloth.
In truth, unemployment is soaring and the most vulnerable and
impoverished among us are taking a beating from housing debacle.
to the Mortgage Bankers Association of Washington, the total of
mortgage loans outstanding in 2006 was $10.9 trillion; $6 trillion
of which were transformed into securities (CDOs, MBSs). About
$1.5 trillion of those securities are subprime; another $1 trillion
Alt-A (nearly as risky) and at least another $1.5 trillion in
adjustable rate mortgages (ARMs).
At least 20 per cent of these shaky liabilities/securities will
default, and yet, no one really knows who is holding them on their
books. All of the major financial institutions - the insurance
companies, foreign banks, hedge funds, investment banks - have
purchased these CDO "roadside bombs" and mixed them in with their
other performing loans and hard assets.
The projected explosions have already begun to take their toll
on the financial giants - Citigroup and Merrill Lynch are just
the latest victims; others will follow. The problem can't be fixed
with Bernanke's low interest rates. The bad debts are everywhere
and must be accounted for and written down. That puts us on the
threshold of a jarring market-downturn triggered by an unprecedented
number of defaults that will rumble through the entire system.
Bankruptcies will pop up everywhere at random. It is a blueprint
for economic chaos. And it is unavoidable.
markets have never seen a financial typhoon of this magnitude
before. Mortgage lenders, homeowners, banks, hedge funds, bond
insurers, etc., will all either go under or feel the sting of
a slumping market.
consumer spending paralyzed by the decline in home equity
and frozen wages, and the banks "stuffed to the gills" with
over a trillion dollars of mortgage-backed sludge; the prognosis
for the hobbled dollar is looking grimmer by the day. The
bulging trade deficits and dwindling foreign inflows haven't
helped either. The greenback has suddenly become the global
of the major investment banks are already broke; it's clear from
their own reporting. Charles Hugh Smith sums it up like this in
his recent article "Empire of Debt: The Great Unraveling":
bad bets were marked to market, Citicorp and Merrill Lynch would
be declared insolvent. Why? Because they are insolvent - right
now. The meaning of insolvency is straightforward: their losses
exceed their capital. Recall that these firms list assets of $100
billion (or whatever) but their actual net capital is on the order
of 2.5 per cent to 5 per cent - a mere sliver of their stated
assets. In other words: a 5 per cent loss of their stated assets
wipes them out... The game is now over, and the players shuffling
losses can only last a few more days or weeks."
Up to this
point, the banks have been able to place a sizeable portion of
their "hard-to-value" assets in a Level 3 grab bag, which allowed
company accountants to assign a value to those assets according
to their own judgment. No more. The new FASB 157 regulation will
force the banks to use "market prices" to determine the true value
of their holdings.
Some analysts believe that these new disclosure rules may result
in $200 billion write-downs on assets and require that the over-leveraged
banks to increase their capital reserves. That will slow down
lending and put a wrinkle in the banks' bottom line. In any event,
once the law is enacted; we'll see who's "faking" the value of
their assets or as Warren Buffet says, "Who's swimming with their
Nouriel Roubini summed it up like this:
of losses that financial institutions have already recognized
- $20 billion - is just the very tip of the iceberg of much larger
losses that will end up in the hundreds of billions of dollars...
Calling this crisis a sub-prime meltdown is ludicrous as by now
the contagion has seriously spread to near prime and prime mortgages...
And it is spreading to every corner of the securitized financial
system that is either frozen or on the way to freeze... The reality
is that most financial institutions have barely started to recognize
the lower "fair value" of their impaired securities... The credit
crunch is getting worse and its financial and real fallout will
be severe." (Nouriel Roubini blog)
drumbeat of bad news is having a numbing affect on Wall Street.
Traders' are tight-lipped and downcast. Spirits are sagging. No
one likes loosing money, and yet, the credit storm shows no signs
of letting up anytime soon. Yesterday, the Dow Jones Industrial's
took another 360-point pounding before the bell rang. Another
day, another bloodbath.
The subprime virus has now infected the broader markets leaving
the once-brawny financial giants bruised and reeling like Joe
Frazier in the Thrilla in Manila. A few more down-days like yesterday
and they'll be carrying out hedge funds feet first. The stock
market is looking more and more like a glass pitcher propped up
on the edge of a bookshelf. One little bump, and down she goes.
Mike Whitney is a well respected freelance writer living in Washington
state, interested in politics and economics from a libertarian
perspective. He can be reached at [email protected].
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