The Big Game – Collapse Accelerating

| October 1, 2008


Readers will recall that I have been against the massive, wasteful bailout bill that is still before congress. My position has been that the $700 Billion allocated cannot and will not fix the problem, if for no other reason than the problem is several orders of magnitude larger than that figure. This collapse is powered by the hulking mass of debt that is being destroyed on an hourly basis as banks, investment houses and individuals are experiencing the gap between what they think their assets are worth, and what the market will pay as they sell whatever they can to cover investments purchased on margin credit. This is causing the collapse to accelerate, though intervention by the government is trying to slow it down, which sadly increases the amount of the final tally and ensure that the scope of the big wipe out that is coming will be even larger than had the just let it work it’s way out naturally.

Unlike previous panics and recessions, the largest and wealthiest institutions are leading the way. This is because the easy access to short (overnight / 1 week) and long term credit has been so ubiquitous that it became built into the system. For many decades everyone loaned money to everyone else at that level. They had some spare cash, they loaned it short term using something called Auction Rate Securities. In the history of this collapse, these were some of the first to seize up.

As the market for short term debt died, every business that uses a credit pool to help manage their business began to starve for liquidity. They had healthy assets, but without the ability to borrow working money against those assets, they were as good as broke. Yet you hear weekly of how the Fed and world central banks were injecting money into the market to provide liquidity, sadly you cannot force anyone with cash (or Fed supplied liquidity) to lend.

Our entire economy is based on trust, and right now that trust is near zero because the big players all suspect whomever they are lending to is a house of cards moments from collapse. This was the case with Bear-Sterns, Wachovia, Washington Mutual, Lehman Brothers, AIG and a host of other brand names that collapsed under the weight of their own debt that they could no longer borrow money to service.

But this is not over yet! Many other banks are in the same boat Wachovia was. Names like Fifth Third Bancorp, Sovereign, National City and possibly even Citibank itself. Thanks to globalization this problem has been exported around the world, and we are seeing impacts in Europe and Asia just starting. You can reasonably think of them being 6-12 months behind the US in this mess, with their banks and financial companies not as tightly regulated as the US, their balance sheets are likely even more exotic that the companies in the US that have already gone down.

So in the past I have asked who is going to be holding the bag. The answer is clear – we are. Many of us have enjoyed using the national and world equities markets for decades as a means to build a retirement account through IRA and 401(k) accounts. This influx of money has done wonders for the US economy and US industry, and is one of the primary reasons why the US savings rate is so low – people don’t use a bank savings account, they invest their excess money.

As a result many of us paid top dollar for companies and assets that are be re-valued downwards, and sometimes by dramatic amounts. As people receive and open their account statement for the end of the 3rd quarter, the effect is going to be a collective exclamation of anger and outrage. Sadly for the politicians this will happen right before election day. Quickly thereafter people will put most if not all discretionary spending on hold (if they had not done so already). This spells doom for the legion chain stores that have been built in the last 5 years peddling plasma TVs, poorly made expensive furniture and just about anything else that people can find a reason to do without.

Worst of all for those already retired, the accounts they were depending on to fund their life until they die may no longer be sufficient for the task. They are past their productive working years and suddenly find the comfortable retirement they had worked so hard towards for decades is now gone.

Try to keep in mind the full scope of what is happening in the financial markets (and I don’t mean the Dow Jones or NASDAQ) won’t be known for several weeks or months. One of the likely outcomes is that very long term investment companies such as insurers State Farm and Liberty Mutual are going to be under significant strain as the money they sunk into supposedly “safe” investment vehicles disappears from their balance sheets. We are likely to see a few of these big brand names crumble soon as well.

This is unfortunately a natural and necessary period of time, where everyone forcefully re-learns the lessons of how to handle money and the hazards of risk. The good news is – once this is done we have a really wonderful period of new ideas and prosperity to enjoy.

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Category: Credit Backlash, Economics, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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