Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

missed the sarcasm

I am usually not a sky is falling person by IMO the economic situation of the US today is in a mighty precarious position. It is said the darkest hour is right before the dawn and right now it looks to me pretty close to midnight.

Anyone who doubts that we are a year into a Depression, remember, these things do not hit you like a punch in the face; rather, they are more like an untreated boil that slowly festers until body parts have to be amputated from infection....


In October 1929, the stock Market crashed, yet there wasn’t a run on the banks until 1933....

Last year, in this column, I identified the start of the New Depression as November 7, 2007. That was the day that China announced they’d be unloading about $400 billion in US currency they were holding in the form of treasury notes. It was a check in the global economic chess game, and the checkmate came from bad playing on the part of the United States.

Without the Chinese largesse, Treasury Secretary Paulson and Fed Chairman Bernanke – aided by both Congress and Bush, went right ahead and started fixing every problem by printing more money. Between stimulus packages, bank bailouts and, most recently (and most egregiously) the underwriting of Fannie Mae and Freddie Mac, nearly $7 trillion has been added to the existing $10 trillion of national debt. Your dollar is worthless, and the banks that are holding...your assets are insolvent.

We are not even close to midnight yet.

Year Two of the New Depression

Shares of Merrill Lynch & Co. declined Friday, as concerns over the fate of the investment bank's rival, Lehman Brothers Holdings Inc., spread to other financial stocks.

Merrill shares tumbled $1.61, or 8.4 percent, to $17.80 in late morning trading, after earlier falling to a 12-year low of $16.90. Shares have traded between $18.50 and $78.66 in the past 12 months.

Lehman's shares have plunged this week, as the No. 4 U.S. investment bank scrambles to find a buyer, or otherwise reassure Wall Street that it's stable.

Thriving in an Age of Financial Collapse
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But analysts say that the liquidation of Lehman will put the financial markets under pressure for some time as banks are forced to take additional write-downs and credit spreads widen. And the Wall Street Journal reports that some traders are having trouble trying to find new counterparties for their trades with Lehman.

The Next Victim: The financial firm seen as the most vulnerable is now clearly the American International Group. The insurance giant, desperate for new capital as its losses mount, may announce asset sales as soon as today. The company has also reportedly asked the Federal Reserve for $40 billion in short-term financing.

A.I.G. lost more than $13 billion in the first half of this year, most of it due to investments in mortgaged-backed securities and other debt-related instruments.

And there may be others. Still overhanging the financial-services industry is the fate of Washington Mutual, one of the nation's largest mortgage lenders. A team of private equity firms pumped $7 billion intothe thrift last April, but its losses have continued to mount and its shares barely paused in their slide. They have lost more than 90 percent of their value in the last year, and closed on Friday at just over $2.

The End of the Investment Bank: With Bank of America's $44 billion acquisition of Merrill Lynch, only two independent Wall Street firms remain: Goldman Sachs and Morgan Stanley. Will they now feel pressure to merge with a big commercial bank?

In the course of one tumultuous weekend, US treasury secretary Hank Paulson and Federal Reserve chairman Ben Bernanke have permitted one bank to go under and another bank to be quite unexpectedly sold.
For some observers, the news is almost enough to bring on a 'Jim Cramer moment' – a meltdown broadcast on TV in August last year when the CNBC pundit Cramer wondered whether the US government had any concept of the trouble brewing in the US housing market.
Orchestrating a sale and a bankruptcy in such a short period of time has certainly led to an acute sense of crisis both in the US and internationally. For a start, no one believed the sale of Merrill Lynch was so imminent; there had been very little discussion of a sale prior to this weekend.
But the act of allowing Lehman Brothers to go bankrupt is especially high risk. The fire sale price of the mortgage-related assets that Lehman will now have to unload will depress prices across the board – including similar asset classes held by all the other major financial institutions.
The fact that Washington Mutual and AIG – a deposit-taking bank and a major insurer even more important to the financial system than two broker-dealers – and also struggling suggests that the timing of Lehman’s demise could not have been worse. It may even provoke the dreaded 'domino effect', when investors panic and dump all financial shares, or in WaMu's case pull out their deposits, because there is no clear commitment from the government in the event of a crisis.
The risk now is that sagging stockmarkets (inevitable after the failure to bailout Lehman) and a weakening dollar (equally inevitable) will affect the capital adequacy ratios of even the healthy commercial banks in the US. This will force them to reduce lending, worsening the credit squeeze, and condemning the US economy to further pain.

Paulson's current opposition to a Wall Street 'bailout culture' developing rings hollow compared to his and Congress's inability to properly regulate the banks in the first place.

Ultimately, this is a heavy blow to the US model of capitalism. Very few countries around the world will now be tempted to open up their capital markets to turbo-charge growth. The US’s own transition from manufacturing to financial services has suffered a huge setback, even as China takes over its mantle as the world's biggest manufacturer. The UK is next in line, with its even more 'manufacturing light' model – mortgage-lender HBOS is already being shredded. But while Asian countries may be feeling smug, they are in trouble as well, with suddenly much fewer outlets for their manufactured goods. The world suddenly looks a much more dangerous place.