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

To put the problem into perspective, let’s just consider some base statistics.

The publicly issued debt of the Unites States was, until very recently, a massive $5.3 trillion. The total debt, including non-public IOU’s and unfunded obligations including social security and Medicare, is now a staggering $50 trillion! The total annual wealth generation, or GDP of America, is some $14 trillion.

Contrast those figures with the current debt problem ascribed to the reckless pursuit of predatory lending. Incidentally, predatory lending was made illegal in most states until overridden by President George W Bush to protect Wall Street profit opportunities.

The US mortgage holdings are some $14.8 trillion, including some $3 trillion of commercial mortgages. Local government debt is about $3 trillion. But, even these gigantic figures pale in comparison beside the $20.4 trillion of consumer and corporate debt. Therefore, the total of non-federal government debt is in the region of $38 trillion!

Of course, not all of it will default. All things being equal, possibly only a small proportion will fail, at least initially. But today, all things are not equal. We know that we are heading into a recession. This means that increasing amounts of debts will default.

The main problem is that predatory lending incurs a high default rate. So if only 10% of outstanding loans default, the government will have to raise some $4 trillion, or more than five times what Congress is being asked. It will increase the US government public debt by some 80%.

This will threaten the triple-A credit rating of US government debt. It will also crowd out corporations and entrepreneurs from crucial debt funding. Finally, it will put upward pressure on interest rates at precisely the time when lower rates are called for to avoid recession slipping into depression.

If the economy moves into a severe recession and then depression, default rates will explode. These, in turn, will cause stock markets to implode, as they did in 1929. In addition, the US dollar is likely to plummet, driving up the trade deficit in the longer term. Considering these factors, many of which the government prefers to hide, things look bad - very bad.

The next shoe to drop is the stock market. Its not that complicated either; when wholesale prices on supplies and raw materials go up, but businesses can't pass along those costs because consumers are already maxed-out, then corporate profits plummet and the stock market crashes down with the force of an avalanche.

LONDON : Global share prices crumbled Friday and investor anxiety mounted as political wrangling blocked a deal to save the US finance sector, a big US bank collapsed and a European institution showed signs of stress....

"We've got a big problem ... we need a rescue plan," Bush said in televised remarks minutes after Wall Street shares plummeted in line with Asia and Europe and as central banks again injected tens of billions of dollars to avert seizure on interbank lending markets.

After a rescue for US savings giant Washington Mutual by JP Morgan Chase in the biggest-ever US banking failure, shock waves hit European financial markets.

NEW YORK – Stocks have turned in a lopsided finish as investors nervously wait for more news on the government's financial bailout plan.

The Dow Jones industrials rose 126 points to the 11,149 level, lifted by big national banks like Citigroup Inc. and Bank of America Corp. Although investors are very nervous about the financial sector, they were gravitating toward companies they believe are in more secure financial positions.

Smaller banks and tech stocks led the day's selling, which came on very light volume as many investors chose to sit out the session....

Broader indicators fell. The Standard & Poor's 500 index declined 5.16, or 0.43 percent, to 1,204.02, and the technology-heavy Nasdaq composite index fell 14.42, or 0.66 percent, to 2,172.15.

Declining issues outnumbered advancers by more than 3 to 1 on the New York Stock Exchange, where volume came to 624.5 million shares....

Uncertainty over the bailout package left the dollar mixed against other major currencies. Gold prices rose.

The International Monetary Fund has been cautioning for months that the global economy was much weaker than governments were admitting. Bush missed a chance to use those warnings to bring international organizations and cash-rich nations together to talk about creating a global insurance fund and taking other steps to keep credit problems from metastasizing.

It is still worth trying. French President Nicolas Sarkozy has suggested that a summit of major financial powers should take place shortly after the U.S. elections. Such a gathering should begin a systematic effort to update the six-decade-old Bretton Woods institutions, which risk being swamped by the economic overhaul that Bush has undertaken on the fly.

Yeah, that sorta sums it up....