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alstry (36.37)

A CRISIS summary......Time for a Break for a while

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August 30, 2008 – Comments (4)

At this point, the issue is pretty clear....... incomes in America are evaporating and the mainstream press is starting to tell you.  What they havn't told you yet is why.  That an huge percentage of America's income over the past five years was dependent simply banks loaning out bags of money and now that is stopping causing incomes and spending to evaporate and asset values to crash.

This crisis will affect those that borrowed and those that didn't.

We see it in businesses shutting down and going bankrupt, foreclosures rising, and governments and hospitals running out of money.  We tell ourselves this will stop soon but we are still in the early stages of the unwinding process.

Nothing about what I am saying is new to anyone really following the problem,,,,it is just that the system has allowed the CRISIS to be masked by illusory accounting practices.  This is a good summary of the issue:

http://calculatedrisk.blogspot.com/2008/08/sfas-157-fair-value-and-other-fairy.html

Chancellor Darling has "let the cat out of the bag" calling this the worst economic crisis in 60 years.

http://news.bbc.co.uk/2/hi/business/7589291.stm

There is simply not enough income to pay the debt.  Add in the pension/entitlement obligations and our governments are in hole so deep Superman couldn't fly out.

At the end of the day, America depends on most of its constituents being able to pay each other.  If Business A owes Business B a lot of money for goods and services, and A can't pay, then B could also fail as well along with its employees.   If this process spreads, the failure rate grows exponentially.

We are now at the point where the failures are becoming more and more visible.  We see the stress everywhere as I have documented it ad nauseum.

The problem is enormous......Obama's new $100 Billion stimulous plan is idiotic as it will only put the nation into more debt and will do little to offset a much larger issue.

Basically, a huge percentage of the assets in our banks is loans collateralized by Real Estate.  Much of that debt was issued or refinanced in the last five to seven years.  A lot of that debt is failing and for the first time ever, the collateral is crashing at a rate never seen before.

This is well documented with the continually rising home foreclosures.  It has now reached the point where for the first time, prime foreclosures are exceeding subprime foreclosures and subprime is still increasing.

It is spreading now to commercial RE.  As more and more businesses fail, more and more vacancies arise causing more and more distress to commercial RE.

Again, I guestimate that there is about $20 Trillion of debt loaned to RE.  Loans collaterized by RE is the majority of many banks assets.  A material part of that debt was current simply by the borrowers being able to borrow money and make service payments.(sorta like these idiotic governemnt stimulous plans).

During this  process we all benefitted by rising asset prices and increased sales in our businesses.  But anyone who purchased any RE in the past five years, especially if they borrowed money against it, could be facing a situation where they are now underwater.

Think about the number of people involved who either purchased RE in the past five years or benefitted from people borrowing and spending against their RE.  It is practically every business and government in America.  Many businesses and governments expanded and levered up on the increased spending compounding the current problem.

Since banks are tightening up, we must now deal with the ENORMOUS debt created.  An unprecedented amout of debt.  These debts are our obligations and the banks assets.  As our incomes fall, servicing the debt is becoming harder and harder for more and more....not just people and business...but government as well. 

The government issue will really start heating up right now.  There is simply no way for government to meet debt obligations with the current decrease in tax revenues.  Cutting the budgets will not work as the problem is too big and minimum spend obligations too high.  Increasing taxes won't solve it even if you tax 100%.

We are becoming a nation, and world, that more and more simply can't meet their obligations due to the fact that we leveraged up soooo much and credit is being cut off.  For those that didn't leverage, they were still beneficiaries of the system whether through rising asset values, stable bank accounts, or recipients of governent services.

Now the evidence is finally becoming more mainstream over a year beyond when it should have been obvious.  The rising food and fuel prices are only going the make this CRISIS much worse.

There is simply no easy way to solve the problem of incomes evaporating accross America.  As people can't pay, others will lose their jobs, and the cycle will get bigger and bigger faster and faster.

This is not a fun subject to focus on.....but it is the single most important issue facing America today AND WE NEED TO DEAL WITH IT AS A NATION RIGHT NOW.  If America doesn't have a system where people can meet their basic needs....we don't have much.

I have documented the early part of the Crisis over and over and over.......now it appears the mainstream press is ready to inform the world of a situation that should have never been allowed to materialize.

I know, we have been through crisis before.....just never one close to being this big......in the past the world had been through bombs before....but when nuclear came along.......the stakes changed.

As you read the crap put out their by so called analysts and cheerleaders, just remember these numbers.....

there is about $20 Trillion dollars of loans in America alone collateralized by RE alone (compare that to the total value of gold in the world or the total value of America's agricultural output)  much of which was issued in the last five years.

At the peak, Americans were withdrawing appraoching $1 Trillion dollars in HELOCs per year(compare that to the impact of a $100 billion dollar stimulous package)  Add in toxic mortgages, commercial RE loans, and private equity debt and we were over $2 Trillion per year goosing the economy.

ASK YOURSELF THIS SIMPLE QUESTION.....WHAT WOULD OUR GDP for the past five years BEEN IF THIS TOXIC LENDING DIDN'T TAKE PLACE?????? (Then you will see why I call it a ponzi scheme)WHAT WOULD ASSETS REALLY HAVE SOLD FOR WITHOUT FREE MONEY???

The debt created became the assets in our banks protecting our savings (less the hundreds of billions in bonuses bankers took for themselves).  As more and more banks fail, the FDIC will step in.....the only problem is there is now less than $50 Billion of insurance protecting $5 Trillion of debt.

Not a single political party is addressing the crisis.  They are both feeding us dreams about a better future while the present is crumbling around us.  If enough debt fails, America's economy will become crippled as incomes and assets will evaporate and few will have anything to pay each other.

Until someone proposes are credible plan to restructure the debt very soon.....our nation's dreams will become nightmares very very soon.

Note:  this is an IMMEDIATE crisis simply based on an income/debt analysis....factor in unsustainable pension obligations, impossible entitlements(social security and medicare). and rising food and fuel prices.............................and I am not sure how you characterize it.

I have little doubt these issues will change America to a degree we have never seen before...the only question going forward is how??????

 

4 Comments – Post Your Own

#1) On August 30, 2008 at 10:39 AM, alstry (36.37) wrote:

THE CRACKS ARE GETTING WIDER IN ENGLAND

A member of the Bank of England's Monetary Policy Committee said on Friday that radical action was needed to ensure the crisis did not get worse and warned of a sharp rise in unemployment.

Mr Osborne said: "Who is telling the truth at the top of government?

"The prime minister says the economic situation isn't as bad people think and that Britain is well placed to weather the economic storm but the chancellor says we are at a 60-year low.

"Gordon Brown has briefed out stories that he has an economic recovery plan all worked out, meanwhile the chancellor says the downturn will be more profound and long-lasting than people thought.

"It's not clear whether Alistair Darling meant to tell us the truth about the mess 10 years of a Labour government has left our economy in, but he has certainly let the cat out of the bag."

Liberal Democrat Treasury spokesman Vince Cable said the government had been inconsistent with its message.

"Until very recently there was no problem, there was a state of denial, Britain was the strongest country in the western world, any problems we had were from overseas," he said.

"Now suddenly we've lurched into Apocalypse Now, the return of the Great Depression."

The Treasury said the chancellor's comments were "entirely consistent" with his previous statements.

A spokesman said: "These are the same difficult economic circumstances that every other country in the world is having to deal with.

"But with employment levels near record highs, interest rates that are historically low and the past decade of rising incomes and job creation, the UK is well placed to deal with this."

http://news.bbc.co.uk/2/hi/business/7589739.stm

#1... Interest RATES don't matter......the ability to service the debt is the ONLY issue

If someone is paying 15% of a $100K loan....it is less than paying 5% on a $500K loan.  $100K houses in 1980 are $500K houses today.

#2 Unemployment is RISING and wages are DECLINING...factoring in rising prices and practically WAGES are DECLINING at a record pace....how is that well prepared to deal with the current CRISIS????

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#2) On August 30, 2008 at 11:55 AM, devoish (96.26) wrote:

"Obama's new $100 Billion stimulous plan is idiotic"

Alstry,  am not aware of any "new" $100 Billion economic stimulus program being promoted by Obama. At leats not a complete give-away like the one recently passed. I know he is promoting to use tax rebates to steer our Country on course toward energy independence through renewables, and improving efficiencies. And I know he has proposed a plan for 10bil. to help with mortgages that liar loans and such will not qualify for. Of course that money will be spent here or with the coming bailout of Fannie Mae, which our current administrators have authored and will protect the liar loan folks too. He has also proposed 10bil to go to state and local gov'ts in thehardest hit areas to help prevent the closing of courthouses, police forces etc, at a time when job losses are likely to make crime go up. If the United States is unable to maintain law and order, it is third world status for us, and the current administrations work will be almost complete. Most of his other proposals are directed toward renewable energy and spread out over the course of years.

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#3) On August 30, 2008 at 1:22 PM, alstry (36.37) wrote:

Dev,

The problem is that we are all GM and Ford now. 

The only way F and GM stayed in business for the past 30 years was loan them more and more and more money.  It hid this fact because its buyers were able to borrow more and more money and purchase high margin SUVs.  Well that game is over now but we all want to cling to the past.

Ford and GM need to borrow $50 Billion dollars....if they don't get it they will be bankrupt.....if they get it it will only put them deeper into debt and when they do default it will make the problem even worse.  

Revenues to Ford and GM are evaporating as their margins are shrinking even more.....it is a double edged sword that cuts on both swings.  THERE IS NO WAY FOR FORD AND GM TO RECOVER THE OLD MARGINS AS THERE IS A MIGRATION TO SMALLER LOWER MARGIN VEHICLES AND THE AUTO BUSINESS IS BECOMING MORE COMPETITIVE.

A similar thing is happening to our municipalities around the country.  Municipalites have borrowed more and more over the past 30 years banking on growing revenues but now the tax revenues are shrinking and they can't meet their obligations.  Not only are revenues shrinking, but payment obligations are rising with increasing entitlement issues.

We are now paying the price for 30 years of leveraging up a financial system.  We were all sold on 30 years of BS retirement planning that will likely turnout to be one huge ponzi scheme.

Now the system is no longer able to extend much more credit.  It is the inability to extend credit that makes it an IMMEDIATE crisis.  If you can't delay or hide it any more.....you must deal with it now.  Any proposals now without fixing the debt problem insures a terrible future for our kids.

Obama's proposal is more of the same Washington BS to make a horrible crisis even worse........

Sen. Barack Obama (D-Ill.) on Friday announced an “Emergency Economic Plan” that would give families a stimulus check of $1,000 each, funded in part by what his presidential campaign calls “windfall profits from Big Oil.”

Details are in this
six-page policy paper.

The first part of Obama’s plan is an emergency energy rebate ($500 to individual workers, $1,000 to families) as soon as this fall.

“This rebate will be enough to offset the increased cost of gas for a working family over the next four months,” Obama said. “Or, if you live in a state where it gets very cold in the winter, it will be enough to cover the entire increase in your heating bills. Or you could use the rebate for any of your other bills or even to pay down debt

Separately, Obama’s plan includes a $50 billion stimulus package that his campaign claims would save more than 1 million jobs.

This proposal is more of the same Washington  BS!!!!!

By the way, BUSH is even worse.  His medicaid presciption bill added about $10 TRILLION in additional obligations.  In his speech this morning he said there was evidence the Economy was turning around.  This is a flat out lie and he knows it.  If Bush is willing to lie to you about something so obvious, what else has he lied about thoughout the past eight years????

NOT a single politician wants to deal with the crisis at hand....they are all simply pandering for votes while the problem gets deeper and wider.  

Right now the banks are misrepresenting the fair value of their assets.....if the accounting was honest....my guess is thousands of banks would have failed by now.

It is the dishonesty that has allowed perceptions to miss the severity of the issue.  That is why I hammer on integrity of reporting finanicial statements. 

I have no doubt that when we exit this problem, America will be better off, but the longer we wait to deal with it......the pain going through it will be intense.

Right now America is broke.......the question is whether we engage in a new crisis to distract our population from this issue.

 

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#4) On August 30, 2008 at 1:22 PM, alstry (36.37) wrote:

Dev,

The problem is that we are all GM and Ford now. 

The only way F and GM stayed in business for the past 30 years was loan them more and more and more money.  It hid this fact because its buyers were able to borrow more and more money and purchase high margin SUVs.  Well that game is over now but we all want to cling to the past.

Ford and GM need to borrow $50 Billion dollars....if they don't get it they will be bankrupt.....if they get it it will only put them deeper into debt and when they do default it will make the problem even worse.  

Revenues to Ford and GM are evaporating as their margins are shrinking even more.....it is a double edged sword that cuts on both swings.  THERE IS NO WAY FOR FORD AND GM TO RECOVER THE OLD MARGINS AS THERE IS A MIGRATION TO SMALLER LOWER MARGIN VEHICLES AND THE AUTO BUSINESS IS BECOMING MORE COMPETITIVE.

A similar thing is happening to our municipalities around the country.  Municipalites have borrowed more and more over the past 30 years banking on growing revenues but now the tax revenues are shrinking and they can't meet their obligations.  Not only are revenues shrinking, but payment obligations are rising with increasing entitlement issues.

We are now paying the price for 30 years of leveraging up a financial system.  We were all sold on 30 years of BS retirement planning that will likely turnout to be one huge ponzi scheme.

Now the system is no longer able to extend much more credit.  It is the inability to extend credit that makes it an IMMEDIATE crisis.  If you can't delay or hide it any more.....you must deal with it now.  Any proposals now without fixing the debt problem insures a terrible future for our kids.

Obama's proposal is more of the same Washington BS to make a horrible crisis even worse........

Sen. Barack Obama (D-Ill.) on Friday announced an “Emergency Economic Plan” that would give families a stimulus check of $1,000 each, funded in part by what his presidential campaign calls “windfall profits from Big Oil.”

Details are in this
six-page policy paper.

The first part of Obama’s plan is an emergency energy rebate ($500 to individual workers, $1,000 to families) as soon as this fall.

“This rebate will be enough to offset the increased cost of gas for a working family over the next four months,” Obama said. “Or, if you live in a state where it gets very cold in the winter, it will be enough to cover the entire increase in your heating bills. Or you could use the rebate for any of your other bills or even to pay down debt

Separately, Obama’s plan includes a $50 billion stimulus package that his campaign claims would save more than 1 million jobs.

This proposal is more of the same Washington  BS!!!!!

By the way, BUSH is even worse.  His medicaid presciption bill added about $10 TRILLION in additional obligations.  In his speech this morning he said there was evidence the Economy was turning around.  This is a flat out lie and he knows it.  If Bush is willing to lie to you about something so obvious, what else has he lied about thoughout the past eight years????

NOT a single politician wants to deal with the crisis at hand....they are all simply pandering for votes while the problem gets deeper and wider.  

Right now the banks are misrepresenting the fair value of their assets.....if the accounting was honest....my guess is thousands of banks would have failed by now.

It is the dishonesty that has allowed perceptions to miss the severity of the issue.  That is why I hammer on integrity of reporting finanicial statements. 

I have no doubt that when we exit this problem, America will be better off, but the longer we wait to deal with it......the pain going through it will be intense.

Right now America is broke.......the question is whether we engage in a new crisis to distract our population from this issue.

 

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