Let's review current events:
Goldman told us profits are way down. Lehman told us the same. Further, a large part of the business that was responsible for past profits will not be available in the future.
Paulson told us the economy is slowing rapidly. Uncle Ben told us inflation is becoming a bigger problem. Hmmmmmmmmmmm rapidly slowing economy and rising inflation?
Banks, Investment Houses, and Investment Funds are as leveraged as they have ever been....especially to Real Estate. Tonight Carlyle received court approval to liqudate a $20 billion dollar fund that was leveraged over 30X. Fremont General can't meet an interest payment. Major developments in Nevada are in default. Banks on the brink of insolvency. And the Governator is travelling around CA telling cities they have to cut police officers due to insufficient funding even though crime is up.
The problem comes down to debt. Too much debt and not enough revenue to meet the obligations. And the fed buying up some toxic paper does nothing to help the underlying insolvency problem.
For example, let's say the fed buys a defaulted mortgage in a development. Behind that mortgage is a vacant house probably in disrepair damaging the neighborhood and costing the city money to maintain. As the owner of the house, the Fed simply can't sell the house cheap because by doing so it will deminish the value of the other houses in the neighborhood. The problem would be exacerbated if more then one house in the neighborhood was in foreclosure..... as the more houses sold at distressed prices and decreased in value, the greater the liklihood of future forclosures.
What would stop people from letting their house go into foreclosure and buying it back at auction at a fraction of the mortgage balance. We now likely have Trillions of dollars of mortgages underwater. Trillions of dollars. Never before in history has anything approached this dollar amount, and this is just residential mortgages. We havn't even touched Private Equity Defaults, Commercial RE Loans, or Derivitives.
Without trying to solve the underlying problem of defaulting mortgages and loans, expect problems to get worse. Much much worse. Imagine going to a doctor and he knows you have a rapidly growing cancer, he fails to tell you and prescribes asperin...........what do you think will happen in the not too distant future?
Defaults continue to rise. Companies starting to layoff as balance sheets constrict. Delta announced 30,000 today. Defaults will beget more defaults. It will be like taking a penny a day and doubling it, in the not too distant future, one default will be so big the market may not be able to get out of the way.
Mommy, why is our bank closed today, and yesterday, and the day before?