Why its about OVER
July 29, 2008
– Comments (11)
Basically, the Wealth of America(and the world for that matter) is primarily centered in Real Estate, Business Debt and Equity(Stocks and Bonds), and Cash.
The Finance Industry accounted for over 1/3 the market valuation of stocks on the S&P in recent years. Much of that market valuation was predicated on making agressive loans(recently) that no longer are being made(subprime, reverse am, LBOs, Private Equity, Auction Rate ect....) As a result, the profits of the financial industry has evaporated. Not only that, much of the assets on the books are now suspect. Consquently, it is very difficult to determine whether there is any value in our financial industry.
In addition, the since the balance sheets of banks have deteriorated, it is becoming more and more difficult to make a loan. As loans become more difficult to obtain, borrowing becomes more expensive and assets decline in value.
Now housing is crashing at a record pace. Following housing is Commercial Real Estate. Between the two, there is trillions and trillions of loans outstanding securitized by real estate that now is rapidly declining in value due to defaults. These loans are the assets of our banks, insurance companies, pensions, and 401Ks. As these values crash, so does the wealth our our country.
The insanity is that over the past few days, actual write downs have been taken by two major banks. If the other banks, pension plans, and insurance companies took similar action....we could be facing HUGE writedowns. Much of America's debt is based on Real Estate.
As lending stops, so does business. Now that business is contracting, it is freeing up even more real estate. With Business and Real Estate crashing, there is little left to securitize the trillions and trillions of dollars of loans on the books of our banks and insurance companies. Over the past seven years, we basically leveraged America up on Trillions of BAD DEBT.
Now that debt is being written off, much of our financial industry could be insolvent very soon. Basically, with an insolvent finanical system, it is difficult to value anything.
Behind the scenes, everyone is doing their best to make everything look as good as they can....but in the end, if you can't pay the debt, it is a bad loan......and the number of bad loans are skyrocketing everyday. THE TREND OF DETERIORATION IS INCREDIBLE.
When we make a deposit in the bank, we loan the bank money and in exchange they give us interest. The banks then goes out and loans it out 5-10X what we give them. If just a fraction of those loans go bad.....the banks can't pay us back. There is only $50 Billion dollars of insurance protecting $6 Trillion of deposits.
At this point there are two choices:
1. Hyperinflate and dilute the value of money......penalizing saves and putting our increasing number of fixed income elderly in a very precarious situation.
2. Simply wash out the toxic debt and let things collapse quickly, and start over.
Each day that passes, we get closer to the point where there will be fewer and fewer options left as more and more debt gets written down. Few really see what is coming.....my guess is after meeting with Buffet and Volker yesterday.....Obama has a pretty good idea what he is facing.
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