Writedowns: So Where Did The Money Go?
Morgan Stanley writes down an unbelievable amount of cash. Banks are getting crushed with tons of losses. I am sure they'll be ok at the end, but many a good fool has helped me understand that it's not wise to try and predict this downfall. Further research has proven that the fool community is right on - should I expect less?
What I want to know is, where is the billions and billions of dollars ending up? Leaving monetary policy out for now (but not later) --- the market is the same as physical mechanics --- money (or energy) is conserved. What does that mean? It means that if banks are writing off billions and billions of dollars - somebody, somewhere is lining their pockets. So who is it? Here are my best guesses, but I'd love to hear the community's opinions.
1) Lower Middle Class - Is this the ultimate tax break and federal program for the lower middle class? "No worries on you loans. Don't pay. We've got you covered. You bought a house you couldn't afford. Go ahead and default and ruin your credit, but you don't owe another cent to anyone". Is this where the money went? Bankruptcy is no picnic, but relieving people of their debt isn't exactly harsh either. Is this credit crunch injecting money into the lower middle class? Hmmm... I don't know. But I'm interested to find out.
2) Homebuilders --- Build, build, build, make money and run. Why not. That's what the bubble was all about. Plenty of unqualified buyers ready to go. So, are the execs of homebuilder corprorations sitting pretty? After the plunge, it wouldn't seem so --- but there was a major uptick in both stock prices and cash flow for many of the homebuilder equities. Is this where the banks gave their money?
3) Thin Air --- Due to the Fed's policy and manipulation of rates, did they just create "funny money" to get absorbed by the ether? Clearly, the deep cuts in the price of money have fueled the bubble. Maybe, just maybe, you can inject a bunch of cash into the system and watch it all disappear. Nobody benefits - its just a black hole that the market absorbs. If the Fed rate is very different from what the market thinks the rate should be, this doesn't actually sound that rediculous (but still an odd look at macro ecomonic theory).
4) Inflation --- Finally, the one that probably makes the most sense, is that all this money is just boosting prices, wages and the overall expenditures that people and corporations make every day. The housing bubble simply generated even more cash in the market place - much more than the Fed intended to - because now, the banks are chipping in - on the billion dollar level. Not only are we borrowing more and more, but we've got an injection of billions of dollars from the banks. What a scary thought, but it seems the most logical to me. Inflation with stagnant growth makes me think --- early 1980s here we come!
Who knows what the future will hold, but I can't wait to see how it all shakes out.