Wednesday, October 1, 2008

The Race to the Bottom

Good afternoon folks! A little commentary tonight.

Well, it appears that the world economies are in a race to the bottom! After digesting the fact that the "rescue plan" is actually a global bailout, I have come to some conclusions. We are all going down together!

As the negative news flow continues to pour out of Europe, its pretty obvious they are in as bad a shape or worse than we are. The problem here folks is that the the derivative markets have tied all of us together. They are woven together in a giant basket with each other.

As a result, if any of the "too big to fail" banks here or internationally goes BK, the global banking system could potentially go down with it. So we are left with a global problem. Congress as a result thinks we need to have a global bailout.

Folks, this is a bad situation. I don't think anyone has the answer here. It appears this situation is beyond fixing at this point. Blowups are occuring right and left. The financial meltdown is being exacerbated by the fact that we are also having a global slowdown a the same time.

We couldn't have picked a worse time to slide into a recession! The beginning of the financial meltdown marked the end of the bull market. This is a very dangerous situation.

What should we do now?

This is the million dollar question. I wish I had the answers. The pigmen are demanding that credit must become available or we are facing a financial meltdown because businesses will no longer be able to get loans. The problem we have here is there is no capital to provide this credit. Its like asking your dad for $100 when he is broke.

Supposedly the pigmen think that only the Treasury has deep enough pockets to pull us out of this meltdown. Sadly, I disagree. We do not have enough money to finance the world. Hell, I don't think we have the money to finance ourselves at this point.

There was an analyst on CNBC's Fast Money yesterday that said there are $14 trillion dollars of mortgages loans in the US alone. If 10% of these mortgages default, we have a $1.4 trillion dollar problem. Thats a big number. It would increase our national debt by over 10%. The fear here is if the economy melts down and the unemployment soars, defaults could move even higher.

We also need to keep in mind this doesn't even include all of the credit card, HELOC, automotive, and student loan debt that is floating around in the system. Who knows what the losses are there.

The bottom line here is we already have $11 trillion in debt heading into a global slowdown where our tax base is going to deteriorate. At the same time, our national debt is going to rise substantially from the pronblems I described above.

As a result, we need to be damn careful about where and how we spend our money. The one thing we shouldn't do is rush into this. What scares me is watching how quickly our government just wants to jump into this throwing money out of helicopters.

I realize they are being pressured from all sides but come on guys! Our future is at stake. Take a Xanax and relax.

Bottom Line:

I believe that we should do two things at this point.

#1 Do not throw $700 billion out the window without careful thought and consideration especially when most of the money could potentially end up outside this country. Maybe we need to cut our losses and let the rest of the world deal with their own problems. The current bailout needs to be taken off the table. We need to start worrying about our own problems versus everyone else's.

#2 Gather all of the best and the brightest and bring them to Washington and create a consortium where ideas can be shared and discussed. The majority of this consortium should be composed of third party economists and scholars. There should also be a representation of bankers there, however, their input and size should be kept to a minimum.

It's obvious they cannot come up with reasonable solutions among themselves. Every solution that I have seen from them allows these pigs to make a fortune at the expense of the taxpayer. The Paulson Plan is proof of this. Putting a bunch of bankers in a room to solve a financial crisis is ridiculous. Its like asking a group of crooks to sit down and come up with a solution that reduces crime rates.

Lets hope we can find a solution quickly. We are running out of time and credit conditions are deteriorating rapidly.

One thing we must not do here is overreact and respond to this crisis in a panic. This seems to be the path that we have chosen, and we will end up regretting it if cooler heads don't prevail.

10 comments:

John Maynes said...

Jeff, unfortunately this is one of your dumbest postings ever. Just delete it and start from scratch. :-(

Anonymous said...

John,

How about some constructive criticism. If you don't have any - shut the hell up. Can't stand lulz hunting troll idiots.

Jeff,

Keep up the good work I have been sharing your blog with many of my friends. All of whom, including myself, very much appreciate your posts.

John Maynes said...

I read Jeff's blog every day. Most of the postings are really good. But this one is definitely not. I think he knows himself. Btw, I will not shut the hell up.

Bonnie said...

I think your 2 points are great. All the people making the rushed decision are compromised. It baffles me why they haven't rounded up the economists and others that have predicted this FOR YEARS to come up with a smart plan that will really help America. Instead it is left to the same people that closed their eyes (at best) and now are crying hero. See www.bonnieclarkca.com for names and details

Jeff said...

anon

Thank you for your support, and I appreciate you sharing my blog with others.

My traffic is way up and this is a controversial topic so I expected some distractions.

I will always try to give you my honest opinion even if it goes against the public sentiment.

Being realistic and bearish is not popular here but its what I believe.

I will be the first guy in line to join the next bull market when I think stocks make sense!

Jeff said...

Bonnie

Nice blog! Thanks for the support.

No wonder Obama's economic chief advisor used to work for Fannie.

This kinda stuff makes me sick. Fannie/Freddie were the key players in creating this disaster.

It scares me to think Obama's key econimc advisor will be the guy who created the most over levered hedge fund in American history!

John Maynes said...

Hi Jeff, thanks for not deleting my postings. Speaks for you. :-)

Jeff said...

Ugly day today. The boat is taking on water!

I will have something up late this afternoon!

j

Avl Guy said...

Jeff, good post.
Note how Congress' behavior over the past 72 hours is a prime example of Kubler-Ross' 7 stages. Not just economists are poised to have a field day in chronicling and analyzing this historic event, so are sociologists, psychologists...and forensics analysts.

I’m monitoring how this credit crisis is waking up colleges, some 1,000 of whom are in a $9.3 billion short-term fund where Wachovia has resigned its role as trustee and is limiting access. Back in January I began warning my higher ed associates that the credit crisis would affect them as well. "Colleges have used the fund, formally called the Commonfund Short Term Fund, almost like a checking account, depositing revenues including tuition payments and withdrawing funds daily to finance payrolls, maintenance expenses, small construction projects and other short-term needs, college officials said."

Jeff said...

avl

Good stuff

One of the things that has surprised me is how many funds there were in the financial world that I didn't even know about.

The credit crisis seems to be spreading into everything. Insurance may be next.