Big Reversal This year especially since March we have become rather accustomed to the reversals that either wipe out the gains or losses from the previous day or two. This week we saw the same but on a grander scale. The first three days of the week dropped the Dow about 800 points and on Thursday the Dow hit new multi-year lows but from that point rallied 1024 points to the Friday high. Fed chairman Ben Bernanke in the last 9 months has often stated that we have no big problems. Even in March he said that problems in the subprime market seem likely to be contained. Of course just about every independent financial blog and newsletter have been saying right along that this is a huge problem and will take perhaps years to work through. Seems finally there was a change of heart and on Thursday night there was an emergency meeting of the leaders of congress where they were told that the financial system was facing eminent collapse. Nice that after al of these months someone woke up. Recently the Government, meaning all of the USA taxpayers bought the majority of Fannie May and Freddie Mac and then Lehman Brothers and this past week they announced they would spend at least $85 billion to buy about 80% of AIG. This is such a mountain of bad debt that it may run as high as $1 Trillion (1 thousand billion) - that is about the cost of two Irag wars or roughly $3,333 for every adult and child now in the USA or $13,200 for a family of four. The government also said it would set up a plan (perhaps similar to the Resolution Trust Corp) that would give them broad power to buy the bad debt of any U.S. financial institution for the next two years. The hope is that when they buy up toxic mortgages that no one wants they can hold them long enough until they may become profitable. Guess who is going to be in charge of all of this? Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke if you can believe it. The national debt ceiling is the limit this nation can spend itself into the red and it was $6.4 trillion in 2003. By 2006 it was raised to $8.9 trillion and in July congress raised it to $10.6 trillion. Now it seems it will have to be raised at a minimum to $11.3 trillion. Of course this is only the preliminary figure so this new raise could double of so in time.
I was thinking, as long s the government has decided that it is ok for it to buy private companies and nationalize them so to speak, hope they don't just buy the losers - why not pick up some good solar companies then pass some laws that homeowners have to use at least partial solar. I am sure there are a lot of companies the taxpayer would prefer to own. (tongue-in-cheek)
The current administration, who has the highest disapproval rating of any presidency in the 70-year history of the Gallup Poll, had a plan years ago that every one should own a house whether it was a good idea or not and it seemed not so important that the buyers had the income to buy or if they bought at any reasonable price. In the past banks cared about who they gave mortgages to and they required sizable down payments and thorough credit and income reviews. However, with presidential backing Fannie May and Freddie Mac could basically buy the mortgages from banks so the banks need not care so much about checking to see if the buyer could afford the house or in getting large down payments. Since the Government's Treasury Secretary and the private sector's Federal Reserve are suppose to provide for a smooth working financial system they were absolutely to blame for this mess. Technically I suppose it was congress who is to blame for doing nothing years ago but Bernanke and Greenspan before him were either asleep at the switch or just doing what the president wanted instead of doing what their real job is supposed to be. Regardless they failed miserably and now are being given more power - great, and on this news the market rallied. So our man here in the picture who was in dismay over the falling chart is just as much so at the rising one.
(If you would like to learn more about how money is simply created by banks and this whole system of "smoke and mirrors" Watch Paul Grignon's excellent "Money as Debt" we put up on the site)
Of course something had to be done to prevent a run on the banks and maybe they did the right thing as they had less choices because they waited a year before acting. What many people though do not like at all is that in this current scenario all Americans (USA) are having to pay the bill for mismanaged and greedy companies who in the proper course of things should be allowed to fail and go out of business. That is how a normal market works. It used to be that the forestry service would try to put out all forest fires. They learned though that this is not a good idea as it allows forests to grow artificially too much and they then get out of hand. When fires are allowed to burn the soil is nourished and the ground is opened up to allow much sunlight and when new growth begins it is rapid and strong. The natural state of economies are to go up and down and if they get out of balance way too much on one side they often correct to the opposite side as well but then build a solid foundation. To try and control this natural process can lead to even more problems later.
Stunning........
How come more of America isn't mad as hell about this?
Maybe they just don't get it. We're paying for the unbriddled greed and mismanagement of the past 8 years.
When I told people 18 months ago there would be a financial meltdown of this magnitude, they thought I was fucking nuts.
I was a early - but the results are still there.
