Monday, October 6, 2008

One Question Has All the Answers

Things are starting to feel very dangerous out there. Worldwide there was action aplenty. I guess it will be some solace that the entire world is going down the crapper all together. Brotherhood at last!

World Markets Break Down
While it may come as some surprise to anyone that only watches US mainstream media, there are indeed banks and stock exchanges in other countries too! Some countries even have indoor plumbing to boot! How did things go today all around the globe? (hat tip to Watchtower for the alert in the comments section):

Panic as Russian stock market falls by almost 20%
MOSCOW, October 6 (RIA Novosti) - The Russian stock market gave in to panic on Monday with the MICEX dropping 18.6% to 752 points and the RTS falling by 19.1% to 866.39 points - the worst losses since the 1998 crash.

Brazil Markets Look Dead
Things are so bleak for Brazil that I could not even find a story to copy! The index for Brazil (IBOV:IND) was at 73522 just last May, and closed today at 42038! That is a whopper move down!

The story is much the same for all markets the world over. See Iceland's current all out collapse and the picture is grim.

The talking heads would have you believe that the USA can stay isolated from all these events, but that is foolish. It is in no small part the export of toxic paper worldwide that has led to this crisis. Who says the US does not export goods anymore? I would say we manufacture the best worthless paper ever made!

Interest Rate Cuts To Save the Day
The chant has now become loud for an immediate interest rate cut. Bill Gross (who has yet to take me up on my steel cage challenge) would like a cut to 1% (from 2%) as well as the US government buying up basically all troubled assets everywhere, but especially those held by Mr. Gross's firm PIMCO no doubt.

Low rates brought this mess on, so of course low rates will take us out. I fail to see how a reduction in rates from 2% to 1% is really going to make any difference, but then I am not paid to think up wastes of time like the pros.

One Question Has All the Answers
While governments worldwide scramble to stop a panic, it may be useful to ask one simple question. The answer to this question is complex and multi layered, but it would go a long way towards explaining the issue facing us today. Maybe the next time Ben Bernanke or Hank Paulson are on the hill our congress can try to get an answer, but do not hold your breathe. The answer to this question I feel is powerful enough to end the financial world as we know it.

So what is this question? What could be so powerful? What central understanding could cause a panic that would make the Great Depression seem like the good old times? Here is it:

How can the default of only 5% of all existing mortgages cause so much damage?

Simple. Elegant. Concise. Scary.

If you lost 5% of your net worth tomorrow, what would happen? For many, not much at all. In fact you have probably lost more than that over the past 2 weeks! So why then with 95% of all mortgages being paid on time is the US financial system on the verge of collapse?

I could flesh out a long winded answer. Think leverage. Think fractional reserve banking. You can find the answers all over the web. My point here is that to an average person the 5% loss number does not make sense and seems very confusing. Most people have no idea that their money is not at the bank. Their life savings are leveraged up and lent out many times over. Even small losses mean your money is not where you think it is. The FDIC made the move to insure deposits up to $250k, and there is a mad scramble all over Europe (Ireland, Germany, etc) to guarantee deposits. This is being done to suppress fear. If my question was answered in a forum where many could see it, fear and panic would not be "contained".

I am not trying to start a debate about fractional reserve lending, or argue for one form of banking or another. I am just trying to point out that through wild speculation and credit extension the banking system has become insolvent. The FED was a willing accomplice during Alan Greenspan's tenure, and it seems many banking systems all over the world followed suit.

The fundamental issue confronting the banking world right now is that the money that was "created" simply does not exist. At some point this fact will have to be addressed. What happens when maybe half of the mythical money out there ceases to exist? I do not know, but I cannot think it is going to be a good thing.

Instead of using money and credit to make sure people making $20,000 a year had granite counter tops and a new Hummer, that kind of capital could have been put to use elsewhere. The Mars Phoenix Lander has been a major success. NASA has released a composite video of a Martian sunrise as viewed from near the north pole of Mars. I have been watching this video and some other ones of this event all day. I mean, to be watching the Sun rise up on another planet gives me goosebumps. What man can accomplish amazes me, both the great things like the lander and the ridiculous like mortgage backed securities. Anyways, enjoy:

Have a good night.


Anonymous said...

Hey all,

Found this on Market News tonight:



PS: Wish I knew someone important to hand me the task of 700 billion making its way back into my former employers greasy hands.

watchtower said...

It looks like you may be getting closer to that steel cage match with Mr. Bill because I'm starting to see "Thunderdome" on the horizon.

Oh, Nooooo! Mr. Bill!

watchtower said...

You'll need to watch out for Mr. Bill because he is one tricky SOB!

Anonymous said...


"How can the default of only 5% of all existing mortgages cause so much damage?"

I'll take a stab at it. The main reason was the lack of any other sector of the economy to take on more debt. With the dollar being backed only by debt as more debt is taken on the debasement causes asset prices to rise which are used as collateral to take on more debt, once the inability of any place in the chain, consumers, business, or even government to take and have the ability to service the debt the process goes into reverse which is what we are seeing now. The problem is the debt which cause the illusion of wealth.

Managed to hold my own yesterday in all the mayhem, we're about half way to the dark side IMHOP

watchtower said...

Put your seatbelts on we're coming in hot!!!

U.S. Consumer Credit Dropped by the Most on Record (Update1)

By Vincent Del Giudice

Oct. 7 (Bloomberg) -- Borrowing by U.S. consumers unexpectedly fell in August by the most on record as banks shut off access to loans, a report from the Federal Reserve showed.

watchtower said...

And that was for August!!!