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.

Distraction
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.