Great Financial Panic 2008
What financial panic you might say? Hasn't the recent Fed actions, lead by Helicopter Ben Bernanke, poured enough taxpayer money, pardon me, that is printing press generated US dollars, into the hands of his Wall Street buddies, to ware off any potential panic?
Nope, afraid not. While the government line may be coordinated with the talking heads on MBNC and elsewhere, as to that a crisis and panic has been adverted and that we no longer need to worry, I fear that the truth is that the financial meltdown has barely gotten started as the problems of over leveraging and the necessary deleveraging are still very much with us.
While the troubles with the subprime mortgage lending market has received most of the press on the debt deleveraging issue, and the actions of the Fed in arranging the bailout of Bear Stearns has smoothed out the turmoil in financial waters, the huge ticking time bomb of the huge derivative market has not even been addressed.
The size of this market is estimated at $45 trillion. It is really impossible for the human mind to conceive as to how big a number that is but let me tell you it is huge. Since this market was created largely by the same financial engineers who created the means to package and to transform junk quality residential mortgages into AAA rated securities, we can assume that the same care was taken in creating and packaging many of these often plain weird financial instruments.
The scary thing is this. If only a 10% markdown in value of this $45 trillion pile of potential toxic waste occurs that is a $4.5 trillion write down somewhere out in front of us. Even the Fed would have trouble dealing with a write down of anywhere near that magnitude. Should it occur surely a few major financial institutions would fail.
The fact is that the world has never faced such an over leveraged situation as we have today. Smart guys at major financial institutions who ready should have know better thought that since real estate markets can only go up there was no reason for their financial models to assess the risks of markets falling.
They then packaged and sold trillions of dollars of derivative financial instructions to investors all over the world based upon a flawed model of risk assessment. Some of these guys were greedy and stupid enough (yes, smart people often do stupid things) to keep a few billion dollars of these toxic sure to fail mortgages made to people who didn't have the ability to repay on their firms own books.
And being extremely greedy they bet the farm that their make believe pricing models were fail proof and leveraged their bad investments at up to 40 x 1. At this high ratio only a 2.5% decline in a portfolio's value completely wipes out the institutions equity base.
That is why there is such a high probability of a true panic at some stage of this financial disaster up to now slow motion financial train wreck. As the under lying values of the loan portfolios continue to fall as housing value further decline and homeowners stop paying on their underwater mortgages at some point panic will set in as equity disappears in a flash.
The banks and brokerage firms at some point will not be able to attract fresh investment capital to shore up their balance sheets because the new capital they previously raised disappeared so fast.
For all of the above reasons and more there is a high potential for an uncontrolled financial panic in 2008. Perhaps a bit of gold hidden away in a safe hard to find place makes a lot of sense. That and a supply of food and water and a far away place to retire to for awhile.
(ArticlesBase SC #408427)
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