The Great Depression Online

Great Depression Online Archive Issue:

The Whirlwind Sweeping Across The Planet

Great Depression Online
Long Beach, CA
April 11, 2008

Inside This Issue You Will Discover…

*** Nearly A Trillion Dollars
*** Enthusiastically Ruining Themselves
*** The Shakeout Has Only Just Begun
*** And More

Nearly A Trillion Dollars

We learned this week that the price tag for the mortgage windstorm has reached $945 billion.  Veronica Smith, for AFP, reports the destruction...

“The International Monetary Fund said Tuesday the worldwide losses stemming from the US subprime mortgage crisis could hit 945 billion dollars as the impact spreads in the global economy.

“The IMF, in a particularly stark report, said that falling US housing prices and rising delinquencies on the residential mortgage market could lead to losses of 565 billion dollars.

“Combined with other categories of loans originated and securities issued in the United States related to commercial real estate, the consumer credit market, and corporations ‘increases aggregate potential losses to about 945 billion dollars,’ it said.”

Nearly a trillion dollars.  Here one day.  Gone the next.  But not without a consequence.  Like a tornado - or a traveling circus - when a financial whirlwind blows through town it leaves a wake of debris, wreckage, and destruction.


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But this tornado's not just hitting one town – or country.  It's sweeping across the entire planet.

“‘The crisis is spreading beyond the US subprime market -- namely to the prime residential and commercial real estate markets, consumer credit, and the low- to high grade corporate credit markets,’ the IMF said in releasing its semiannual Global Financial Stability Report.”

“While the US remains the epicenter, ‘financial institutions in other countries have also been affected, reflecting the same overly benign global financial conditions and to varying degrees -- weaknesses in risk management systems and prudential supervision.’”

Enthusiastically Ruining Themselves

The problem with a credit induced asset boom is that people misconstrue it for a real boom.  Suddenly, as if from the heavens, money has appeared where it wasn't before.  But this money, while it looks the same as money created through real trade, is a temporary illusion…its mirage lasts just long enough for people to enthusiastically ruin themselves.

People borrow more money than they can possibly repay...and at terms that would make a black market loan shark blush.  Speculators, blinded by the bright glimmer of glistening riches, leverage up a house of cards that’s magnificently reckless.  Fund managers invest in seemingly safe asset backed securities chasing a percentage or two of higher yield.  And all this activity further perpetuates the boom that was a farce to begin with.

In Southern California the median home price exceeded the median income by a factor of 10.  Those few who stopped to think about it -- of only for a moment -- could tell something was awry.  The rest didn't bother...they were too busy getting rich.

The Shakeout Has Only Just Begun

Nearly a trillion dollars in expected losses, we'll repeat.  How it all shakes out has only just begun.

Here's one example that happened earlier this week.  Madlen Read, AP Business Writer, explains...

“Washington Mutual Inc., one of the financial companies hurt by investments in soured mortgages, said it is raising $7 billion by selling a stake to a private equity investment group.  But the Seattle-based thrift also said it will lose $1.1 billion during the first quarter, stash away $3.5 billion for loan losses and cut its quarterly dividend to shareholders to a penny from 15 cents.”

The next bank to shake out may not have such a soft landing.


M.N. Gordon
Great Depression Online

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