A Newer Deal for the Economy
One major international bank after another is collapsing; they're either being nationalized or sold off in sections. Although a bailout plan for beleaguered banks has been passed by the US Senate, the House of Representatives has yet to approve it.
There's a sudden shortage of US dollars in global money markets. Major central banks are injecting enormous amounts of money into money-market systems worldwide.
Japan and the US are already in economic recession, while Europe is on the brink. The economy of China, which has been the major driving force behind global economic growth, is slowing down, which is causing commodity prices to decline.
Want top traders to sit at your desk and share their insight and ideas?
Minyanville's Buzz and Banter- 14 day FREE trial
Understandably, equity markets worldwide are finding themselves in sharp bear markets.
The causes of the above are legion, but can be summarized as follows: Money-hungry financial institutions lent too much money too readily to eager individuals and institutions for the purchase of overvalued assets. If the one who bought last cannot find a buyer, he -- as well as the one who financed him -- will be in trouble. This has a domino effect, as no one wants to buy or take over the debt.
The critical positions in which the banks find themselves have led to virtually frenzied activity in all financial markets as they tried to reduce their risks and neutralize market positions at all costs, and take out cover on other assets. This is similar to the 1920s in the US when banks allowed investors to use equities as collateral. When equity prices dropped, the investors could not repay their debt, resulting in the banks holding collateral that had no value. Many of the banks subsequently went bankrupt.
The question is: What now?
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
In other words, with so many resources tied up in unused homes, what is going to be available to fill those homes and actually INCREASE the number of homes built, occupied and paying mortgages in the future, as well as filling gas tanks to heat and drive?
There may be an immediate spike in economic activity with the bailout and interest rate improvement, but the 'stuff' market is saturated at this point. There is no place for more 'stuff' to go, even if people can afford it. GM can't make as much money on small cars, and that means lower wages. Unless they can figure out how to make SUV-type money on selling windmills and solar panels, this economy is already dead. Free up people's energy budget, and you loosen up the economy a little.
At $100/bbl, we are exporting $615 Billion PER YEAR that could be spent on local foods, GE cars, Johnson Controls batteries, etc.
