The Coming Financial Crisis


I fear the coming year is going to be a particularly bad one for all of us.  I really believe that we are on the brink of an economic disaster because of forces in the world of finance that remain unchecked.  What scares me is that those who run the financial world are allowed to act with impunity.  They do not have to worry about bad acts of faith, to worry about even possible illegal acts, because they know no one is going to go after them.  Consider this, to be a person who makes financial transactions on Wall Street you have to pass a series of grueling tests, be certified, be bonded, be investigated, and be bound to a long list of ethics.  To be in a managerial position of such people there is no requirement for any other this as long as you do not participate in actual financial transactions.  A corporate CEO could actually be a convicted felon.

In 2008 we experienced a downturn like none we had experience since 1929.  We are gong to experience basically the same thing again for many of the same reasons.  In 1929 many companies were way over-valued and not well-financed.  People bought stock “on margin,” which you cannot do today, which mean they paid as little as 10% of the face value of a company’s stock.  We those people were pressed to pay their debt they were unable to pay.  That started a stock sell-off which in turn lowered the trading value of the stock until it was worthless.  A major US company is experiencing a similar problem right now.  AMR stock, the parent company of American Airlines, is selling today for 35 cents.  The New York Stock Exchange has suspended trading of this stock.  Earlier this year the stock was selling at $8.89.  While I do not believe that AMR will be liquidated, I think it is a precursor of what many, maybe thousands, of other stocks could have happen in the upcoming year.

Our first warning of such troubles came in December 2, 2001 when ENRON filed for bankruptcy.  ENRON was guilty of improper accounting procedures among other things.  AMR is not likely guilty of this but its debt load which came about as the result of trying to replace an aging fleet and high fuel prices as well as expensive labor.

When FDR took office in 1933 he put in place many regulations to stabilize the financial community along with creating the FDIC, SEC, and many other oversight organizations.  Starting in 1981, Ronald Reagan and then George W. Bush did everything they could to reverse what FDR had started.  What they were unable to end, they reduced in size so as to render the organization virtually ineffective.  The result was the almost 40% decline in the stock market in 2008.

The $780 billion infusion of cash into the financial industry only forestalled the inevitable without the introduction of much-needed financial oversight, regulation, and enforcement.  There is virtually none of this right now.  It is unchanged since before federal funding was authorized.  That leaves the question, what is to say we won’t go through the same thing we did in 2008 all over again?  Nothing!  And this year we may well see a second financial melt-down.

Of the $780 billion the government fully expects it will never see at least $150 billion.

To be clear, it is not the national debt that will influence such a meltdown.  Actually, in the short-term, it is probably better we neither add to nor reduce that debt.  The debt that is worrisome is private debt.  The first signs of that problem was the mortgage crisis which actually is continuing today.  The answer to the mortgage crisis was not an infusion of government money, but a much more pragmatic approach.  The banks and other lenders needed to find who had means to pay some sort of a mortgage and who did not.  Instead, they took everyone in default and almost universally foreclosed on them, with even the smallest amount of research.  Many of those properties continued to lose value and were unsellable even at auction.  Some banks chose to simple abandon the properties and write them off.  All banks and lending institutions took loses, as we all saw.

The solution to at least half of those loses was a simple restructuring, refinance, and small lending loss.  First the banks needed to go to those mortgagees and offer to forgive all debt above the market value of the house.  Then they needed to reissue the mortgage with terms the mortgagee could afford.  In time, banks and lending institutions could have recovered most of their initial loses through interest.

Even more importantly, the mortgage crisis, as it was, would have been far less and the effect on our economy in general would have been much less far-reaching.  My fear is that in the coming year we will be seeing another major economic downturn.

As long as Americans allow their Congress in Washington to keep the financial community as deregulated and unaccountable as it is now, Americans should expect a very long period of lean times.  We could actually fall into another worldwide depression.

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