What Happened and What's Next ?....(gloom just got out of hand and a panic was created)

We have all watched the financial panic unfold over the past few weeks and most of us have taken a big hit in our investments. 401K plans are now 201Ks. My wife asked me to please put our money where it is safe. The bad news, nothing and nowhere is safe. Even the government faces a serious risk of technical bankruptcy even though it has a "secret weapon" available to use in an emergency to tax even the most deeply held wealth. The fact that the government has a weapon to "fix" maybe even the most serious financial problems doesn't mean that you will like what happens. I'll come back to the treasury's secret weapon later.

In the early summer of 2008 the world's oil markets careened out of control, and an incredible price bubble developed fueled by Wall Street savants, the media and the many who claimed a massive supply shortfall in the face of worldwide acceleration of consumption. It is true that consumption has accelerated in the last few years, especially in Asia, but the world is awash in petroleum and shortages are due to either delivery, refining capacity or problems associated with geo-politics.

Some of the people who voiced the wildest opinions in an all too willing and credulous media had serious conflicts of interest: Bear Sterns and T. Boone Pickens, to name two, who had significant speculative positions in the petroleum markets. The MainStream Media (MSM), always looking for a sensational story, sought out these extreme and often highly biased reports and put them on the front page. The media "feeding frenzy" on petroleum was over the top even for them, with breathless daily headlines on oil and gasoline prices. The net result was the terrorizing of the public.

That is not to say that there was no problem; but the problem was rooted in unregulated speculation in the petroleum markets, a fact overlooked by the MSM. During the eight-year reign of Bill Clinton, Enron Corp convinced Clinton to pressure the regulators to open up the futures markets in petroleum to a large variety of investors, not necessarily those in the business who had traditionally operated a futures market to ensure stabilized pricing. Up to that time an investor in futures had to be a producer or a consumer of crude oil or natural gas. Once the entry barrier was lowered it wasn't long before 95% of the futures trades were not by users or producers but by speculators. Speculation was the primary driving force to create the bubble. Leverage was extremely high with just a 10% margin required on a trade, much like the stock market of the late 20s. Once prices broke, the market plunged from a high of $147 per barrel at the peak to less than $40 in December 2008. High leverage cuts both ways; win big or lose big.

In the third quarter of 2007, the MSM began to talk of the bad economy even though growth was running at over 3% annualized. At the time it seemed to be anti-Bush motivation driving the bad news when there was not a real problem. But, if the country could be talked into a recession, surely the Democrats would prevail in 2008. It seems that the gloom just got out of hand and a panic was created, and the Democrats did prevail in a big way, both houses and the presidency.

I am of the firm opinion that this general economic setback was at least partially manmade by the irresponsible reporting by the MSM. The wild gyrations in the oil market helped scare the public and the media swallowed the overheated petroleum demand story hook, line and sinker. Gasoline prices soared to above $4.00 and folks stopped buying SUVs and large cars, shocking Ford, Chrysler, GM and their dealers.

The sub-prime home loan debacle has been cooking on the back burner for a few years and it contributed the final spark that set off the bomb in the financial industry. Again, Bill Clinton is at the bottom of this story too. When he left office he left more than one ticking time bomb for the incoming George Bush. Clinton took the Jimmy Carter home finance program for the less fortunate to a new level of irresponsibility by literally forcing the banking and mortgage institutions to extend loans to those patently unqualified financially and demanding that Freddie Mac and Fannie Mae buy these bad loans.

Low to zero down payments assured that the buyers were not well bound economically to their property. That made the abandoning of mortgages easy if there were even the slightest downturn in the housing market. Overvaluation by appraisers at the time of purchase made the risk of default even higher. Once confidence in the residential real estate market began to break, due to politically motivated MSM gloominess in my opinion, the game was over and defaults skyrocketed. It appears that the sub-prime housing loan disaster became the trigger event that brought down the entire financial house of cards so skillfully built by the cadres of super-bright Wall Street geniuses.

Highly leveraged securitized loan packages, CDOs, were created and floated around the world to unsuspecting investors over the last decade. Once the market broke, the leverage began to cut the wrong way and massive writeoffs followed. Major Wall Street firms exploded as they became totally insolvent as a direct result of these and other incredibly bad investments. It is estimated that the value of bad mortgages likely to be defaulted is in the range of $5 trillion, that's $5,000,000,000,000. That's enough to sink many enterprises which stupidly and greedily ventured into this market. It seems that the "prudent man" has ceased to exist in the world of financial markets.

There is still extreme leverage throughout the financial arena worldwide and the game is far from over. Derivatives in the form of credit default swaps and thousands of other clever financial gambles are ravaging the world. While many of these instruments have sound uses as hedges for crops, oil, industrial commodities and materials, most are just pure speculation. In any derivative transaction, there is a winner and a loser but if the loser can't pay, there are two losers. When the loser is a major Wall Street firm or an insurer like AIG and the numbers are in eleven or twelve figures, the situation becomes dire indeed.

Now these gamblers are looking to the government (read: us taxpayers) to bail them out. Same thing for the corrupt management and legacy unions which produce American automobiles; they want their customers to cover their mismanagement. And the government is busy as a bee ladling out our money to these bums. It chaps me that my money is going to a $75/hour union worker or to a $5 million a year executive at Ford or GM.

It is reported that the total face value of derivatives worldwide is around $700 trillion. The entire Gross World Product is only about $50 trillion, $15 trillion of which is the US output. Most of the massive derivative action has been created in the US, making America the world's biggest casino. It will take a few years for all of these chickens to come home to roost, to paraphrase the Reverend Jeremiah Wright.

I'm not at all sure our economy can take the strain without effective default of the US treasury. America has farmed out manufacturing, many services and a significant chunk of agriculture as the nation became the financial manager, banker and casino tout for the entire world, a job we seem to have totally screwed up.

So what is the American advantage today beyond a fierce military capability? The Chinese and Indians are educating ten times as many engineers and scientists as America so that American R&D and design superiority is slipping away at a scary rate. The country cannot survive on service sector jobs alone. The conserved wealth and vitality of the nation is inexorably eroding. How long do we have before we as a nation become a true second rate enterprise?

And then there is the specific issue of Fannie Mae and Freddie Mac! The red flags have been flying for several years with serious experts complaining that the sub-prime loans being packaged and securitized by these two organizations were a huge risk. There was no significant oversight from the Congress. The Democrats, seeking votes, had a pragmatic and ideological stake in the free flow of money into the low socio-economic sector and chose to look away from the risks. The few Republicans, including the President, who raised red flags were hooted down by the home mortgage oversight "experts": Barney Frank and Chris Dodd, both leading Democrats.

But, in my opinion, the sub-prime mortgage "crisis" is not the only cause of the economic "meltdown," but it was the trigger igniting both the spectacular cascade of bad credit at many levels and the media frenzy that compounded the problem. The magnificent financial house of cards so laboriously built to great heights by the New York investment houses began to teeter and then began to fall. Sonic booms circled the earth as layer after layer of highly leveraged and carefully crafted financial instruments crashed to the ground.

As the economic reversal progressed on multiple fronts, like a great falling domino display once the first domino falls, the media, especially the TV networks, began to make panicky commentaries on the hour and half-hour about the need for consumers to cut back their spending on all non-essentials and basically just quit consuming. While thrift is a notable virtue for the individual, it is a disaster if practiced universally in a consumer economy.

Cutbacks in discretionary spending by individuals dropped the car market 30% overnight, deepening the crisis in Detroit and Washington as the auto companies wailed over huge accumulating inventories with dealers. Falling gasoline prices had little effect at this point, too little, too late. Automobile dealers found that the banks were less willing to loan more dollars to cover their "floorplan" (car inventory finance plan) since the banks' access to credit was drying up too. Inventories of all products began to grow.

If America sneezes, China gets pneumonia. Containers of merchandise overpowered the system in Chinese ports as importers cancelled orders. Orders for Chinese goods are being cancelled as fast as the digital networks can handle it. China will not be able to deal with the resulting inevitable factory cutbacks without massive worker uprisings. Look for a great implosion in China in the next few months. China's fragile government-controlled financial situation will come to a boil as its government tries to print money to buffer the problem. China very well could collapse into total chaos and civil war. That would make them as dangerous as a wounded water buffalo in the deep grass.

From 1939 to 1965, the US built up huge economic and technical momentum. But beginning with the Vietnam War, the country began to use up that great store of intellectual and entrepreneurial energy and financial strength and power. Today the stored up energy is almost totally dissipated. Close to 50% of the population depends on a vast array of government handouts for their survival. Medicare and Social Security are stealth Ponzi schemes bound to fail eventually. The lower 50% of the US population pays only 5% of the federal income tax now and that will be changing for the worse as the new administration and Congress move ever further to the left. The standard Democrat complaint on any tax cut is that it favors the rich, but the "rich" are the only ones paying the taxes. There is absolutely no motive for the lower 50% to favor a tax cut as it will have no benefit for them except in the possible case of an increase in the "earned income tax credit," an Orwellian name for a welfare program in the form of a reverse income tax . . . the government pays tax to the non-taxpayer!

These abusive programs will only proliferate in the next few years, pounding down any initiative in the lower socio-economic class; why work if you can live in relative comfort on hundreds of miscellaneous welfare programs, especially those that you can double-dip. The loss of initiative might even spread into the working class as jobs are lost and pay is cut.

Lyndon Johnson launched "The Great Society" in the 60s and since that time two or three generations have been ruined as a direct result. That program, or set of programs, was the initial step in moving from the accumulation of strength and wealth in the country to dissipating it. Schools dropped their academic standards under the growing power of the teachers unions and their cockeyed approach to education. The teachers unions developed unbounded power to protect even the worst teachers from losing their jobs. The trial lawyers stripped discipline from the public classrooms, further exacerbating the classroom problems. Social promotions became almost a norm just to move the troublemakers out and keep the public moneys flowing into the system. Textbooks became soft and filled with liberal ideology. Lack of an official US language and the politically correct concept of multi-culturalism and bi-lingual education further compounded the education problem and its cost. Unlimited illegal immigration has added the final straw to the cultural, educational and financial collapse of public schools.

The seeds of our destruction were planted in the 60s and have grown and metastasized ever since.

So far, this has been a very brief summary of what happened and now we move to what's next!

The road ahead looks very, very rough. Recovery is not in sight. Bailouts seem to be the order of the day but where does the several trillion dollars (rumored to exceed $8 trillion already) needed for bailouts and liquidity come from?

There are just three sources of new government money: new taxes, increased borrowing and the printing press.

The economy will not withstand any significant tax increases. Increases in the tax rate will likely yield less revenue as the drag on the economy caused by new taxes would probably reduce the tax base. Remember the "Laffer Curve." At some point, an increased tax rate is counterproductive and yields lower revenues. We are near the point of inflection: higher rates will probably generate less revenue. Broad economic growth is the only tax-way out and that seems a very long shot in the next three years.

The big question on borrowing is "from whom." It seems unlikely that any foreign nation either can or would want to loan significant amounts to the US government now. The Treasury probably has accumulated as much money from the public as is available. The Treasury rate on T-Bills is at a historic low, approximately zero. America's financial status will evolve quickly as the congress and the administration shove cash into the many outstretched hands.

This is where the "secret weapon" mentioned earlier that can be used . . . print more money. And, that's exactly what's going to happen on a massive scale. This money supply expansion to cover government largess is the classic definition of inflation. Actually, printing presses are almost obsolete when trillions are at issue. But, with computers, expanding the money supply requires just a "click" or two. Need a trillion, click . . . need two trillion . . . click-click! Done!

Expect to see double-digit inflation within a year or two. First, there will likely be a period of deflation or what was called stagflation in the 70s. Stagflation is a combination of inflation and recession. But, the inflation engine is running and it is in high gear and it will prevail. The dollar will sink in the sunset as Reagan's "Shining city on a hill" goes up in financial flames.

A trillion here and a trillion there and pretty soon you are talking real money, to paraphrase Everett Dirksen, a former US senator.

The dollar is weakening fast against most currencies as the prospect of inflation looms in the near future. The dollar has been under attack by the likes of North Korea, Iran and Russia for quite a while. These scoundrels want to see the dollar kicked out of its position of being the world's reserve currency. The most likely candidate to replace the dollar is the Euro, so that means most of Europe will jump on the anti-dollar bandwagon if it appears likely the Euro will displace the dollar. Both Ahmadinejad in Iran and Putin in Russia have openly forecast the end of America . . . but that was when when oil was $100+ per barrel.

Putin has gone so far as to predict the demise of not only the USA but the dollar too. Thankfully, his rhetoric may have been tempered by the recent collapse in world oil prices, a major economic problem for both Russia and Iran. Both of these presidential loudmouths, Putin and Ahmadinejad, may need to be a bit more careful of what they say as their cash evaporates.

Iran may become seriously unstable as their resources are pinched and that means trouble for the Middle East. Other ME countries will also feel the pain as oil goes below $40/bbl. There is no recovery in oil prices in sight.

Still the American financial hole is deep too and some folks, notably your Democratic Congress, are still digging. The Bear Market is in absolute total control of Wall Street for the foreseeable future and rallies will be brief and each one will be followed by deeper slides. The DJIA will likely lose 60-70% from its peak value of about 14,000 points, down to 4000-6000 points by the end of 2009.

As the inevitable inflation moves forward, interest rates will soar. Jimmy Carter will be proud to see his term replayed in detail. Obama will put on his cardigan sweater and dolefully advise us to lower our thermostats and conserve energy. He will squelch any idea of increased drilling in the USA. He will emphasize Global warming as an absolute article of faith and the MSM will genuflect in his radiance. He will look favorably on bicycles for their energy-saving features and great exercise potential. Yet, he will need everyone to buy a new Ford or Chevy to get the economy up and running.

A new global warming treaty, far worse than the doomed Kyoto Accords, will work its way into our lives. CO2 will continue to be a bugaboo and carbon taxes are seemingly inevitable. Carbon credit trading will further enrich Al Gore and his buddies.

Nancy Pelosi and Al Gore will continue to travel in large private planes with huge carbon footprints. Do as we say, not as we do!

Our children and grandchildren will grow up in an America that is very different than the one we enjoyed.

We are done for. The Liberal solution to problems caused by liberalism is..always more liberalism. So far it looks like the Obama Admin. is going to be a lot worse than Clinton or Carter. The MSM is already in full “save the Democrat “ mode. With Clinton it was “its only sex” “everybody does it”. With the obvious Obama and democrat corruption that will be replaced in the MSM by “ it’s only politics” everybody does it”.

I’ve always wondered what role Soros played in all this. The timing was impeccable if your goal is to hijack the US Government.

Inflate oil prices and naked short sell banks and investment houses. With mark-to-market, you can bring down any bank in a matter of weeks if you’re willing to lose a $billion.

Well, I don't think "we're lost," not quite yet, at least. However, that said, he makes two good points, the first one about the oil business:

During the eight-year reign of Bill Clinton, Enron Corp convinced Clinton to pressure the regulators to open up the futures markets in petroleum to a large variety of investors, not necessarily those in the business who had traditionally operated a futures market to ensure stabilized pricing. Up to that time an investor in futures had to be a producer or a consumer of crude oil or natural gas. Once the entry barrier was lowered it wasn't long before 95% of the futures trades were not by users or producers but by speculators. Speculation was the primary driving force to create the bubble....

This was something I didn't know about and it answers a lot of questions I have had about oil prices.

He also says that the "crisis" was manipulated and even semi-created by the press, and I think this is true, too. Of course, I'm not sure he's helping by screaming "we're lost," but that's another story.

Your synopsis of how we got here is dang near perfect! Of course, let’s not forget that we have lost MANY true conservatives in the Republican party and that too added to this mess: very little distinction between Reps & Dems. But, I think we can and will get out of this hole. We did it after 1929 (in 1941 when we entered WWII - NOT from FDR) and we did it in 1980 (in 1980 BECAUSE of Reagan!).

The real question is how long are we going to slide before we find a root to grab hold of and pull ourselves out of this muck and mess? The scary look of this is that we are seeing 1976 all over again! Deja vue! I mean significant unrest in the ME, building financial strife in Russia and China - which pushed them to start puffing their chests and beating a drum of war. And an incompetent incoming US President that put the US economy in a quagmire and emboldened our enemies with “talk” and words of “peace.” I think we were very close to WWIII by the time Reagan came to office. His quick return to military might caused the world to settle down and re-think their actions.

Unfortunately, I do not see a true conservative politician that can take the reins in four years and pull us out of this run-away situation. If the world markets continue to drop, I see Russia and China starting a war with SOMEONE - probably not us because we are an injured animal and those are the most dangerous. But, I definitely see a major, possibly World War coming out of this if Obama goes forward with his current economic plans. Carter inherited a low, but steady economy and his programs made them worse. But Obama is being given a skidding economy and instead of turning into the skid, he is going to steer us into oblivion.

I hope that we all can hand on for the ride! I would like to say it is going to be fun, but I really doubt it!

An extremely well-written article. And the respones and remarks are also excellent. With that said the question is what do we do now? Let me explain a little of my frustrations.

In Calvert County, Maryland in this last election, a black woman ran - as a Republican - for the school board. I attended a couple meetings in which she spoke and I did not like her. Main point - she was backed by the Teachers Union while the other Republican candidates were not. About a week before the election an email was transmitted stating this woman held a fund raiser for Obama and that all Republican documents supporting her be withdrawn. I then found out a week after the election that this woman had as her campaign manager the biggest Dem fund raiser in the county. When I emailed a Republican leader in the county asking if this was true, I never received a reply and I was suddenly removed from the GOP emailing list.

Another case in point - during the amnesty debate back in 2007, I emailed the leader of the Republican Women in Calvert County detailing why we should call our elected representatives, talking points, phone numbers, etc. I asked her to transmit the information out to other Republican women. Instead, she spiked my email. When I asked why, she - as a Republican - stated she believed in amnesty.

So that's my problem in my county. The grassroots organization not fighting for conservative principles.

So I ask the question again - what do we do? Who is out there to speak for us conservatives? Who is willing to risk the slings and arrows of racism and other taunts by the left and their media lap-dogs? Or are we all sliding towards violence?

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