I said here two years ago (and was a laughing stock), that the housing/credit meltdown could lead to a recessionas bad or worse than the GD. It seemed “almost” impossible to me at the time, but a risk.
In my mind, the probability of anoter GD beginning in the next three years, without government intervention in the banking system, is much greater than 50%. With it, significantly lower.
Forcing banks to mark to market, and applying serious jail time for those who cooked the books, sounds like good intervention to me.
Buying up junk paper in an attempt to reinflate the housing bubble, treating the debt binge by supplying more debt, is a cure worse than the disease.
The problem that the politicians don’t understand are the massive “derivative books” these large banks and brokerage firms hold. There are untold trillions of dollars of financial arrangements that aren’t in the form of “loans”. These derivative contracts go into jeopardy when a big shop like Bear (or now Lehman) goes down. These financial arrangements in the form of derivative contracts are crucial to the operations of many of our businesses across the US.
If I’m a manufacturer who has the interest rate on my $100 million dollar loan capped or fixed for 10-years by virtue of a Lehman SWAP, what happens when Lehman is no longer around to honor that as counter-party?
This whole thing has been on the verge of collapse now for the last 6-12 months. More to come.
Ok, let’s say the whole thing blows - what then?
The crisis was not hard to see but the problem is much larger IMO and reflects the shift in our culture to debt.
Our government is not afraid to borrow money and spends it like crazy.
Our citizens borrow and spend like there is no tomorrow.
Someone tell me why I should be surprised that our banks have done the same thing?
At some point this whole house of cards will fold unless serious change occurs and I believe that point will be within the next 2 decades when entitlement funding runs dry.
We are seeing the same problems already in the private sector.
My children will be left holding the bag.
Sorry to sound so pessimistic about all of this.