A Horrible Mess, and How We Got There!

A horrible mess, for the pass two weeks it's have been an exciting time for any economics knowhow. Cause amount happening in the financial markets will made good future study materials. Read below and find out how we got there.............

Bud Conrad, chief economist at Casey Research, wrote about the beginnings of our current problems back in March of 2007... before most people were even aware of the storms brewing just over the horizon.

"Faced with historic levels of debt, falling housing prices, and weaker economy, the pressure on housing would gain momentum as desperate homeowners either hand their keys back to the banks, or simply hit the bid on the best (low) offer they can get. A vicious cycle would set in, threatening to shove the economy into uncharted and unpredictable waters.

"The impending calamity - mass housing foreclosures, failing banks, Fannie Mae and Freddie Mac in ashes, millions of personal bankruptcies - is so dire, most people can't even conceive of it. And indeed, it may not hit us this year, or next, but the market always corrects itself, and this time will be no exception - sooner or later... That's why the coming crisis is so predictable: there's no way to avoid it."

I actually wish that his analysis had been flawed.

I also wish that the government officials had been right who have consistently claimed since then that the subprime crisis was contained and the markets would rebound in the second half of the year.

Unfortunately, this is not the case.

The Fed's recent attempts at quick fixes have not worked, and current events are reinforcing what Bud Conrad prognosticated almost two years ago: that this is much more than a normal cyclical correction. This is a disaster of biblical proportions.

As the Fed and the Treasury continue to intervene in the market, they continue to lose ground and credibility, caught between a sharp recession and strong inflationary pressures. In an effort to bail out the financial sector, they have no choice but to start injecting hundreds of billions in liquidity into a contracting market place.

This will contribute to the creation of a stagflation period that will make the '70s look like a tea party.

The Fed's never-ending injection of liquidity into the market has, and will continue to, devalue the dollar.

Ordinarily, a country threatened with currency collapse would lean toward tight money, perhaps contracting its domestic money supply. That would push interest rates upward and compensate foreigners for holding on to the currency despite the depreciation risk. And it would soften that risk.

But this time, things aren't ordinary... there is a difference that has turned what might otherwise be a disturbance into a disaster: the U.S. economy's inability to endure high interest rates.
Because of the corrections taking place now in the grossly distorted U.S. housing, commercial real estate, and personal credit markets, raising interest rates to protect the dollar would prove as calamitous as not raising interest rates.

The housing bubble fueled a blockbuster business in first mortgages, and then home equity loans. Homeowners drew down their equity to splurge on consumer goods, including shiploads of imports.

The relative attractiveness of U.S. financial instruments kept the game going into overtime. The foreigners who received all those U.S. dollars put them back into U.S. Treasury bills and other dollar-denominated instruments, thereby underwriting low interest rates for all U.S. borrowers.
The net result? Foreigners funded our housing boom. The amount of mortgage growth annually matched the amount of trade deficit, which foreigners dutifully invested back into the U.S.

And subprime lending was no mere sideshow. It was big business. In 2005, it accounted for 25% of all new mortgages - about $600 billion of high-risk paper, most of it with adjustable interest rates.

The collapse of the subprime market soon spread into other mortgage sectors... and the derivatives created on top of all those subprime mortgages made everything much worse. Given that the annual GDP of the U.S. economy is just $13 trillion, the $250 trillion in derivatives should have been seen as an accident waiting to happen.

The Feds is caught between the devil and the deep blue sea, Feds can continually poured money into the market that's will not helps until unless the US housing had bottomed out. Sad news is it will not bottomed out for at least another year or two. Losses currently form the housing market it's around US500billion, figure will or can go up to US2trillion in losses. At US500billion losses the financial system almost at meltdown level just think if it's reached peak at US2trillion the next few years.

This coming financial problems will be an epic proportions comparing with the 1930 great depression, therefore Buy Gold safe haven!


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