Friday, October 17, 2008

The Great Bush Depression

Here we are entering into the Great Bush Depression.  This time it is a bit more entertaining than the Great Hoover Depression.  Dow has dropped both a greater percentage and in terms of number of points lost over the last year than it dropped during the first year of the Great Hoover Depression.  Housing prices have dropped further, too, over an equivalent time period.  Disturbing start.  The gov't is doing the same things it did last time almost to the letter.  The dollar amount is larger but the problem is larger this time, too.  From what I have read, the problem amounts to a "bit" over $60 Trillion.  $700 Billion Bailout is a rounding error for that amount of trouble.  Can you say, "Doomed to failure"?  I knew you could.

Mortgage derivatives, initially, are the problem this time.  They are based upon home mortgages.  The last time we had a depression it was based upon home mortgages.  This time it is base upon mortgages that have been leveraged at up to 40 to 1 in some cases.  Yikes.   Some say house prices must drop to the equivalent of 2.5 to 3 times the average income, locally, to be back in line with historic home pricing indexed for inflation.  (That makes the "leveraged vehicle" worth less than ten cents on the dollar invested in many cases.  That is why some companies can now not give back the money of some holders of mutual funds that were based on the safest of vehicles other than Treasury bonds, corporate bonds issued by major US banks and insurance companies like Lehman Bros and AIG both of which have cost you and me over $175 Billion to finance so that their bond holders will not go into default.  Confusing?  The details are even more so but it boils down to trust of which there is currently very little among thieves and bankers.  That is what stops lending worldwide.  It is an amazing thing to behold.)    Some say that will be overshot to the downside as owning a home will be viewed as a ball and chain.  When we bought our first home in 1984 it had cash flow over principal, interest, taxes, and insurance.  That is where housing is headed judging by places like the Central Valley where 50%-70% drops in home value are commonplace.

If you are interested in info about how this financial mess began, how it will progress, and possibly how it will end I would recommend reading these, to begin with, and progress from there:

Excellent behind the scene Cal housing info.
In depth economic overview.
This has an interesting set of articles.  Don't read this to your children at night.  It is scary. 
 This compares Depressions then and now and gov't response to both.
 This shows a global shipping company specialising in the transport of drybulk cargoes.  If they are not moving product, the world is not buying and selling items and, therefore, not manufacturing as readily across the globe.  The chart says it all excpet for the 'why' of it.  See the 11/14/08 entry for that here:  London Banker
 The banking system has lost over 1 Trillion dollars (dollar amount is outdated as of 11/08, see below), more than was ever made in the history of banking.  It only took them two years.  (That's why they get the big bonuses.)

The Fourth Quadrant is an examination of why and how the banking/lending/brokerage industries made the Great Bush Depression possible and impossible to avoid.  Skip down to the first two charts in the The Fourth Quadrant.  It is about Turkeys.  That much is darkly hilarious.

 Paragraph 7 points out the Turkey aspect of banks.  Kohn is a Fed Vice Chairman.

Please do take some time to read some of the above info but...  

Fair Warning:  It's a nightmare seemingly come to life.