Really Pissed Off!

The scenario…..a Boeing 747 flies at 30,000 feet when suddenly…..a puff of white smoke and everyone is left on the plane but their wallets are gone to Heaven! Are we seeing the End Of Days? Has The Rapture begun? That’s what seems to have happened not only on Wall Street but all over the world. It is impossible to keep up with this crisis, but in this week alone, the Dow has plummeted 1874 points, and that was after TARP was passed. What we’re seeing is a total breakdown of the “Global Economy.” The only solace is that the “Global Economy” appears to be hitching its diminishing star to the U.S. Dollar and the Federal Reserve,

There is no more proof that we are in a Global Economy as the European Markets have mirrored the Dow over the past decade. Recently, as the dollar declined, the European Market has snubbed its nose while boasting of a booming economy and a strong currency, particularly the Euro. This recent crisis has proven that what happens to the dollar can happen to the Euro, Pound or Yen. To state this in simple terms…..We’re all screwed! What happened and when did it begin. Two sure culprits were the Depository Institutions Deregulation And Monetary Control Act of 1980, which lifted the Usury limits of what banks could charge interest on mortgages and the Alternative Mortgage Transactions Parity Act of 1982 that allowed banks to no longer seek conventional fixed term mortgages and allow them to improvise more the exotic mortgages. Both of these were the setting up the pins for the mortgage crisis that we face today. The banks were given a green light to sell as many mortgages that they could and to whomever they wanted, irregardless of whether that could afford them or not! The basic idea of a sub prime mortgage was not a bad one. It allowed those with fixed incomes to buy a piece of the American dream and get out of poverty and into a home, which would eventually increase their wealth. What happened was that the sub prime market was meant to be limited and only be a small part of the overall mortgage picture. However, with the Fanny Mae and Freddie Mack promise of backing them, it opened the gates to sell, without any real worry of the consequences. Other banks and mortgage lenders followed suit. The final blow to and regulation was the repeal of the Glass-Steagall Act of 1933, which had wisely established the rules for commercial banking in the United States in 1999, by the Gramm, Leach, Bliley Act,with a kiss thrown by former Fed Chairman Alan Greenspan and former Sen. “Foreclosure” Phil Gramm, then Chairman of the Senate Banking Committee. With the field wide open, it was the perfect storm….an incoming Administration that believed in total deregulation and a Congress that went right along with it. We were heading for a credit crisis and no one was looking ahead, as the money just flowed into Wall Street.

With markets failing all around the world, what have we learned? One thing certain is that “The Global Economy” centers on the United States and Wall Street. What we are witnessing is an implosion within! The Mexican Peso Crisis of 1994 was circumferential, as it was limited to one country, but bailed out by the US and other nations. The problems were simple compared to the complexity of what we are facing today, tomorrow or next week! No one has an answer as we are in uncharted waters. The first thing that must happen is to kick start the movement of money and credit throughout the banking system. This includes the international banks as well. Confidence must replace the fear that bears down on the Market. It appears that government intervention may be the prime answer and the Federal Reserve will play a major role in how we come back. The big question is how? In the meantime, The Dow dropped over 18% in one week, beating the 17% drop on July 22, 1933, making it the worst loss in Wall Street history. Investors have lost from 20% to 50% of the value of their investments, during this crisis. The hardest hit age group is the “Baby Boomers,” who are now approaching retirement, preparing to enjoy that retirement on their investments. For many, and probably most, that dream is now a nightmare! Those in their 30s and 40s have a chance to rebuild their investments, as the market will eventually bottom out and rebuild. It will, however, not return as it did after October 9, 2002, when it bottomed out just below 7300 points. We don’t even know if we are near the bottom at the moment. One thing is certain and that is that volatility is the key word for investments into the foreseeable future. To make it worse, it was greed and short sighted planning by all as we may have brought this all upon ourselves!

Economics 101: The Class you slept through!