Ladies and Gentlemen,

since it's election time which is also fairy tale time I'd like to give you the probably most important point to chew on for the next presidency.

I'm not sure how many of you read the newspapers or have developed a habit to actively monitor their private savings. This post is addressed to these two groups. Those who have decided to prioritise topics like abortion, same sex marriage, civil rights and so on may pass and move along - nothing to see here and text provided below will be too boring to read.

This week something remarkable has happened I'd like to give you a very brief idea about what could have happened, what didn't and what it potentially means for US citizens, especially for tax payers.

As you all know there is something cutely named "The Credit Crunch" going on since July 2007. Most thought it would be over when a major Wall Street bank got shoved over to JP Morgan this spring. As it turned out this was only the beginning.
What happened afterwards was Fannie Mae and Freddi Mac getting overtaken by the state. Again most thought and surely hoped that's it.
The last weekend came along with some unpleasant developments. Another major Wall Street entity named "Lehman Brothers", long rumoured to be in trouble, couldn't find a friendly buyer to merge with and had to file for Chapter 11. That reduced the number of independent investment banks down to three. At the same time another one, named Merrill Lynch, did seek cover in the loving arms of Bank of America (that also was a very likely reason why Lehman couldn't - they've been the alternative take over target). That reduced the number to only 2 independent investment banks.

If this would be the TV series 24 you'd see something like a "Monday, 9:00 am to 10:00 am" line.

Fast forward only a few hours.

The insurance giant AIG was reportedly in trouble and was seeking an institution which would throw them a lifeline with something like 50 to 75 bn USD. JP Morgan and Goldman Sachs were picked to structure an emergency loan but apparently failed (no wonder - a sign of Credit Crunch is that you simply don't get a credit line, especially if you need one). Then the rating agencies stepped in and downgraded AIG, rightfully so. This means AIG had to raise even more capital for a lifeline.
Then the state took over AIG too and pumped a two year 85bn USD loan into them.

This was meant and hoped to calm the world down. Financial markets are incredibly interconnected nowadays and if a major one goes bust it creates a black hole which sucks the rest in, as easy it is and probably best to envision on this LHC watching board.

But, unfortunately, this already herculean effort failed completely to remove concerns, quite the difference. At that time the pre-last investment bank, named Morgan Stanley, was struggling to raise more capital (despite a better than expected earnings reported a day earlier) and was in active talk to merge with another commercial bank. Some apparently shrugged them off (BoA was already happy with Merrill, JP Morgen digests Bear Sterns, Citi digests themselves...) and no one was left to help, apparently even the Chinese declined to buy themselves deep into the heart of corporate America (well, the street says they're still in talks).

Thursday: 2pm - 3pm (well, give or take an hour).
US treasury bills traded for negative returns. This happens as often as taped alien abductions in good quality, females get elected as popes and major religions get invented.
Usually if you buy a treasury bill the state gives pays you some interest in exchange for lending money to the state - we all know this concept.
Now why on earth would anyone actually pay the debtor interest rather than the other way around? There is only one explanation: Major institutional money holders (funds, pension funds, stuff like that) were sitting to amounts of money which exceeded the insured sums of their accounts. That is normal and happens every day if you run a capital appreciation fund with a few billions. But they started fearing, probably rightfully so, that the whole financial system is on the verge to collapse within a few hours. So the only safe place to put your money to is T-Bills (and comparable bonds). The situation exaggerated to the point where interest payments reversed, practically perverting the whole idea of "investing" into "devesting" (just in case this word even exists).

To give you only very few numbers to measure on the disaster-meter.
US debt (before the crisis): ~ 9 trillion
Fannie Mae and Freddi Mac debt now practially to add for some time being: ~ 6,4 trillion (not exactely sure on the number)
Lehman Brothers debt: 613 billion
Merrill Lynch purchase price in BoA stocks on Sunday: 50 billon (value a year ago: ~ 150bn).
AIG debt before govt loan: ~ 188 billion
Credit volume insured against default (Credit Default Swaps) by AIG: 440 billion
Volume of the CDS market which would have instantly collapsed without a state bailout: ~ 60 trillion
Corporate survivors of this collapse: 0 + self sustaining agricultural businesses breeding poultry and cattle for their own use

Thursday: 3pm to 4pm:

The US government declares a saving package for the financial markets in form of the ability for banks to unload their distressed assets (plenty of financial derivatives), borrow from and / or against other assets.
This will cost the US taxpayers by government forecast a few hundred billions (given the accuracy of such numbers always expect it cost more rather than less). Due to the huge losses suffered all others tax payers on earth will get their equal share by the way. Small Germany for example also dumped 15 billion of tax money into the IKB bank which subsequently got sold for ~ 160 million to Texas based investor Lone Star.
The last time I remember something like this happened was the US Saving and Loan crisis in the1980ies. A similar fund, at this time called Resolution Trust Corporation was formed to accumulate all the distressed assets from the hundreds of bankrupt S&Ls.

To measure it against the disaster-meter:
Total assumed cost 156,4 billion
Share for the US tax payer to swallow: ~ 82%

As you can see there is quite a criss for the common US household coming up. Before the game of blaming and counterblaming starts - these costs are inevitable for either of the candidates.
More importantly is what would have happened if the Bush administration would not have followed this path? Well, imagine something like the depression in the 1930s. No income, only debt and nothing to borrow against. No credit cards, no car loans, no car sales, no car factories, no factory workers, no taxable income, only security checks to write out, hyperinflation since money get only printed on paper is no more backed up by income taxes from an economy and so on... Since this would have swept like a wave around the globe within a few months no sovereign wealth funds either to help out.

Every system, political, social, financial, economic... at some point get under a stress test. This time the stress test failed, almost, but enough for a major intervention. Now the US is practically and ironically a country with very socialist indications by having the key financial sector practically nationalized. But no worries, no one will ever call the US a socialist country. It's just the course of history that at some points the state player a larger role than usual, especially when things go wrong - that's essentially why we have states. When things run fine everyone bitches about the state interfering too much (I'm usually the first to complain), and when things go wrong and there's no one you can turn to, there's still the sate left (where I am again lining up fast).

I think everyone here is sound enough to add up the numbers provided above and make sure they do not derive from a mysterious conspiracy site (unless you call the financial times and wall street journal radical anti conservative socialist blogs). If one comes to the conclusion that's all fine and will somehow evaporate all by itself then it's fine with me and the numbers don't care either. For those who sit on the other side and start to assume the world now will stop to turn - worrying will get you nowhere and as any other crisis before, this one will get solved too, over time but not overnight and certainly not solely by electing a new president. Hail is easily promised, but hard to do. Or as your former president Benjamin Franklin used to say "Well done is better than well said" - adapted to election speeches it should read "Well said is easier than well done".

There is no single free lunch in the world of economics, and this even more so applies to a full all inclusive holiday in a five star resort which lasted years. This will not threaten the American way of life, but as so often before, reshape it mildly for most and dramatically for few. Since a large part of the western world has somehow adapted to an equal lifestyle it will affect all of our lives too on the other side of the big pond.

If you ask yourself how it may affect your personal life I fear I fall short of definite answers. But I'd carefully predict higher taxes (not drastically, but notably), an increase in the unemployment rate and most certainly a higher number of people eyeing their personal debt to equity ratio (in layman terms: owning more than owing). Third mortgages in exchange for new furniture, car loans for an upgrade to the latest model or revolving credit card debt on ridiculous 16% interest rates in exchange for new iPods may most certainly decrease for some time to come. How to battle such harsh and inhuman living conditions you may ask - easy. don't live above your means. It's not a myth that there is a direct link between income and how much you can spend on nice but non-essential stuff. Consumer spending gives you a kick for a day, but private wealth built over years gives you that warm and cozy feeling which lets you sleep well at night. The potential decrease in debt financed toy availability is unpleasant of course, but still so much better than sliding into a decade long depression where people will trade in a plasma TV for a dozen of eggs where the guy who gets the plasma is using it to fix the roof leak (I know, too drastic example, but you get the idea).

If you're interested in my personal advice, as always it is: save what you can save, avoid debt whenever you can unless you buy something worthwhile like a house. If you buy a house don't take additional mortgages on it, instead try to pay back asap. If the next financial crisis hits your country and neighbourhood you'll be sitting on your debt free front porch with a cup of coffee watching with great interest how the leasing agencies pick up the enviable cars of your neighbour. You may then cross the street and drive a hard bargain to acquire his house for half the price and lease it back to him. And if you use credit cards, just use them as an electronic payment device, not as loan provider. In case you've ever wondered how to become wealthy above your means, just reread this.

Now when you watch your favourite candidate & mate running for president don't forget to pay at least some attention to what they REALLY have to say about economy as this will affect your personal life in the next decade likely more than probably all other items combined. And mind you - announcements to set up new agencies (also called the agenciitis disease which leads anyone infected into believing it's a solution or everything) or a group chant of "yes we can" (mass hypnotizing) have an appealing feel good factor, but lack substance.

It's all your choice, that's what democracy was made for.

Thanks for reading, I hope you didn't fall asleep.

My money is on that it's all a Xanatos Gambit.

The question is only: who will become the second emperor of the united states?

BNA! wrote:

Now the US is practically and ironically a country with very socialist indications by having the key financial sector practically nationalized. But no worries, no one will ever call the US a socialist country.

me & a guy @ work were using that very word with the US last night (he immigrated from Hungry in the 60's). When the Us bought all these loans/banks (maybe not bought 100%, but they own a huge stake), they own ~50% or so of the entire country (plus many non-US soil properties I'm sure). Best case is they do what they say: hold on until the market's better & sell them off for a profit (but that'll just end up being more $$ for extra crap that's not needed, not an actual reduction in anything). Worst case is elected officials use that power to do what THEY want to do. They make the laws, they own the country, they can do what they want to do.

i'm still puzzled how so many US citizens did so many stupid loans. I'm not a huge egg head, I'm just "average" but even I could see that paying interest on a CC was stupid, getting a variable rate loan was stupid, not putting some extra $$ away was stupid. On our home loan is a BIG area with checkboxes for different types of interest rates. It's plain as day to see what the loan says.

gotta say, I've never been happier to be poor then I am now. I'm betting we live better then many people out there now on ~1/5th of others pay.

In short to BNA's initial post I'd been predicting the next big crash would be due to the irresponsible creditors of the US. To contrast this I'd like to compare the anti-tobacco campaigns vs. modern banks in the US. So many groups and individuals speak about how irresponsible the tobacco industry is in how it advertises and addicts people. There is a very strong parallel between that irresponsibility and the current banking system but no one has considered doing anything about it. Now there is a cancer in our economy that even someone like me, a poor schlep who is probably lesser educated in economics than most could see from 10 miles away years ago. It's the reason I do not have credit cards (I CAN get them I just don't agree with how they are marketed and abused by both citizens and the banks). It's a shame that me and my children and their children will be the ones paying for this.

Well, in financials it's very easy. When you stumble over an offer (available to the masses) where you think "too good to be true" then you're in right 999 out of 1000 times. If you are not financially educated enough to tell that 1 out of 1000 times chance from the 999 attempts to screw you over, then simply pass all "good offers".

It was very late last night and I haven't much time sleeping in the last weeks for work reasons, but I should have added this:

Politicians not in power, may it for the reason they are a "president in waiting" for the next turn or simply in the current opposition will likely be very quick to respond with iron fist clean up talk. I didn't have any time left to read the political papers in the last three days, so if it already happened then don't take it as a targeted post towards x or y.
What is important to understand that even a rescue plan between 500bn and 1 trillion is far cheaper than military spending over 18 months (to measure the numbers again against the disaster-meter). I don't want to swing on the high moral horse on judgement to say which of both spendings are more important.
But the rescue plan can also be seen as an investment with time shifted maturity. Let's say they pump at least 500bn more into the market to suck in all these distressed papers.
House prices in the US will appreciated in value again, don't forget it's darkest before dawn. As by September 2008 it might not be the absolute darkest hour, but we're very close to the bottom assuming nothing enormously disastrous happens overnight (like Washington Mutual going bust despite the rescue plan).
As soon as house values appreciate again all these now toxic papers will become liquid again. Lending will pick up and the credit securitization market (the place where a mortgage miraculously turns into an interest rate paying bond) will become more active again.
Then this half a trillion in outstanding paper money can slowly get recovered on the market, step by step. Whoever may be in office then will claim it was his invention, probably along with the internet and the BlackBerry, but we've been there before.
So unlike military spendings which still exceed the money pumped into the markets there is a real chance a certain amount of the money can get recovered. (trading in expensive tanks as scrap metal hasn't proven a good business model - we Germans can tell you that...).

I think it's important to understand the mindset of the US, the moral backbone. There is this often and rightfully so admired self-made-millionaire and optimistic state of mind. As if a large part of the population is only a Bill Gates, Steve Jobs, T.B. Pickens, Warren Buffett or John Carmack in waiting. This is nothing the US should ever give up and I don't think they ever will. But combining blindly excessive lending with pathogen optimism is a dangerous course which always leads to a bubble.
If this bubble grows large enough it covers the whole world.
Our often naive politicians have declared lately the German economy has successfully decoupled from the US economy and can miraculously sustain a good growth rate. Reason: We're selling our cars now in emerging countries (just as an example). But the emerging countries send their cheaply produced goods to the US themselves. It doesn't take much genius to predict how and in which direction a line of three domino stones will fall when you see the first one flapping towards the second one.

Well I've got no CC debt, a pile of cash building up, and am keeping my eyes open for a home. My only debt is to a well funded friend who is self employed, completely owns a couple great pieces of property, and will never run out of good paying work. Sounds like I should be okay if I'm not a moron. I just need to avoid offers from friends, with $9k in CC debt, to rent an apartment with them. So many people are financially retarded. It's how we get large portions of our "poor" with 2+ cars and cable.

Credit cards are nice because they are handy and can give you extra security and bonuses, but just pay off your debt in full ASAP.

The Boeing Employees Credit Union is open to anyone in Washington state, and they're still awesome. Not pre-911 awesome, but still better than most others out there.

Humans always strive to improve things, and this case will be the same. Patience and it'll all be over eventually.

This problem falls on Federal Reserve and has less to do with the White House. Prompted by the beginning of the U.S. housing bubble, Congress approached Greenspan to regulate the underwriting of loans in the mid 90's. Ed Gramlich heightened the concern in 2000. Greenspan dismissed both demoting the severity of the problem and stating that the Federal Reserve does not have that ability and market forces would compensate. The Bush administration couldn't wrap their pea-sized minds around the scope of the then impending crisis. Most Americans, sitting on 401k's and E-Trade accounts, knew that these exotic loans were financed by investors on Wall Street, collectively sold in mortgage-backed securities, and not by traditional loans and deposits. The warnings were written in the New York Times and Wall Street Journal. But they were largely ignored because a lot of people made A LOT of money. I'm sure that some lenders misrepresented the terms of their loans and some Americans were genuinely deceived. I have to believe that most, while not completely understanding the jargon contained in their mortgage agreement, would have at least recognized that not having a guaranteed liability on that loan is a really bad idea.

I'm not sure when the nadir will come honestly. There was a piece on NPR a couple of months ago about homeowners defaulting on their loans, not because they can't afford them, but because they have lost so much equity, sometimes 40% or higher, and the time needed to recover that value in their property may be decades. The credit penalty they incur is abolished after 7 or 10 years depending on how they file. Virtually every American homeowner notwithstanding rising interest rates has lost some value in our properties. Imagine the fallout if only half of us walked away from our mortgages.

People, with a small percentage of exceptions, are greedy and place self above the common good. That is why we are posting in this thread right now. Government regulation is a good thing sometimes, in cases when it is appropriate and necessary. Sometimes, we need to be protected from ourselves and the reckless choices that we make.

Yes, I am a bit bitter over some investments growing at negative percent right now.

This is sort of a tangent, but as a favor to more recent forum readers I must remember that BNA! works with real estate so he must know what he's talking about. Just in case people think he's just being an Internet Expert on the forum. I mean, he even wears a suit.

Seriously though, I've been waiting to read his opinion and what he makes of this crisis for a while, so thanks for the post BNA!.

Hiho, someone found my "Trust me, I wont screw you" image on the net. From there to now exactly 10 years passed by. I lost ten thousand hairs, gained ten pounds but have much nicer suits now.

Well, I tried to avoid to imply any pseudo-insider-knowledge by opening this, or similar, posts with "I work long time in the industry with 4 for the 5 five Wall Street banks and tell you...". This would have reduced potential disagreements with me which in return always give me to opportunity to get fresh input and / or back-test what I may think is right or wrong. And NDAs keep me from spilling the guts anyway.

It is true that all major journals have consistently warned about the credit bubble. Greenspan was, until three days or so ago, a driving force NOT to interfere with bubbles and let the market sort it out. This however did not appear to be true when creating them. From my point of view the US way of life heavily depends on credit and consumer confidence. In a post 9/11 world the economy received a stimulus package and no cost of the war got handed to the tax payers. That's why everyone still thinks a war is probably something good since it made house prices rise and so on.
Excess liquidity at negative interest rates when inflation adjusted have always in the past created a bubble. The housing market was too much in the hand of asset flippers rather than people who just wanted to live in their houses. Those who purchased a house at the height of pricing curve may need decades to recover, but if they live in it nothing will change. On paper they are less rich, but the house still serves the purpose it was meant to. Nothing lost there unless one gets forced into foreclosure.

The FED indeed created the problem, but they didn't get up in the morning and decided to let almost unlimited liquidity flow into the market. Washington has a say in economic policies too.

I am always suggesting to introduce financial education in schools whenever I get the chance rather than mostly boring economic classes which do not relate to personal finance. Tell people in school how to make money, grow it and keep it rather than introducing them to nobel price winning formulas with greek letters in them explaining basic national economy interdependencies. Too much theory, little to practise.

Wall Street, stocks, bonds, real estate, commodities... are not gambling. Sound investment is the best thing one can learn in life and it doesn't measure up to rocket science. Once you understood stuff like compounding interests you will understand how it works to your disadvantage too with debt, especially consumer debt for toys. Of course thousands of factory workers will lose their jobs first when people don't buy everything on debt the second they see it. Instant gratification is nice, but delayed gratification adds value to the things you want to own when you can afford them.
I've been in debt a few times, but never from consumer spending or living above my means. Sometimes investments go wrong and remind you how leverage can work the other way around.

This crisis has cost me more nerves than money, but there are some positions in my portfolio I will probably have to pass on to my heirs to see them recover. None of these positions have been "investments" but only the "quick trades for fast money" went wrong - what an irony and well deserved losses.

Only few people realize a mere monthly saving per month of 250,- will turn into ~ 3 million after 40 years (assuming 12% annualized growth rate and a tax shelter around it). If one starts saving from 25 by passing bad video games and upgrading the GPU only every two years they can grow themselves a nice nest egg which will keep the light on in the fridge and the oven heated in retirement. If such a person climbs up the ladder, makes more and avoids the typical traps (multiple cars on loan, credit card debt, failure save investment offers promising 10,000% return in 3 months...) they accumulate a house, a decent car, school education for the kids and so on without ever getting themselves into a too bad situation.

At one point in my life I was also living more the high life and I am slapping myself everyday for doing so. I could already be retirement ready in financial terms at 39, not now I have to slave along. I wouldn't have retired at 39, but it's a good feeling if you could if you wanted to.

Most people for some reason act as if they'll win the lottery one day. There sure are things like group pressure to get bling bing, but again, if you can tie your hands behind your back and save it you'll have gained so much more. Personal wealth, even if it's only a few ten thousand (adjust that to your currency), gives you independence in thought and acting. If your boss is trying to turn you into a shivering piece of fear with the threat of job loss when not complying to often experienced silliness - fire him, walk out, go home, find a new job. In the meantime your savings will keep your household running. I often imagine how an independent workforce would reshape the corporate world by forcing senior staff to be better managers too.

I run a small business myself (real estate appraisal company) and am totally delighted if my people earn above average and I can stack a voluntary bonus on top for impressive performance. But I see myself every day as the employee reporting to my workforce as if I'd be the junior staff. I want to see everyone to come in happy, work happy and leave happy. That's why they make good money and me too. Especially when running a business it's the management and / or the owners who have to act in a way that they deserve the extra payment from all the employees who only see a specific fraction of the turn over.

This is no happy tree hugging hippie stuff - goals are set, deadlines are tight and mistakes are not allowed to be made, for therapy hours they need to go elsewhere. But I believe in the right working environment people simply need less therapy hours and they don't envy the good income of the owner.

But that is not really a point which belongs to this topic.

Quote:

People, with a small percentage of exceptions, are greedy and place self above the common good. That is why we are posting in this thread right now. Government regulation is a good thing sometimes, in cases when it is appropriate and necessary. Sometimes, we need to be protected from ourselves and the reckless choices that we make.

This I totally agree with. It's a hardwired part of human nature. It's always the question who sets the standards as what is appropriate and when. I believe after the new economy bubble and the 9/11 time the US got spared the due recession cycle by artificially increasing the liquidity. It's tough if a presidency tries to counteract every normal cyclic beahivour of the market in fear of getting unpopular or having to answer too many questions why many of trillion need to get spend on a war while people at home lose their jobs.
Now we'll sure go through a recession cycle which usually is relatively brief anyway. But people often think when things go down for 2 years it's the end of the world while in following the 4 to 8 year upswings they act as time flies by and the only direction can be up forever.

We'll see how it pans out this time, but I'm personally happy with the current recovery plan to stabilize the market. The recession will pass and I hope most private investors will not watch the following upswing till it eclipses again to place their funds a day before everything will crash.
Money is always made in a crisis, never by getting in at the heights.

Ladies and Gentlemen,

since it's election time which is also fairy tale time I'd like to give you the probably most important point to chew on for the next presidency.

I'm not sure how many of you read the newspapers or have developed a habit to actively monitor their private savings. This post is addressed to these two groups. Those who have decided to prioritise topics like abortion, same sex marriage, civil rights and so on may pass and move along - nothing to see here and text provided below will be too boring to read.

This week something remarkable has happened I'd like to give you a very brief idea about what could have happened, what didn't and what it potentially means for US citizens, especially for tax payers.

As you all know there is something cutely named "The Credit Crunch" going on since July 2007. Most thought it would be over when a major Wall Street bank got shoved over to JP Morgan this spring. As it turned out this was only the beginning.
What happened afterwards was Fannie Mae and Freddi Mac getting overtaken by the state. Again most thought and surely hoped that's it.
The last weekend came along with some unpleasant developments. Another major Wall Street entity named "Lehman Brothers", long rumoured to be in trouble, couldn't find a friendly buyer to merge with and had to file for Chapter 11. That reduced the number of independent investment banks down to three. At the same time another one, named Merrill Lynch, did seek cover in the loving arms of Bank of America (that also was a very likely reason why Lehman couldn't - they've been the alternative take over target). That reduced the number to only 2 independent investment banks.

If this would be the TV series 24 you'd see something like a "Monday, 9:00 am to 10:00 am" line.

Fast forward only a few hours.

The insurance giant AIG was reportedly in trouble and was seeking an institution which would throw them a lifeline with something like 50 to 75 bn USD. JP Morgan and Goldman Sachs were picked to structure an emergency loan but apparently failed (no wonder - a sign of Credit Crunch is that you simply don't get a credit line, especially if you need one). Then the rating agencies stepped in and downgraded AIG, rightfully so. This means AIG had to raise even more capital for a lifeline.
Then the state took over AIG too and pumped a two year 85bn USD loan into them.

This was meant and hoped to calm the world down. Financial markets are incredibly interconnected nowadays and if a major one goes bust it creates a black hole which sucks the rest in, as easy it is and probably best to envision on this LHC watching board.

But, unfortunately, this already herculean effort failed completely to remove concerns, quite the difference. At that time the pre-last investment bank, named Morgan Stanley, was struggling to raise more capital (despite a better than expected earnings reported a day earlier) and was in active talk to merge with another commercial bank. Some apparently shrugged them off (BoA was already happy with Merrill, JP Morgen digests Bear Sterns, Citi digests themselves...) and no one was left to help, apparently even the Chinese declined to buy themselves deep into the heart of corporate America (well, the street says they're still in talks).

Thursday: 2pm - 3pm (well, give or take an hour).
US treasury bills traded for negative returns. This happens as often as taped alien abductions in good quality, females get elected as popes and major religions get invented.
Usually if you buy a treasury bill the state gives pays you some interest in exchange for lending money to the state - we all know this concept.
Now why on earth would anyone actually pay the debtor interest rather than the other way around? There is only one explanation: Major institutional money holders (funds, pension funds, stuff like that) were sitting to amounts of money which exceeded the insured sums of their accounts. That is normal and happens every day if you run a capital appreciation fund with a few billions. But they started fearing, probably rightfully so, that the whole financial system is on the verge to collapse within a few hours. So the only safe place to put your money to is T-Bills (and comparable bonds). The situation exaggerated to the point where interest payments reversed, practically perverting the whole idea of "investing" into "devesting" (just in case this word even exists).

To give you only very few numbers to measure on the disaster-meter.
US debt (before the crisis): ~ 9 trillion
Fannie Mae and Freddi Mac debt now practially to add for some time being: ~ 6,4 trillion (not exactely sure on the number)
Lehman Brothers debt: 613 billion
Merrill Lynch purchase price in BoA stocks on Sunday: 50 billon (value a year ago: ~ 150bn).
AIG debt before govt loan: ~ 188 billion
Credit volume insured against default (Credit Default Swaps) by AIG: 440 billion
Volume of the CDS market which would have instantly collapsed without a state bailout: ~ 60 trillion
Corporate survivors of this collapse: 0 + self sustaining agricultural businesses breeding poultry and cattle for their own use

Thursday: 3pm to 4pm:

The US government declares a saving package for the financial markets in form of the ability for banks to unload their distressed assets (plenty of financial derivatives), borrow from and / or against other assets.
This will cost the US taxpayers by government forecast a few hundred billions (given the accuracy of such numbers always expect it cost more rather than less). Due to the huge losses suffered all others tax payers on earth will get their equal share by the way. Small Germany for example also dumped 15 billion of tax money into the IKB bank which subsequently got sold for ~ 160 million to Texas based investor Lone Star.
The last time I remember something like this happened was the US Saving and Loan crisis in the1980ies. A similar fund, at this time called Resolution Trust Corporation was formed to accumulate all the distressed assets from the hundreds of bankrupt S&Ls.

To measure it against the disaster-meter:
Total assumed cost 156,4 billion
Share for the US tax payer to swallow: ~ 82%

As you can see there is quite a criss for the common US household coming up. Before the game of blaming and counterblaming starts - these costs are inevitable for either of the candidates.
More importantly is what would have happened if the Bush administration would not have followed this path? Well, imagine something like the depression in the 1930s. No income, only debt and nothing to borrow against. No credit cards, no car loans, no car sales, no car factories, no factory workers, no taxable income, only security checks to write out, hyperinflation since money get only printed on paper is no more backed up by income taxes from an economy and so on... Since this would have swept like a wave around the globe within a few months no sovereign wealth funds either to help out.

Every system, political, social, financial, economic... at some point get under a stress test. This time the stress test failed, almost, but enough for a major intervention. Now the US is practically and ironically a country with very socialist indications by having the key financial sector practically nationalized. But no worries, no one will ever call the US a socialist country. It's just the course of history that at some points the state player a larger role than usual, especially when things go wrong - that's essentially why we have states. When things run fine everyone bitches about the state interfering too much (I'm usually the first to complain), and when things go wrong and there's no one you can turn to, there's still the sate left (where I am again lining up fast).

I think everyone here is sound enough to add up the numbers provided above and make sure they do not derive from a mysterious conspiracy site (unless you call the financial times and wall street journal radical anti conservative socialist blogs). If one comes to the conclusion that's all fine and will somehow evaporate all by itself then it's fine with me and the numbers don't care either. For those who sit on the other side and start to assume the world now will stop to turn - worrying will get you nowhere and as any other crisis before, this one will get solved too, over time but not overnight and certainly not solely by electing a new president. Hail is easily promised, but hard to do. Or as your former president Benjamin Franklin used to say "Well done is better than well said" - adapted to election speeches it should read "Well said is easier than well done".

There is no single free lunch in the world of economics, and this even more so applies to a full all inclusive holiday in a five star resort which lasted years. This will not threaten the American way of life, but as so often before, reshape it mildly for most and dramatically for few. Since a large part of the western world has somehow adapted to an equal lifestyle it will affect all of our lives too on the other side of the big pond.

If you ask yourself how it may affect your personal life I fear I fall short of definite answers. But I'd carefully predict higher taxes (not drastically, but notably), an increase in the unemployment rate and most certainly a higher number of people eyeing their personal debt to equity ratio (in layman terms: owning more than owing). Third mortgages in exchange for new furniture, car loans for an upgrade to the latest model or revolving credit card debt on ridiculous 16% interest rates in exchange for new iPods may most certainly decrease for some time to come. How to battle such harsh and inhuman living conditions you may ask - easy. don't live above your means. It's not a myth that there is a direct link between income and how much you can spend on nice but non-essential stuff. Consumer spending gives you a kick for a day, but private wealth built over years gives you that warm and cozy feeling which lets you sleep well at night. The potential decrease in debt financed toy availability is unpleasant of course, but still so much better than sliding into a decade long depression where people will trade in a plasma TV for a dozen of eggs where the guy who gets the plasma is using it to fix the roof leak (I know, too drastic example, but you get the idea).

If you're interested in my personal advice, as always it is: save what you can save, avoid debt whenever you can unless you buy something worthwhile like a house. If you buy a house don't take additional mortgages on it, instead try to pay back asap. If the next financial crisis hits your country and neighbourhood you'll be sitting on your debt free front porch with a cup of coffee watching with great interest how the leasing agencies pick up the enviable cars of your neighbour. You may then cross the street and drive a hard bargain to acquire his house for half the price and lease it back to him. And if you use credit cards, just use them as an electronic payment device, not as loan provider. In case you've ever wondered how to become wealthy above your means, just reread this.

Now when you watch your favourite candidate & mate running for president don't forget to pay at least some attention to what they REALLY have to say about economy as this will affect your personal life in the next decade likely more than probably all other items combined. And mind you - announcements to set up new agencies (also called the agenciitis disease which leads anyone infected into believing it's a solution or everything) or a group chant of "yes we can" (mass hypnotizing) have an appealing feel good factor, but lack substance.

It's all your choice, that's what democracy was made for.

Thanks for reading, I hope you didn't fall asleep.

My money is on that it's all a Xanatos Gambit.

The question is only: who will become the second emperor of the united states?

BNA! wrote:

Now the US is practically and ironically a country with very socialist indications by having the key financial sector practically nationalized. But no worries, no one will ever call the US a socialist country.

me & a guy @ work were using that very word with the US last night (he immigrated from Hungry in the 60's). When the Us bought all these loans/banks (maybe not bought 100%, but they own a huge stake), they own ~50% or so of the entire country (plus many non-US soil properties I'm sure). Best case is they do what they say: hold on until the market's better & sell them off for a profit (but that'll just end up being more $$ for extra crap that's not needed, not an actual reduction in anything). Worst case is elected officials use that power to do what THEY want to do. They make the laws, they own the country, they can do what they want to do.

i'm still puzzled how so many US citizens did so many stupid loans. I'm not a huge egg head, I'm just "average" but even I could see that paying interest on a CC was stupid, getting a variable rate loan was stupid, not putting some extra $$ away was stupid. On our home loan is a BIG area with checkboxes for different types of interest rates. It's plain as day to see what the loan says.

gotta say, I've never been happier to be poor then I am now. I'm betting we live better then many people out there now on ~1/5th of others pay.

In short to BNA's initial post I'd been predicting the next big crash would be due to the irresponsible creditors of the US. To contrast this I'd like to compare the anti-tobacco campaigns vs. modern banks in the US. So many groups and individuals speak about how irresponsible the tobacco industry is in how it advertises and addicts people. There is a very strong parallel between that irresponsibility and the current banking system but no one has considered doing anything about it. Now there is a cancer in our economy that even someone like me, a poor schlep who is probably lesser educated in economics than most could see from 10 miles away years ago. It's the reason I do not have credit cards (I CAN get them I just don't agree with how they are marketed and abused by both citizens and the banks). It's a shame that me and my children and their children will be the ones paying for this.

Well, in financials it's very easy. When you stumble over an offer (available to the masses) where you think "too good to be true" then you're in right 999 out of 1000 times. If you are not financially educated enough to tell that 1 out of 1000 times chance from the 999 attempts to screw you over, then simply pass all "good offers".

It was very late last night and I haven't much time sleeping in the last weeks for work reasons, but I should have added this:

Politicians not in power, may it for the reason they are a "president in waiting" for the next turn or simply in the current opposition will likely be very quick to respond with iron fist clean up talk. I didn't have any time left to read the political papers in the last three days, so if it already happened then don't take it as a targeted post towards x or y.
What is important to understand that even a rescue plan between 500bn and 1 trillion is far cheaper than military spending over 18 months (to measure the numbers again against the disaster-meter). I don't want to swing on the high moral horse on judgement to say which of both spendings are more important.
But the rescue plan can also be seen as an investment with time shifted maturity. Let's say they pump at least 500bn more into the market to suck in all these distressed papers.
House prices in the US will appreciated in value again, don't forget it's darkest before dawn. As by September 2008 it might not be the absolute darkest hour, but we're very close to the bottom assuming nothing enormously disastrous happens overnight (like Washington Mutual going bust despite the rescue plan).
As soon as house values appreciate again all these now toxic papers will become liquid again. Lending will pick up and the credit securitization market (the place where a mortgage miraculously turns into an interest rate paying bond) will become more active again.
Then this half a trillion in outstanding paper money can slowly get recovered on the market, step by step. Whoever may be in office then will claim it was his invention, probably along with the internet and the BlackBerry, but we've been there before.
So unlike military spendings which still exceed the money pumped into the markets there is a real chance a certain amount of the money can get recovered. (trading in expensive tanks as scrap metal hasn't proven a good business model - we Germans can tell you that...).

I think it's important to understand the mindset of the US, the moral backbone. There is this often and rightfully so admired self-made-millionaire and optimistic state of mind. As if a large part of the population is only a Bill Gates, Steve Jobs, T.B. Pickens, Warren Buffett or John Carmack in waiting. This is nothing the US should ever give up and I don't think they ever will. But combining blindly excessive lending with pathogen optimism is a dangerous course which always leads to a bubble.
If this bubble grows large enough it covers the whole world.
Our often naive politicians have declared lately the German economy has successfully decoupled from the US economy and can miraculously sustain a good growth rate. Reason: We're selling our cars now in emerging countries (just as an example). But the emerging countries send their cheaply produced goods to the US themselves. It doesn't take much genius to predict how and in which direction a line of three domino stones will fall when you see the first one flapping towards the second one.

Well I've got no CC debt, a pile of cash building up, and am keeping my eyes open for a home. My only debt is to a well funded friend who is self employed, completely owns a couple great pieces of property, and will never run out of good paying work. Sounds like I should be okay if I'm not a moron. I just need to avoid offers from friends, with $9k in CC debt, to rent an apartment with them. So many people are financially retarded. It's how we get large portions of our "poor" with 2+ cars and cable.

Credit cards are nice because they are handy and can give you extra security and bonuses, but just pay off your debt in full ASAP.

The Boeing Employees Credit Union is open to anyone in Washington state, and they're still awesome. Not pre-911 awesome, but still better than most others out there.

Humans always strive to improve things, and this case will be the same. Patience and it'll all be over eventually.

This problem falls on Federal Reserve and has less to do with the White House. Prompted by the beginning of the U.S. housing bubble, Congress approached Greenspan to regulate the underwriting of loans in the mid 90's. Ed Gramlich heightened the concern in 2000. Greenspan dismissed both demoting the severity of the problem and stating that the Federal Reserve does not have that ability and market forces would compensate. The Bush administration couldn't wrap their pea-sized minds around the scope of the then impending crisis. Most Americans, sitting on 401k's and E-Trade accounts, knew that these exotic loans were financed by investors on Wall Street, collectively sold in mortgage-backed securities, and not by traditional loans and deposits. The warnings were written in the New York Times and Wall Street Journal. But they were largely ignored because a lot of people made A LOT of money. I'm sure that some lenders misrepresented the terms of their loans and some Americans were genuinely deceived. I have to believe that most, while not completely understanding the jargon contained in their mortgage agreement, would have at least recognized that not having a guaranteed liability on that loan is a really bad idea.

I'm not sure when the nadir will come honestly. There was a piece on NPR a couple of months ago about homeowners defaulting on their loans, not because they can't afford them, but because they have lost so much equity, sometimes 40% or higher, and the time needed to recover that value in their property may be decades. The credit penalty they incur is abolished after 7 or 10 years depending on how they file. Virtually every American homeowner notwithstanding rising interest rates has lost some value in our properties. Imagine the fallout if only half of us walked away from our mortgages.

People, with a small percentage of exceptions, are greedy and place self above the common good. That is why we are posting in this thread right now. Government regulation is a good thing sometimes, in cases when it is appropriate and necessary. Sometimes, we need to be protected from ourselves and the reckless choices that we make.

Yes, I am a bit bitter over some investments growing at negative percent right now.

This is sort of a tangent, but as a favor to more recent forum readers I must remember that BNA! works with real estate so he must know what he's talking about. Just in case people think he's just being an Internet Expert on the forum. I mean, he even wears a suit.

Seriously though, I've been waiting to read his opinion and what he makes of this crisis for a while, so thanks for the post BNA!.

Hiho, someone found my "Trust me, I wont screw you" image on the net. From there to now exactly 10 years passed by. I lost ten thousand hairs, gained ten pounds but have much nicer suits now.

Well, I tried to avoid to imply any pseudo-insider-knowledge by opening this, or similar, posts with "I work long time in the industry with 4 for the 5 five Wall Street banks and tell you...". This would have reduced potential disagreements with me which in return always give me to opportunity to get fresh input and / or back-test what I may think is right or wrong. And NDAs keep me from spilling the guts anyway.

It is true that all major journals have consistently warned about the credit bubble. Greenspan was, until three days or so ago, a driving force NOT to interfere with bubbles and let the market sort it out. This however did not appear to be true when creating them. From my point of view the US way of life heavily depends on credit and consumer confidence. In a post 9/11 world the economy received a stimulus package and no cost of the war got handed to the tax payers. That's why everyone still thinks a war is probably something good since it made house prices rise and so on.
Excess liquidity at negative interest rates when inflation adjusted have always in the past created a bubble. The housing market was too much in the hand of asset flippers rather than people who just wanted to live in their houses. Those who purchased a house at the height of pricing curve may need decades to recover, but if they live in it nothing will change. On paper they are less rich, but the house still serves the purpose it was meant to. Nothing lost there unless one gets forced into foreclosure.

The FED indeed created the problem, but they didn't get up in the morning and decided to let almost unlimited liquidity flow into the market. Washington has a say in economic policies too.

I am always suggesting to introduce financial education in schools whenever I get the chance rather than mostly boring economic classes which do not relate to personal finance. Tell people in school how to make money, grow it and keep it rather than introducing them to nobel price winning formulas with greek letters in them explaining basic national economy interdependencies. Too much theory, little to practise.

Wall Street, stocks, bonds, real estate, commodities... are not gambling. Sound investment is the best thing one can learn in life and it doesn't measure up to rocket science. Once you understood stuff like compounding interests you will understand how it works to your disadvantage too with debt, especially consumer debt for toys. Of course thousands of factory workers will lose their jobs first when people don't buy everything on debt the second they see it. Instant gratification is nice, but delayed gratification adds value to the things you want to own when you can afford them.
I've been in debt a few times, but never from consumer spending or living above my means. Sometimes investments go wrong and remind you how leverage can work the other way around.

This crisis has cost me more nerves than money, but there are some positions in my portfolio I will probably have to pass on to my heirs to see them recover. None of these positions have been "investments" but only the "quick trades for fast money" went wrong - what an irony and well deserved losses.

Only few people realize a mere monthly saving per month of 250,- will turn into ~ 3 million after 40 years (assuming 12% annualized growth rate and a tax shelter around it). If one starts saving from 25 by passing bad video games and upgrading the GPU only every two years they can grow themselves a nice nest egg which will keep the light on in the fridge and the oven heated in retirement. If such a person climbs up the ladder, makes more and avoids the typical traps (multiple cars on loan, credit card debt, failure save investment offers promising 10,000% return in 3 months...) they accumulate a house, a decent car, school education for the kids and so on without ever getting themselves into a too bad situation.

At one point in my life I was also living more the high life and I am slapping myself everyday for doing so. I could already be retirement ready in financial terms at 39, not now I have to slave along. I wouldn't have retired at 39, but it's a good feeling if you could if you wanted to.

Most people for some reason act as if they'll win the lottery one day. There sure are things like group pressure to get bling bing, but again, if you can tie your hands behind your back and save it you'll have gained so much more. Personal wealth, even if it's only a few ten thousand (adjust that to your currency), gives you independence in thought and acting. If your boss is trying to turn you into a shivering piece of fear with the threat of job loss when not complying to often experienced silliness - fire him, walk out, go home, find a new job. In the meantime your savings will keep your household running. I often imagine how an independent workforce would reshape the corporate world by forcing senior staff to be better managers too.

I run a small business myself (real estate appraisal company) and am totally delighted if my people earn above average and I can stack a voluntary bonus on top for impressive performance. But I see myself every day as the employee reporting to my workforce as if I'd be the junior staff. I want to see everyone to come in happy, work happy and leave happy. That's why they make good money and me too. Especially when running a business it's the management and / or the owners who have to act in a way that they deserve the extra payment from all the employees who only see a specific fraction of the turn over.

This is no happy tree hugging hippie stuff - goals are set, deadlines are tight and mistakes are not allowed to be made, for therapy hours they need to go elsewhere. But I believe in the right working environment people simply need less therapy hours and they don't envy the good income of the owner.

But that is not really a point which belongs to this topic.

Quote:

People, with a small percentage of exceptions, are greedy and place self above the common good. That is why we are posting in this thread right now. Government regulation is a good thing sometimes, in cases when it is appropriate and necessary. Sometimes, we need to be protected from ourselves and the reckless choices that we make.

This I totally agree with. It's a hardwired part of human nature. It's always the question who sets the standards as what is appropriate and when. I believe after the new economy bubble and the 9/11 time the US got spared the due recession cycle by artificially increasing the liquidity. It's tough if a presidency tries to counteract every normal cyclic beahivour of the market in fear of getting unpopular or having to answer too many questions why many of trillion need to get spend on a war while people at home lose their jobs.
Now we'll sure go through a recession cycle which usually is relatively brief anyway. But people often think when things go down for 2 years it's the end of the world while in following the 4 to 8 year upswings they act as time flies by and the only direction can be up forever.

We'll see how it pans out this time, but I'm personally happy with the current recovery plan to stabilize the market. The recession will pass and I hope most private investors will not watch the following upswing till it eclipses again to place their funds a day before everything will crash.
Money is always made in a crisis, never by getting in at the heights.