I have been eerily silent on the current financial crisis, and a crisis it is.   I’ve been mostly silent because I’ve been just too busy to write.   I’ve also been reluctant to write because I’m still trying to get a good handle on the issues.  The issues are complicated and complex.

The Bailout
Since the bailout/rescue was announced I’ve been a bregruding supporter.  While we should question the specifics of the plan, and should be in no haste to spend the $700 billion to take on the riskier assets in the banking system, I also know the banking system needs major help.   The message that is only now being vocalized is that this bailout is not for the banks but for all the companies and individuals that bank.  This is all of us.   It’s not just American Banks, but companies and individuals and ultimately everyone in the global economy.

It’s hard for individuals to understand the impact of the credit freeze.  Most responsible Americans do not rely on a steady flow of credit to fund everyday spending.   Companies, large ans small, often do rely on steady credit.   Companies almost always use a combination of cash and borrowed monies to fund new projects.  In addition on daily basis large companies borrow short term via commercial paper to meet constant obligations. The Fed’s recent and unprecented move to actually by commercial paper directly is the most recent sign of the credit freeze.  Even when a company has a solid balance sheet of assets and cash, these assets are not always readily accesible.  It’s impossible to sell a factory overnight, and it today’s market’s even money market funds are less than liquid.   The judicious use of credit serves as a bridge as longer term plans are enacted. When the markets freeze up as they have done it disrupts long term planning. Companies are effectively unable to conduct any business other than the basic adily requirements. I do not believe the bailout will get the country out of the deep malaise is that about to grip the nation, but it will at least prevent us from starting from an even worse point.


The Economy
I believe we’re headed to the worst recession that I’ve seen in my adult lifetime. The recession of 91 and and 2001 were very mild my historical standards. The Asian financial crisis of 1997 was remarkably localized and shortived. Asian countries were able to export themselves out of long term spiral down. The 1987 Market crash was just that, a market crash, it was a market event that affected people’s net worths but not incomes. What we’re experiencing now is a global crisis at the intersection of the financial and real economy.

Root Causes
While at first blush it’s easy to blame the high flyers on wall street, and irresponsible borrowers on main street, the root problem is much deeper. The housing bubble, and it’s spawn of CDOs, MBSs, and CDSs, are the at the center of the crisis. People brought houses they couldn’t afford financed by a banking system that traded short term gains for long term profits and stability. The scheme worked as long as housing prices kept on rising much like a ponzi scheme. Once prices started falling as they inevitably would, the deck of cards began to collapse. Bubbles happen, and this was not the first housing bubble. The country has had it’s fair share of housing bubbles. The last one in the early 90s. In the past, the country and economy has survived. And we will survive again, but I believe the repercussions will be much more serious this time around.

Why are the repercussions going to be more serious? All debts must be paid someday. I believe that someday is today. Over the course of the last 30 years Americans - the Government, Individuals, and Corporations, have become enamored with debt. We are a nation of deficit spenders. The effects are two fold, but both tied to our lack of savings. Individually and as nation we have no reserves because we as nation have collectively decided to pay installments for a fancy new BMW instead of surviving with the old beater and putting savings into the bank. So when a crisis such as this surfaces we have no recourse. Even if there were buyers for the BMW we can’t really sell it because we don’t really own it. Not only does our lack of savings affect us personally, but it has indirectly driven banks to riskier profit opportunities as access to cheap money (savings deposits) becomes more limited. Banks are hardly in the business of funding real businesses, but have increasingly relied on financial engineering and further leverage to create profits by selling and reselling while investments into the real infrastructure of America has waned.