This is my first diary after spending the week on "Dkos" leaving snide remarks, zingers and few relevant comments. I am writing this to present my view of the state of the union of this great republic. In case, you've been hiding in a cave with Osama Bin Laden, the world financial markets have not declined this much since the great market panic of 1929 and you know what happen afterwards. The situation reminds me of the English nursery rhyme "Humpty Dumpty".
Humpty Dumpty sat on a wall. Humpty Dumpty had a great fall.
All the king's horses and all the king's men couldn't put Humpty together again.
The financial crisis has not been tamed, controlled or alleviated and in fact it continues to get worst. It seems nothing we do has any positive effect and in fact leads to more panic and fear around the globe. Why is this happening to the global financial markets? And nothing seems to help?
The answer is simple and yet little understood, Derivative's! They are those exotic instruments, such as CDO's(Collateralized Debt Obligations)and asset backed securities instruments that are little understood by most, including myself. These instruments have huge notional values that are leverage some times as much as 30 times or more. Derivative notional values are estimated to be almost 700 trillion dollars, that's trillion not billions, the US economy a GDP of only $11 trillion.
A small loss, becomes huge because of the leverage and that is the reason banks will not loan to each other. They are hoarding cash to cover potential derivative loss. Unfortunately, these instruments are unwinding at a rapid pace and that is why Paulson will not explain to the American people the true nature of the crisis because they feel it will cause panic. Well, I got news for Mr. Paulson, the panic has hit Wall Street and will be hitting Main Street sooner rather than later.
This same situation was the cause of the market crash of '29 and subsequent depression. During the 1920's debt was leveraged to purchase stocks or "buying on margin". Stocks could be bought with as little as 10% down and since the stock market always goes up, no problem, until it goes down! The same thing happened with housing, real estate always goes up, maybe somebody should have looked back in history and the last time real estate declined was during the Great Depression. The chain reaction and downward spiral caused by this panic is in full swing and begs the question are we headed for another "Great Depression"?
I don't have that answer to that question, which is still up in the air and will depend on the decisions by world central banks. But, it seems to me they don't have an answer either, so I believe there is a better than 50% chance of a depression.
Some my ask "Why was this done" and the only answer I can garnish is that the leverage was necessary to provide liquid cash to the West to buy the goods from Emerging Markets which was built by capital raised with the leverage debt.
Finally, the last time this situation happened it brought a sea change to the political landscape for the Democrats with FDR. Senator Obama seems to have the intellect, demeanor and leadership to guide the ship through this storm and begin a new age progressive liberalism. This "new deal II" will be required to save the Republic from the excesses of Republican "laissez faire economics" which concentrates too much wealth into too few hands.
We have forgotten our arguments as liberals for re-distribution of wealth because of the "right-wing media machine" bashing of any liberal idea as communist. The best analogy I have to explain liberal economics is my own as follows:
"Say you have 10 people in a room and each has $10 and a sandwich vendor shows up to sell sandwiches for $5 and sells 10 of them and Now we have the another room with 10 people, but 9 of them have $1 and 1 has $91 and the sandwich vendor shows up but only sells 1 sandwich (2 if its Limbaugh!) - which is the healthier economy?"
What can one do - in this crisis, well I have some progressive liberal advice based on good old common sense as follows:
Vote Obama/Biden
I will have an update tonight on the markets after they open in Asia this evening. It will give everyone a heads up on what to expect for the week and I don't think it will be good. The economic summit has not made much of an impact. - Asian and European Markets are all up strongly and US futures are up, looks good, lets see if it holds especially when Bad News arrives!