I've become quite the observer of Wall Street in the past week or so, primarily because they've become the premier newsmaker in the nation, but partly because I've been in the recovery mode for the 'ol bod after my recent surgeries, etc, and have a lot of sit-around time, as opposed to boat-maintenance time, for example.
So I've been watching mostly CNBC on the telly. I don't get Fox Financial or I would watch that. CNBC is OK, since what you want is the tickers, not the blather, anyway.
So, the nation has entered an economic meltdown and I watched the process. Here's why yours truly thinks that the meltdown is happening.
- Overpriced real estate. Due primarily to demand, but also to greed, the price of real estate managed to get at least 30% too high in the past decade or so. There are a few places where that didn't happen, mostly in the South.
- Failure of the Street to police itself. The "derivatives" (stock and commodity derivatives) market, which is a pure gambling empire, took over the Street as surely as Al Capone took over the crime empire in Chicago back in the 1920's. Actually, the Street takeover could have been engineered by Capone. Aside from bodies floating in the East River, things were done about the same in both takeovers. Derivatives, of course, like criminal instruments of investment (crack cocaine, prostitution), are glamorous and took money from actual equity investment in business ventures.
- Overextension of credit availability. I'm an average Joe, but if I applied for every credit card I was offered, I could have leveraged maybe $200,000 in short-term credit before I would have been cut off. Thirty years ago I couldn't have gotten more than $5,000. I KNOW (wife is a retired credit collections agent) that folks of far LESS creditworthiness were offered almost equal amounts in the hundreds of thousands. The mortgage banks USED to apply a general 25% rule to mortgages: your mortgage payments couldn't exceed 25% of your take-home pay. While that rule was applied, the mortgage industry was safe (I know this because my first wife's father was a mortgage banker).
- Government hands-off policy. Government, of both flavors, has kept a blind eye to the Street, contenting itself with only figuring out how to tax the trillions in paper profits made on derivatives trading. It hasn't tried (before the current crisis) to regulate derivatives trading itself.
- Bond rating agency malfeasance. If an "ugly" mortgage contract is drawn up (ugly meaning too much money granted to too poor a credit risk), the resale or assignment of that mortgage paper should be of GREAT interest to Moody's or whichever other bond-rating agency surveys the quality of investments for financial houses. The rule which SHOULD have been applied is the "one bad apple CAN spoil the whole bunch" rule, because if just one of these "toxic" mortgages exists in a package of say, ten others, that package itself becomes "toxic", and a poor investment. Moody's allowed itself to be fooled (or worse, might have been PAID to issue phony high ratings) on the investment quality of these mortgage bundles. Instead of rating them as to their potential for total write-down, a factor which could be accurately derived, they rated them on their earning capability. Since the "toxic" mortgages carry higher interest, Moody's and other rated them higher, not lower as they should have been.
So, add it all up and you have the current meltdown. Now, 3 of 4 of MY children, when presented with this fact set at age 10, could have presented the case for re-regulation and the cleansing of the money-changers from the temple. With decades to see the problem unfolding, neither political party, or any of the minor ones, either, came to the conclusion we were all just lemmings headed for the cliff. Even conservative investors, such as pension funds, etc, sucked up to the derivatives gamblers, because making and collecting on the bets was SO easy.
So now we're all in the same bucket of shit and brother, we AREN'T coming out of this smelling like a rose. If the Street breaks it's fall, and it might, because the Asian and European markets just slowed THEIR precipitous declines, we will all breathe sighs of relief. That's too bad, because a true crash to the bottom, probably a loss of at least 20% more of the inflated value of equities, would have been the correct starting place for a recovery.
Look around you, people: there are exactly 5 banks left standing, and two of those (Wells Fargo and Citigroup) aren't standing too tall, and there are TWO investment houses left (none, if you consider the "magic" conversion of both to "bank holding companies"), Goldman Sachs and Morgan Stanley. Two weeks ago there were twice as many major banks, and three times as many investment banks. The hedge fund bankers (primary derivatives traders) haven't been touched.
The Street won't learn a thing from this "correction" as of today. Congress will AGAIN shirk it's duty to save true banking and finance from the crooks in the derivatives houses, and we are all still at risk.
The smart players have prepared for, and embrace the cleansing of the Temple, but from here, it looks like it ain't gonna happen.