Global Crisis - US Bailout Plan
There is no denying that the United States, and now the World, is in a financial crisis of historic proportions.
When the United States emerges from this crisis, it will likely not look the same as it did when it entered it.
The days of economic superpower status are quickly fading away.
Let's quickly review what has happened in the past 8 years to get us to this point.
The Federal Reserve Chairman Alan Greenspan lowered interest rates (Fed Funds) to 1% signaling an era of easing money, a time of vast credit and monetary expansion unprecedented in this country's history.
Also coming off an economic expansion that left the country with a huge budget surplus, the U.
S.
was flush with cash.
So what did we do with it? It got funneled to the housing market.
Americans started realizing the Amercian dream and buying houses at a blazing rate of speed.
This drove up the prices of housing, but no worry's, low interest rates and banks flush with cash to lend made it easy for borrowers of moderate means to afford housing once believed to be out of reach.
Banks even lowered their lending standards making it possible for people with no down payment, little assets and small incomes to qualify for large loans with tiny interest only payments.
In some cases, banks didn't even check to see if a borrower had an income.
Later, many analysts would say that if a borrower had a pulse they qualified for loans in the hundreds of thousands of dollars, even though their income could realistically service a loan less than half the size.
Why did banks do this? Because they didn't care about making money on the loan itself, they made their money by selling the loan on Wall Street.
And make money they did, the more loans they could originate the more money they would make.
Borrowers were getting adjustable rate mortgages (ARM's) that allowed them to pay interest only for the first 5 years.
That made that half a million dollar home very affordable.
And since housing prices were going up 20% a year there was nothing to worry about.
Fast forward 5 years.
Guess what happens now.
The adjustable rate resets.
That means that the interest rate is going up to the current market rate.
Well now, isn't it interesting that the new Federal Reserve Chairman Ben Benanke has increased Fed Funds rates to over 5% from 1%.
Mortgage rates have increase as well.
The new principle and interest payment these borrowers are now faced with is going to go up over $1,000 a month.
Yikes, they could barely afford the low interest only payments.
What happens next sets off the worst financial disaster since the Great Depression.
Borrowers can't afford to pay and they default...
in record numbers.
Foreclosures devastate the banking industry.
Because banks were selling their loans to Wall Street, many of the worlds largest mortgage brokers would face bankruptcy and many of the country's largest banks would go out of business.
As more and more borrowers defaulted, banks, brokerage houses and mortgage brokers were forced to write down the declining value of their assets.
This was over a half a trillion dollars and may still be going up.
As you can imagine, if your liabilities are greater than your assets, you are "technically" bankrupt even if you have the cash flow to continue operating.
This didn't matter to Wall Street traders who bid down the value of financial stocks and literally forced many "too big to fail" firms out of business.
Almost all of the banks and brokerage houses in America lost 80-90% of their value.
The stock market sold off and lost 40% of its value before stablizing, but who knows, that sell off may not be over.
In steps the mighty government.
The Federal Reserve has been putting off a financial credit re-alignment for 8 years.
Generally, it is better to allow the free markets to adjust the excesses so that they can expand again bigger and better than before.
That is what happens in recessions.
This time, apparently the Fed chairman felt it was in the best interest of the country to not allow the adjustment to happen naturally.
When these inevitable adjustments are put off, when they do finally happen they will be worse then they would have been if they were allowed to happen naturally.
There is no putting it off anymore.
Several unprecedented money supply expansions have happened in the past eight years, but none can possibly top the expansion that occurred in September of 2008.
It is estimated that the country's bailout will exceed 1.
5 trillion dollars.
And in the end that probably won't be enough.
In fact, the only thing that will ultimately work is to let the markets re-balance themselves...
except, there might be one thing that could work.
Hyperinflation! That is what the Federal Reserve and the Treasury department have brought to the plate.
They've expanded the money supply more than at any time in history and are willing to hyperinflate the economy to drive it out of its credit squeeze.
First, lets get the banks loaning money again to all those people that couldn't afford to pay it back before the crisis hit, then we'll deal with the hyperinflation by raising interest rates through the roof, causing even more people with ARM's to default on their loans because their payments have gone up again.
Yeah, that sounds like the solution.
Lets put a few more fun facts together to see how we come out of this.
Historcially, all the worlds superpowers have not lasted more than 200 years, the U.
S.
is 231 years old.
No world superpower has been able to sustain a dominant military when their economy collasped.
If this historical precedent prevails, where does that leave the United States? It will be all we can do to defend our own borders let alone fight wars half way around the world or be the worlds policeman and spray water on the terrorist created skirmishes that will likely increase around the world.
Without someone in that role, terrorism will become uncontrollable, who will do it?...
You? (just kidding).
Anyway, a lot is riding on the outcome of the government's bailout plan.
Could this be what the Treasury Secretary Paulson and President Bush were talking about when they said that funding the Treasury's $700 billion bailout plan is far better than the alternative? In the meantime, if you're a stock market trader or investor there are once in a generation opportunities presenting themselves.
Stocks are extremely cheap and choosing the right ones can lead to extraordinary profits.
While the bottom of the stock market collapse may have a ways to go, now is a good time to begin testing the waters.
When the United States emerges from this crisis, it will likely not look the same as it did when it entered it.
The days of economic superpower status are quickly fading away.
Let's quickly review what has happened in the past 8 years to get us to this point.
The Federal Reserve Chairman Alan Greenspan lowered interest rates (Fed Funds) to 1% signaling an era of easing money, a time of vast credit and monetary expansion unprecedented in this country's history.
Also coming off an economic expansion that left the country with a huge budget surplus, the U.
S.
was flush with cash.
So what did we do with it? It got funneled to the housing market.
Americans started realizing the Amercian dream and buying houses at a blazing rate of speed.
This drove up the prices of housing, but no worry's, low interest rates and banks flush with cash to lend made it easy for borrowers of moderate means to afford housing once believed to be out of reach.
Banks even lowered their lending standards making it possible for people with no down payment, little assets and small incomes to qualify for large loans with tiny interest only payments.
In some cases, banks didn't even check to see if a borrower had an income.
Later, many analysts would say that if a borrower had a pulse they qualified for loans in the hundreds of thousands of dollars, even though their income could realistically service a loan less than half the size.
Why did banks do this? Because they didn't care about making money on the loan itself, they made their money by selling the loan on Wall Street.
And make money they did, the more loans they could originate the more money they would make.
Borrowers were getting adjustable rate mortgages (ARM's) that allowed them to pay interest only for the first 5 years.
That made that half a million dollar home very affordable.
And since housing prices were going up 20% a year there was nothing to worry about.
Fast forward 5 years.
Guess what happens now.
The adjustable rate resets.
That means that the interest rate is going up to the current market rate.
Well now, isn't it interesting that the new Federal Reserve Chairman Ben Benanke has increased Fed Funds rates to over 5% from 1%.
Mortgage rates have increase as well.
The new principle and interest payment these borrowers are now faced with is going to go up over $1,000 a month.
Yikes, they could barely afford the low interest only payments.
What happens next sets off the worst financial disaster since the Great Depression.
Borrowers can't afford to pay and they default...
in record numbers.
Foreclosures devastate the banking industry.
Because banks were selling their loans to Wall Street, many of the worlds largest mortgage brokers would face bankruptcy and many of the country's largest banks would go out of business.
As more and more borrowers defaulted, banks, brokerage houses and mortgage brokers were forced to write down the declining value of their assets.
This was over a half a trillion dollars and may still be going up.
As you can imagine, if your liabilities are greater than your assets, you are "technically" bankrupt even if you have the cash flow to continue operating.
This didn't matter to Wall Street traders who bid down the value of financial stocks and literally forced many "too big to fail" firms out of business.
Almost all of the banks and brokerage houses in America lost 80-90% of their value.
The stock market sold off and lost 40% of its value before stablizing, but who knows, that sell off may not be over.
In steps the mighty government.
The Federal Reserve has been putting off a financial credit re-alignment for 8 years.
Generally, it is better to allow the free markets to adjust the excesses so that they can expand again bigger and better than before.
That is what happens in recessions.
This time, apparently the Fed chairman felt it was in the best interest of the country to not allow the adjustment to happen naturally.
When these inevitable adjustments are put off, when they do finally happen they will be worse then they would have been if they were allowed to happen naturally.
There is no putting it off anymore.
Several unprecedented money supply expansions have happened in the past eight years, but none can possibly top the expansion that occurred in September of 2008.
It is estimated that the country's bailout will exceed 1.
5 trillion dollars.
And in the end that probably won't be enough.
In fact, the only thing that will ultimately work is to let the markets re-balance themselves...
except, there might be one thing that could work.
Hyperinflation! That is what the Federal Reserve and the Treasury department have brought to the plate.
They've expanded the money supply more than at any time in history and are willing to hyperinflate the economy to drive it out of its credit squeeze.
First, lets get the banks loaning money again to all those people that couldn't afford to pay it back before the crisis hit, then we'll deal with the hyperinflation by raising interest rates through the roof, causing even more people with ARM's to default on their loans because their payments have gone up again.
Yeah, that sounds like the solution.
Lets put a few more fun facts together to see how we come out of this.
Historcially, all the worlds superpowers have not lasted more than 200 years, the U.
S.
is 231 years old.
No world superpower has been able to sustain a dominant military when their economy collasped.
If this historical precedent prevails, where does that leave the United States? It will be all we can do to defend our own borders let alone fight wars half way around the world or be the worlds policeman and spray water on the terrorist created skirmishes that will likely increase around the world.
Without someone in that role, terrorism will become uncontrollable, who will do it?...
You? (just kidding).
Anyway, a lot is riding on the outcome of the government's bailout plan.
Could this be what the Treasury Secretary Paulson and President Bush were talking about when they said that funding the Treasury's $700 billion bailout plan is far better than the alternative? In the meantime, if you're a stock market trader or investor there are once in a generation opportunities presenting themselves.
Stocks are extremely cheap and choosing the right ones can lead to extraordinary profits.
While the bottom of the stock market collapse may have a ways to go, now is a good time to begin testing the waters.
Source...