Tuesday, September 16, 2008

Reality Just Hit The Fan

or did it?

I really did not want to talk about this today, or ever, really. I actually had a charming post about BFSK S. (Best friend since kindergarten) and the toad that broke into her house this weekend.

The following is nothing more than a question from some chick in Texas. I am not an expert, just an average Jane.

In the last few weeks I have learned more about Sarah Palin and the uterus' (uterui?) in her family than I ever cared to know. I know where she bought her glasses. I know that some men think she is hot. I know she can shoot a gun and she enjoys a good moose burger. There are other cloudy details about war with Russia. Iraq and WMDs, the bridge to nowhere, overturning Roe V Wade, and gun control that frankly I find revolting.

I know that Barack Obama wants Change. I know he is black, and for some reason that is supposed to be a big deal. I know his wife is well educated and his children are adorable. Did I mention he wants change? Well, he does. I am just not sure what it is exactly he intends to change.

I can look at John McCain’s voting record and see what I would get if I voted for him. It looks like more of the same.

Joe Bidden? What can I say about Joe Bidden? I am amazed that Barack Obama has managed to put a muzzle on him. I wonder how long the peace and quiet will last.

I will admit that I have not done great job learning about the candidates. I know too much about their personalities, not enough about their resumes (or lack there of).

I feel like Chicken Little. Is the sky really falling? I am not sure. I know that the stock market is falling. I know financial institutions are falling. I believe the odds of our country resolving the economic issues we are facing without drastic consequences are falling.

Here is a question for you. Let us say you own a home in the lovely hamlet of Anytown USA. Your modest domicile is worth 100 thousand dollars. What if you were able to leverage your 100 thousand dollar investment into 3 million dollars of cash? Would you do it? Would you borrow 30 times what your house is worth? If you did, you could use the borrowed money to make more investments. You could buy more houses. Then you could borrow 30 times what they are worth. On and on and on...

Here is the catch. You have to pay the money back. With interest. Tuesday. Unfortunately, by Tuesday your house will only be worth 85 thousand dollars. The houses you purchased with your borrowed money are de-valued as well. Still sound good? Is it unrealistic for you to expect to get a 30 to 1 return on your investment? Would you bet the farm on it?

Let us add another dimension just for fun. What if some of the money you were borrowing came from retail banks. Is it OK if the bank on the corner lends you some of Granny's retirement money for your new venture? Never mind that retail banks are supposed to put customer deposits in the safest investments possible. We trust you.

This is an oversimplified version of what I think big investment banks have done. Witness the failure of Lehman Bros. and the planned buyout of Merrill Lynch by Bank of America These companies have portfolios that are leveraged 30 or 40 to one. That means borrowing 30 to 40 thousand dollars for every one thousand dollars of assets.

The effort to de-leverage is putting investment banks out of business. Unlike Bear Stearns before them, the Government did not rush in with a bail out plan for Lehman Brothers. The Treasury Secretary Henry Paulson said no. Apparently, all weekend they asked for help. He refused. Letting Lehman Brothers fail could have had major repercussions to our economy. It may still. Equally devastating could be the impact if the government continues to take on private debt.
There are no simple answers.

What will happen when retail banks like WaMu and other already unstable lesser institutions are pushed over the edge by depositors demanding their money? Will FDIC be able to insure those deposits? What about AIG do they fall with Lehman and (potentially) WaMu?

If you are against the government bailouts of private companies like Bear Sterns and Freddie and Fannie, how do you feel about bailing out FDIC? Do you want the market to correct itself? At what price?

In my uneducated, uninformed, unfounded, opinion this could be the run up to a financial disaster of epic proportions. Uncle Sam is promising to spend money that he does not have. We are currently funding US Government spending with low interest treasuries. China, Russia, and countries in the Middle East are heavily invested in these treasuries. How long before these countries demand higher rates? What happens if they dump them entirely?

We are jeopardizing the nation’s balance sheet with private bailouts, but can we afford not to? Is the idea of financial collapse really out of the question? If banks are leveraged 30-40 to one, can it be avoided?

Maybe I have the whole thing wrong. I hope so.
I want someone running for President to explain this to me. What now? What next?

I am listening. I do not hear anyone talking.
When you watched the Republican and Democratic conventions did any of the nominees address these issues directly?
Have they since?
Are any of them qualified to fix this mess?
Are you willing to bet the farm?

karey m. said...

i always think in this same way...

my god, if i of small brain can see that democracy? in a tribal-based country? really? that's your plan?

same with this financial mess. what the hell just happened? please tell me there are smarter people in charge of fixing this, right?

anyone? grrr. this is a great piece. love hearing your opinion.

laura said...

Right. Bags are packed. Am moving to Luxembourg. Nothing ever happens in Luxembourg. People in Luxembourg don't make stupid-ass decisions like the people in our country do.

What time should I pick you up? You can ride shotgun.

with love from Pittsburgh...

Old House Junkie said...

Tobi, This is the uneasiest I've felt about our economy and are nation's future since the WIN days when we were in a "war" against inflation.

Those were dark days, but I was young and didn't have many obligations. Nowadays I am realizing what these changes can mean for my personal future.

But then, I think about the children in Haiti whose parents sold them into servitude and who find themselves scrounging for rice dropped from relief bags because they don't qualify to get a bag of rice. Then, I feel really small and self-centered, but still worry about taking my somewhat comfortable life down a notch.

Wonder how Costa Rica's economy is doing these days? ohj

Tobi said...

Luxembourg, Costa Rica, Jordan perhaps? Y'all decide. Just give me a few minutes to pack my hefty bag!

Seriously? This freaks me out. Can you imagine the information we are in store for AFTER the election? Scary...

Bluestreak said...

There are going to be disastrious effects because what has taken place with the housing market IS A PYRAMID SCHEME. The problem is we are all losers. There´s no actual product or industry (unless there is a corresponding family or potential family to purchase each home that was built). Take the family/purchaser out of the equation and there is nothing but air, and wasted materials. Oh man, are we ever screwed (Spain even moreso than the U.S. that has NO investment industry or R&D except construction for the past 15 years. They have been making air, paper houses, except with negative effects on the environment).

Fned said...

Great post! I'm currently living abroad but if I was in America I would probably be asking the same questions as you, because I already am! WTF are our so called PRESIDENTIAL candidates thinking of doing to sort this mess out? And is there anything that they CAN do? Can we PLEASE stop with the People cover interviews and the below-the-belt accusations and cheapshot BS and PLEASE take this problem seriously?

The american people are scared and for some, this is a good thing (scared people are easily manipulated) for others, this is a bad thing (scared people are easily manipulated), but the bottom line WE DESERVE TO KNOW THAT THE ONES IN CHARGE HAVE OUR BEST INTEREST IN MIND! And frankly, I am not sure.

I work for a bank. The future sure as hell looks gloomy. I bought an apartment two years ago. The future sure as hell looks gloomy. I am over 18 and intending to vote next november. The future sure as hell looks gloomy.


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