I found this on another site and wondered what you guys would think about it.
Hmmm. It is a credit bubble going ~poof~.
The contortions you are seeing on Wall Street is the result of letting a few bankrupt banks finally go bankrupt. They have been trying to prop them up for about a year now. All credit bubble have some similarities but here is how ours worked until a year or two ago:
1) We run a massive trade deficit: this put lots of dollars in foreign hands.
2) We run a massive budget deficit: so we borrowed a lot of the funds from #1 back from the guys we gave it to. But there was a bunch of it left over. A veritable Mt. Everest of money as a matter of fact.
3) Not being allowed to take over blue chip companies these foreigners had few outlets within US borders to invest in. (The investment within their own borders is limited due to various political reasons) In the end one hell of a bunch of it got funneled into real estate through the large investment banks you are now seeing blow up.
4) These large investment banks combined their own money with that of foreigners and put this cash to work in the real estate market.
5) This credit was so expansive that the limiting factor on housing in many markets was supply. They could not build them fast enough.
6) Prices sky rocketed because of the increased demand for housing produced by this huge influx of credit.
7) Speculators and lax lending standards produced a huge runup in housing prices. Right up until the price got so high that demand slumped for first time buyers. About 2 years ago.
8) This lack of selling to 1st time buyers worked its way up the chain. The entire market depended on a continued supply of new buyers, and the attendent runup in prices, so that people could 'move up' into more expensive houses.
9) When this happened the entire housing market froze up. And to sell houses the prices had to start dropping. This left many upside down on their loans. Speculators fled the market and people who could not afford their homes started defaulting.
10) The investment banks who did not sell all of the bundled up mortgages, and the securities manufactured from them, got stuck with massive losses on the books. These losses are the 'write downs' you keep hearing about. Loan derivatives ~used~ to be worth a certain amount but with some of their loans foreclosed and having to sell it at a loss the security is now worth less. The value is 'written down' by the difference.
So there you have it. Our housing bubble bust in a nutshell. And no, there is nothing to do now but count the losses and figure out who gets stuck with the bill. There is no easy solution to this problem. That is why asset bubbles typically end with the Kingdom bankrupt and the King being led to the gallows. This kind of thing ends empires.
In our case we will try to use inflation to blunt the effects of it and will just have to grow our way through it. But we have misallocated capital in real estate that needs to be drawn down and we will have to solve our trade deficit to insulate us from a recurrance. If we do not, and to a certain extent even if we do, these guys sitting on mountains of dollars will probably not be interested in holding low yielding treasury bonds while we inflate. They want blue chip American companies and will probably end up owning most of them.
Price of running a huge trade deficit year after year.
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