Going West by Mark Powers

Thursday, September 18, 2008

Worst financial crisis since the Great Depression

That's how many people see the current credit crunch effecting Wall Street, the US, and the world. Last year, there were 5 major Investment Banks, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Sterns. Bear Sterns was taken over last spring by JP Morgan. Lehman Brothers went bankrupt, Merrill Lynch was taken over my Bank of America, and now it looks like Morgan Stanley is in merger talks with Wachovia. Goldman Sachs stands alone, I guess they must be considering taking some action. A fire sale of assets has begun, as the value of securities falls, companies have to sell more and faster to raise money and stay in business. A vicious cycle of selling.

But that is just the investment banks, Countrywide, Indy Finance, and now AIG are some of the other huge financing and insurance companies that have recently merged, gone out of business, or are under the protection of the US Government, which itself is ballooning with debt and financial obligations.

The US Government also had to come in and protect the largest home loan organizations Fannie Mae and Freddie Mac, which back up most of the mortgages in the US, a foundation of the financial pyramid so to speak. The housing boom of just a few years ago, has completely bust.

SO the US Government, already the largest debtor nation on earth, engaged in a never ending war on terrorism in Afghanistan and Iraq, with a negative balance of trade and massive social security obligations, is taking on billions, maybe trillions of dollars in additional debt, due to potential losses from these companies the US has essentially taken over.

Though the US Government has the ability to print money, essentially covering all the debt, that would drive inflation and reduce the value of the dollar. We actually have already seen the dollar fall to new lows against the Euro and Yen this year.

A fear that has been talked about for years, but has not gotten much credibility until recently is that the countries that have lent us money, in the Middle East, China, and Russia, will start to demand higher interest or reduce their purchases of US debt.

The US already pays a substantial amount every year as interest on our national debt. If countries require greater interest rates to take on more debt or stop buying our debt, the US Government will have to A) raise taxes substantially to pay interest and government bills B) cut spending drastically, we may no longer be the superpower we have prided ourselves as in the coming years. So the US Government, like the average consumer, will have to face economic realities and face the collectors. The average consumer may spend everything available to him on his credit cards, do balance transfers, borrow more money, pay off the interest on the initial loans and buy more, but this is a cycle that is bound to crash.

That is what many fallen stalwarts of US finance and business have learned recently. That is what the US Government may have to face now as well, some very tough choices going forward, unless some crazy country is willing to lend us more money. One thing is for certain, Wall Street and the US Government are becoming a shadow of the financial powerhouses they were a year ago.


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