What next for the US economy?
Well, this morning it looks like we have another bank collapse and the impending collapse Fannie Mae and Freddie Mac, the nation’s largest mortgage institutions. This raises a whole series of obvious immediate questions, but in the context of other serious failures this year and in recent years, I think we have to consider some future-looking questions now that used to be pretty far-fetched:
Just how far does lending corruption extend beyond the so-called sub-prime fiasco?
How much of the corporate junk bond market is involved?
How much leverage is involved?
Who are the exposed parties?
If the domino collapse starts, how will we create firewalls to stop it?
If it gets going, can be stopped short of imposing governmental controls on capital?
Will the markets anticipate this (are they doing so right now)?
How many banks are going to fail next year?
How many banks are lying to us about their balance sheets? (IndyMac was apparently not even on the FDIC distressed list)
Is the FDIC a large enough insurer to prop them up?
If the FDIC fails, how big will the monetization be?
How many times will the government need to bail out Fannie Mae and Freddie Mac and to what total cost to the taxpayer?
Do massive bailouts of Wall Street create a moral hazard?
Could we experience a rapid credit collapse?
In the face of a serious credit contraction, how many US businesses will survive?
How high can unemployment get if US businesses start to fail?
Without easy credit, is the US manufacturing base strong enough to prevent a depression?
If we do experience rapid decompression, does the government have sufficient power and speed to stall it?
Are we about to experience a major stock market crash?
How much would a stock market crash further exacerbate credit problems and financial de-leveraging and the housing market?
What is the total cost of all of these catastrophes together? (home lending + market collapse + war + energy price spiral + bank failures + inflation + credit default swap de-leveraging + dollar collapse + naked short stock forgeries, etc...),
Is the system heading for hyperinflation?
Will major capital assets deflate? How rapidly?
Will oil prices rise further?
What happens this winter if people can’t afford heating oil?
With the combination of crises, how much further will the dollar fall?
If the dollar continues to fall rapidly, does the US have sufficient power and respect to prevent widespread capital flight?
How long will the rest of the world fund our liabilities if we have lost the ability to pay them off?
Just how far does leveraged credit corruption go on Wall Street?
How many shares of what companies are being forged in “naked shorts?”
What do we do if credit default swaps and lying about credit quality and reserves puts the entire financial system at risk?
In an election year, will anyone do anything or just point fingers at each other?
Who are they going to put up against the wall when this hits the fan?
And most ominous of all: could we see real social unrest in the US?
The situation is looking more than ominous now, and to be honest I don’t see either presidential candidate as understanding the gravity of the situation or having the strength of leadership to take control and solve the problem (if it even is solvable).
Who is going to step up and fill the leadership vacuum?
Maybe he should run for president. He surely couldn’t do worse than George Bush (and Alan Greenspan).
Monday, July 14, 2008