A world of trouble or as they say where I come from, "A Heap of Trouble". I would appreciate one or more of the kind and wise participants here to explain how I am wrong. Here goes... The World Economy has been fed by growth in the developed countries especialy America. U.S. growth has been based, in he last 20 years, not on efficient use of resources, production of goods, or citizen productivity, but on credit enhanced consumer spending. We have lived well and well beyond our means thanks to easy debt creation. The Investment Banks siezed the opportunity presented by laxing of regulations in 1999 >> http://economistsview.typepad.com/economistsview/2008/04/the-end-of-the.html << to begin the practice of adding great leverage to asset based securities, ie mortgage backed securities. The products were deveolped as a way for Investment Banks to jack up profits especially since they were going to lose the retail stock broker revenues they had enjoyed due to electronic trading. The Dot Com Bust caused a lot of cash to flow out of equities and into more "secure" long term investments such as real estate which was considered to be undervauled. Stocks fell further into disfavor on September 11, 2001 when the planes flew into the World Trade Ceter, Osama Bin Laden and his ilk had hopes of doing great physical damage but even greater financial damage to the U.S. and all western interests. I am not sure if they knew exactly how well it would work but that seminal event caused a panic on Wall Street and more importantly in Washington, D.C. where President Bush decided to react with extremely aggressive proactive wars and Alan Greenspan decided to shore up the economy with floods of liquidity and historically low interest rates. Both of these measures have lasted longer than anyone would envision and the unintended consiquences are now being realized in a fashion that must cause Al Queada much glee. The artificially low interest rates and easy access to credit and missing regulations gave the Harvard educated financiers the perfect opportunity to create tremendous wealth in a scheme to convince and lure world bond buyers into mortgage backed securities. The rating agencies considered U.S. Real Estate to be very secure since it had charted up in value steadily for 500 years and along with Politicians were paid off, so that these mortgages good or bad could be leveraged to much greater risk levels. >> http://www.securitization.net/pdf/JPMorgan/abcds_7Mar05.pdf Fun stuff for JP Morgan, Goldman Sacs and the like so dumb and dumber players began to pile in as real estate development and values increased at a much faster pace due to the flood of money. The pace continued to increase in this activity fueling the U.S. economy and tax revenues which really pleased the politicians and American Business. The underlying weakness in the U.S. was conveniently disguised by the flow of capital. No problem that we had massive trade and budget deficits, a destroyed manufacturing base. It was considered stupid for anyone, the government, business or the consumer to worry about leverage, when the debt could easily be rationalized by the skyrocketing asset values the debt had facilitated. Insurance was and is an important part of the scheme as was evidenced when the Feds became convinced they could not let AIG go down. AIG "insures" most of the shadow money world with no regulations causing them to actually hold the reserves to pay if massive debt obligations should fail. So, in the summer of 2005 interest rates had gone up some but were still very low, real estate development and values were moving up so fast people began to call it a "bubble" but that concern did not slow activities, on the contrary it caused more money to flood in while the going was so good. I had the feeling at that time that "something was going to happen" to suddenly change things. Storms happened especially Katrina. 2005 stroms caused the worst ever insurance losses. Global Warming Alarmists predicted climate changes would cause the type of storm season seen in 2005 to be the norm for 20 years. So, the reinsurance money pulled out of coastal and other property insurance markets causing a rare shortage and spike in premiums. Those suddenly high premiums changed the formula on the fastest growing real estate market, condos and track homes. That summer, the underpinning of the Real Estate Bublle fell apart, but the momentum for development was way too strong, the easy money had already been arranged, the consruction contracts signed and even lots of pre-sale deposits were being harvested. It was assumed the downturn would be short lived and sure enough insurance premiums came crashing down after the summers of 2006 and 2007 put a hole in the - 20 years of disasterous Hurricanes theory. Little dis most anyone know that companies like JPM, GS, MS, etc. were still busy reaping huge commissions on the leverage of the now decreasing in value real estate mortgages. AIG and BRK were busy writing insurance contracts with no reserves on those bonds. Some estimate the 11 Trillion in mortgages in the U.S. is leveraged to the tune of 60-70 Trillion. So, the house of cards fell in 2008. Defaults are not just happening from "Sub Prime" because a loan that is "underwater" on a home, business even an auto is easy to "walk away from" since there is no longer the anticipated investment or asset value to enjoy. It is an avalanche of downgrades. The U.S. will lose it's AAA bond rating.End of Part 1
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