Wednesday, July 16, 2008

Too much debt with no oversight

During the Great Housing Bubble people were buying everything they wanted. Everyday our equity was growing. Where did all the money go? But was it really money? It sounds as if it were debt - and it is still there. A great video to watch is Money as Debt. It is long but worth the time.

During the bubble people believed the equity was theirs to spend when they wanted and how they wanted. Now they find the money is not available. During the bubble it seemed as if anyone could get 100% financing regardless of income, debt or credit scores. Now they find financing (and refinancing) is limited. During the bubble it seemed as regulators were forgotten about peripherals. Now they are major players running the show. How things have changed!

That brings us to an article in the US Today titled Economic Pain: 'payback' for debt-fueled growth. Lets take a look -

If it wasn't clear before Tuesday, it is now: This is no ordinary economic crisis, and it won't be over anytime soon. In fact, problems are multiplying. A year ago, the financial virus seemed confined to subprime mortgages, defaults on loans given to those with less-than-perfect credit. Now, much of the banking system appears rickety, and the U.S. economy has slowed to a crawl. But thanks to robust demand from still-growing countries such as China, the prices of commodities from oil to food have soared — hitting Americans from the gas pump to the grocery checkout.

Between now and then, the business pages won't make for happy reading. The economy is going through what analysts call "deleveraging," a fancy way of saying debt repayment. During the housing boom, Americans and their financial institutions borrowed way too much money. Now the bills are coming due — economywide. And that's what is making things so tough in so many different ways.

How bad might it get? Perennial doomsayer Nouriel Roubini, who calls this "by far the worst financial crisis since the Great Depression," predicts stocks will fall 40% from their peaks. That translates into a Dow of 8568 — a level not seen since 2003.

Major global banks now need to reload by raising money — lots of it. Even after scraping together $350 billion over the past 12 months, the U.S. and European financial systems remain undercapitalized, says Mohamed El-Erian, co-CEO of Pimco in Newport Beach, Calif. He calls the current predicament "a crisis at the core of the global capitalist system" and likens the banking sector's woes to a car running desperately short of oil.

An era marked by regulators' light touch is at an end. "The system got carried away with financial innovation or financial engineering," El-Erian says. "Regulators didn't recognize how quickly things were moving. Now they're catching up."
There is a big difference between having money and having debt. Having money means freedom - but debt is in imprisoned. Currently our ulcerated and battered financial selves are trying to heal from all the debt we have consumed. That will take time. That will require changes. Hopefully we are smart enough to internalize and make the necessary changes so we can break out of our self-made debt burdens and re-enter the world again.

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