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Supposedly the financial world almost collapsed. This lie has much currency. A worldwide write down of speculative real estate assets and financial instruments totalling perhaps $1 Trillion or a mere 2% of the world's economy, was Armaggedon [an ancient hebrew word that has nothing to do with the world's demise]. Government created problems – forcing banks to lend to people with no proof of income; cheap interest rates for too long; and a flood of money – is now blamed on 'markets'. How ridiculous. Governments and politicians create the problem, then come in to 'fix it'. It is laughable. The 'housing crisis' so overblown and exagerrated, had no chance to destroy the financial system, the world's trading system or 'capitalism'. It is a remarkably minor episode in financial terms with far less than a Trillion dollars being the real damage of government inspired speculation and land rush lunacy. In fact the major banks and investment houses are already releasing statements that their write-downs over the coming years, will be written-up, in other words they have taken too many losses and the value of the underlying assets is worth more than first thought. How exagerrated is this 'crisis' ? Consider the following: -Goldman Sachs' estimate of total world wide mortgage or housing and related financial instruments write-offs: $1.2 Trillion -Market capitalisation of major banks and finance houses listed on New York Stock Exchange : $16 Trillion or 15 times the total write-offs related to the housing mess. -Total bond market liquidity worldwide: $45 Trillion -Liquidity available in derivatives worldwide: $300 Trillion -State managed sovereign funds capital: $25 Trillion -Liquid cash on hand in Wall Street's top 4 investment banks ONLY: $200 Billion -US total GDP: $13.5 Trillion -World Wide GDP: $45 Trillion -Total stock market value worldwide of all exchanges: $85 Trillion -Excess cash on hand at the Federal Reserve, undeployed: $400 Billion -Income growth in the US in 2007: $500 Billion An objective observer who looked at this situation would say, 'well yes there are some problems, but there appears to be more than enough money, liquid assets, and real assets to back up the financial markets'. Indeed. The reality is that the extreme estimate of $1.2 Trillion in write-offs over the 'mortgage crisis' is really a pittance. It is 7% of Bank market capitalisation on Wall Street as of March 31 2008; it is 2 % of world-wide GDP and the bond market; it is 2 years of income growth; and it is 1% of the world's stock market capitalisation. Yes $1.2 Trillion is a significant amount of money, but is it the end of the world? Of course not. The idea behind the current savage round of market- hating, is the idea that if Bear Stearns the 5th largest US investment bank went bankrupt, the entire system would collapse. Rubbish. Every 5 years a major bank or investment house goes bust, and the system carries on just fine. Bear Stearns was a badly managed entity who did not understand what was on its balance sheet. It was levered 34:1, debt to equity. Thankfully Bear Stearns has no correlation to the balance sheets or strengths of its fomer competitors: “Lehman's liquid assets are more than five times greater than its shareholders' equity. At Merrill Lynch & Co., the world's largest broker, and Morgan Stanley, the second-biggest U.S. securities firm, the ratio is three times equity. Goldman's liquid assets are double its equity...... 'Over the last 20 years, the U.S. securities industry has learned through experience how to navigate through financially stressful events that can damage confidence,' Hintz, a former Lehman finance chief, said...'” In other words, the markets are perfectly capable to respond to changing market conditions and asset re-pricing. If Bears went bankrupt the system and the world would not have ended. It would have been the same as Drexel Burnham's bankruptcy in the early 90s, the valuable pieces would have been picked up by competitors and life would have continued. This is not to deny that problems exist in the financial world. But the main problem is not a lack of regulation – there are thousands of regulatory statutes in the financial world which are never used, or invoked. None of these bureaucratic minions were using their existing powers to prevent loans to people with no income verification for example. We don't need more arcane rules and costly fees and yet more bureaucrats. We need transparency, less government involvement and smarter, lighter regulation. The main problem is of course government and its constant regulatory – political meddling. Way back in the good old days of Jimmy Carter in 1977, the American political class created a law termed 'The Community Reinvestment Act' [how sick and Orwellian does that sound?], which mandated that a certain percentage of bank loans and mortgages MUST be given to undocumented borrowers who did not need to show proof of income or assets. The political idea was to force banks to create more homeowners amongst minorities and the poor [you know end white racism etc. etc.] and thereby stabilise the lower classes of US society and energise community and economic growth. But such decrees by government don't work and in fact they distort markets dramatically. What happens when government distorts markets by making dumb anti-reality laws? You create asset bubbles which at some point in time will deflate. The CRA stimulated speculation; over-buying by un-qualified borrowers and ultimately of course, the creation of loans which had little value. Combined with low interest rates from 2001 to 2004; easy money and relaxed credit lending conditions, the scene was set for a large market price correction. Yet market priced corrections can be positive. Now US homebuyers can purchase valuable assets at reduced prices with reasonable interest rates on a variety of loan and mortgage vehicles. The market in other words is clearing the over supply of housing stock at rational market rates. So what does government want to do? After causing the problem in the first place, they want to create yet more regulation; more fees; more distortions and in the future, more trouble. It is nothing more than populist and retarded politics and circular irrational reasoning: 'we created a crisis with government incompetence; there are problems which need addressing; the voting population expects action; ergo we will do more of what caused the problem in the first place.' This is a definition of insanity. The financial system does have problems and issues, but the market can work them out. The 'crisis' is completely exagerrated and over-blown. By any measure the write-offs are minor, and the impact on the overall system, while strong, is not overpowering. There is enough liquidity, central bank support, and financial strength to easily overcome the government created asset bubble in real estate. Too bad the politicians and the bureaucrats won't admit that. After all these years, people still talk about capitalism and racism as two sides of the same coin.
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