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The Credit Crunch (often called the Credit Crisis) is not about the fact that banks can't just type new loans in their computers. Banks can put anything in their computers, they just need to stay in their books within governmental own equity demands in their books for each type of credit (this is 0% for governmental credits, 4% for mortgages, 8% for blank uncovered consumer credit, etc). Just in their books, with auditing by auditing company that is paid by them. This who audit the banks is the huge weak spot in current banking system. Banks are so complex and have so much ways to 'cook the books' (produce the desired figures) that this governmental legislation more can be seen as an advice, just due the fact that there are in accounting more than thousand ways to Rome. The required Tier One (bank own equity) capital is therefore just something of a good basic theory. Any auditor (paid by the bank, not by the legislation enforcer) can provide the bank one thousand new ways to get the desired Tier One capital level, and as these on 1000 ways and the 1000 ways of the auditors to cook the books are not enough there is always the SIV (Special Investment Vehicle) capable of clean up / distress any stressed bank balance sheet: the final (suitable for any purpose) magic book cooking device. The SIV is a partial by the bank owned company that holds assets (as in: holds debts, as in: debt is just a temperately negative appearing status of an asset). The amount the other partners has to pay for their share is related to the hurry the bank has with cleaning up her balance sheets. There are SIVs that hold no real value anymore but just stay alive as channeling taking looses for the shareholders. Instead of taking the looses into the balance sheets, they value the assets according to 'historical valuation' and even make 'profit' by adding the interest of loans up to the loans. Financials are the fruitcakes of the world. Managed by people who has lost their sense of for the value of money and for real assets and real profits. Capital is a long term economic facility and it's managed mostly by people who have short term visions and motivations (as in: their own this years bonus). So the Credit Crisis is not about banks that not where any more able just to type new loans in the computers, but about the fact that the engine behind that justifies all that (rise of house prices) stopped and the whole financial system that was build on endless growth of house prices got derailed by that. It's the mystery of our decade how on earth a complete industry really was able to believe in such a thing as endless accelerating home price growth. Intelligent people where blinded. What causes the stop of the engine that justifies rapid loan creation? In 2006 the US house prices stopped to rise. Not strange. There is a limit to everything, and there is certainly a limit to the amount of interest a household can pay and therefore a limit to the purchase amount of a house. The financials where so brilliant that not anyone in the whole industry say that if house prices rise more sharply than the economy (as in: purchase power, as in: payment power) that there is an end to this as this difference reach maximal tension. The financial industry has even build their whole business model on it: Customer, pay this year almost nothing, pay next year, but if you than re negotiate your mortgage based on the value than, you can pay the next year once again almost nothing (of course we add the cost of re entering a new mortgage to the new mortgage), just sign now and pay never, just become part of our financial game. Not strange that this kind of behavior lead to top prices (something quite different than value) of houses. Not strange that 75% of the people working (or must we say: worked) in the finance selling industry in Florida are convicted inhabitants (criminals is such a stigmatizing word, so we don't use it). Arranging the right documentation was the slogan. No passport? They take care for it. Bad credit record? They fix it for you within a few days and for a 'few' dollars. Higher valuation report? No problem, consider it as done (the costs of all these services are of course paid by the mortgage on credit). Buy a house, let it empty, get a signing fee each year when you rearrange the mortgage. Take debts and consuming your future now, that's the way to do this. All right, home prices could not rise any more, even the above fake market has eventually it's limitations. So the home prices didn't go up since 2006. So people couldn't arrange a new higher mortgage, so people must start actual to pay for mortgage, something they haven't done for more than a decade. That was certainly a new experience. Certainly for the whole breed of new home owners. And certainly for those who had take a first year interest discount, (how to sell some something he/she can't afford: sell it with credit on their interest on their credit -this is no a typo, it's is as it is written-) and where 'suddenly' faced in the second year with 10-15% interest rates an huge home purchase amount with all the costs on top of it. A market that can no longer up, goes down. First slowing, than standing still and than going down in a much higher speed than it has gone up. Debt that hurts the state of mind/household. Consuming the future was yesterday nice, but today it isn't and tomorrow it will hurt. Foreclosures became a facet of life in the US. First the foreclosure prices where just a little lower, and they didn't disturbed the market prices (giving the foreclosure traders still a good margin), but as demand stopped (not demand: nobody want to stop the game, but finance possibilities dried up and by that demand), the foreclosure prices where driven down till sometimes 50% of the purchase value and even than almost 50% of the forecloses didn't find a buyer in their public offering, bringing the US an new modern words top 10 word: bankowned. If several objects in a neighborhood are sold for 50% of their initial 'value' and many other objects in a neighborhood are bankowned, the prices of the other objects in the neighborhood will be minus 40% on 60%. Where is the bottom of this? The bottom is when there are no bankowned homes more in the market. Meanwhile the American economy fuelled by this artificial housing bubble starts to slow down by the more and more redrawing of this artificial fuel. Suddenly the US economy is no longer about 72% consu­ming and only 28% producing. Everyone with any sense could tell this, but strangely nobody really saw that this was just a short kick of overstretched fun, that requires a long period of correction. Meanly an other problem grows: we all had bought a SUV that consumed a lot of gas and we have bought all big (really big) homes far away from our workplaces. Big cars take a lot of gasoline, riding big distances in big cars even more, big homes take a lot of heating oil. But oil was getting each year doubled in price. We lost purchase power, foreign nations start to 'tax' our oil addiction at a different price. Strange that the SIV and the SUV has both wrecked us and the SUV has wrecked the SIV. So home prices severely down, purchase power (as in: payment power) severely. People starts to pay later, the heaviest gambling SIV goes down first: two of Bear Stearns and one of Carlyle: they barely could not take a month payment delay of they customers and when the lenders did their margin call (correction payment in the tight framework of their debt to asset value ratio) they defaulted and where tear down by their lenders. As example the Carlyle case: Carlyle Capital literally said in their prospectus that investments in Carlyle Capital had a high risk exposure. On top of that the CEO of Carlyle Capital said in an interview in a financial newspaper on their IPO day in Amsterdam: "there are and always will be bigger fools" and yes they were: the whole offered stocked is bought by European pension funds, who lost it 2 years later (of course the shares are still valuated in their balance sheets). Carlyle used Carlyle Capital to unload Carlyle Group of their whole CDO exposure. There where bigger fools. The pension funds that provided the equity and the banks that provide (30 times equity sized) margin loans based on it. For the Carlyle it is just waiting till lawyers will confront them with 'planned and organized deception' which will be the end of the Carlyle Group, forced by claims or they liquidate just before that. Back to why lending dried up (home prices stop growing). Back to why some financials defaulted (to low equity to resist any payment delay of the borrowers). Back to why banks don't trust each other (they know their own skill in cooking the books, no bank knows the real situation of their counter partners). The Credit Crisis is therefore also about a not any longer smooth operating interbanking credit system. Banks don't trust each other anymore. It takes one to know one. What are the consequences of the fact that they don't trust each other (demanding immediately settling of all open accounts)? The gamblers got in to trouble, and the FED give them the money the need for paying their overexposed debts. Why? First of all otherwise other banks should fall instantly like domino stones. In the view of the FED was the salvation of one, the salvation of all. But the trouble (as in: 1) fall of the house prices and 2) percentage of overdue mortgage payments (due high mortgage and high interest rates) was not over. Both facets growth steady bigger and bigger. The real impact of the Credit Crisis begins to enfold to everyone bit by bit. Some even start to calculate the estimated size. Some (the less smartest) says the problem is over, while the home prices still drop and the overdue rate on mortgages still rise: these people see markets as the weather and have no capacity to look to the causes of this all. The US Administration is well aware of the current size of the problem and the fact that the problem gets bigger every day and has choose to socialize the debts. No strong leadership, but just throwing both governmental and FED money at it. But the fire is bigger than and require more water than the US Administration and the FED can give without causing severe negative consequences for both the USA Government and the Federal Reserve. After the CDO troubles a complete new wave of troubles is on our way: the CDS (Credit Default Swaps) problems. The CDO and CDS market together are $ 64 trillion in size (according to the Bank of International Settlements). Their real value is unclear. After that the muni's (Municipal Bonds) will come into trouble. And the Treasuries will not a problem anytime (as the OMC of the FED can buy this as much as they want with printed money). All these fake values are the reason why any solution for the financial industry must let this whole house of cards completely untouched: no one card may default, otherwise the consequences are total collapse of the whole system. All values must stay in the books valuated against historical values. The whole financial industry has shifted to a complete unrealistic model. The only real payers in this value bubble are the taxpayers and the pension fund payers. Both situations can not go on for much longer. The USA needs a Gorbashev who just say: we're broke, let's stop keeping up appearances of this unreal value issue and work out a real solution. That solution will be that all banks, financials and pension funds can sale each stressed/worthless asset for purchase price to a governmental bailout fund (socializing debts) combined with a guarantee that foreign assets owners can trade this debts against real produced products produced in the US. Than everybody got what they want and nothing collapse, maybe not even the dollar than. This is the only clean way out and success not guaranteed. The Credit Crisis is about insolvent banks, that not even have day to day liquidity anymore, bit must borrow that from the Central Banks, caused by both overcooked balance sheets and structural declining payment power of the borrowers. The Credit Crisis is about the current economic status of the USA: its real (not artificial) economic value (as in: actual purchase/payment power).

Author: Gijs Graafland

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