GLOBAL FUTURE ANALYSIS
CREDIT | SOLUTION
What is the solution to this all? Shareholders doesn't want to fund equity problems of financials anymore (as dividends will not paid and stock values decline: the two reasons why shareholders want to provide equity). They are to big to be solved by equity. To much looses are held 'up in the air' waiting for better times. The monolines (designed for individual case collapse, not for general market collapse) and the GSEs (über fruitcakes, holders of the most risks direct after the monolines, therefore just on governmental oxygen) are technically dead, yet still alive. The monolines are held in live by the banks who don't collect insurance coverage (as this will lead to collapse of the monolines and thereby of the collapse of the insuring result demander). Who will supply the money for these major looses? The FED will use the Open Market Committee to support all banks for the market invisible (as the actions of the OMC are not published). All assets of all banks will go to the FED. Accounting is flexible, so is auditing. In the early '80ties all western banks (beside the cooperative organized and on Raiffeisen based ones like the Rabobank) had negative equity positions (technically bankrupted). The government give them the legal opportunity to create an external fund where assets cold be parked (called the Calamity Fund). In these 'funds' where the stressed assets placed and the bank books where artificial and 'legal' (as in: governmental approved, but not in true nature published) beautiful. What are the ways out? The problem is too big, there is just one way out: the FED must facilitate all the air in the books and all the value decline of the house, watering the dollar severely by this. The only tail wind in this is that a lower dollar enforces the position of US products on the world market, the down side is that energy will become (due the decline of the dollar) even more expansive than it already will become. Any other solution than the OMC of the FED silently feed the dollars into the market (as she already does in creating artificial demand for US Treasuries by buying them with printed dollars) has more damage to the US and the world. Stabilization by bringing the balances sheets values easy or sometime at once back to real payment power levels is no option. No bank would stay in business. So what is the Credit Crisis? Credit has been oversupplied and is now short. Short in a way that it's not possible to let credit grow (as it is already grown to big). Credit that is short is not necessary expensive credit. In the '90ties were interest rates in Japan almost near zero percent, but their was no demand, because everybody had pain by buying US assets to expensive (sounds familiar). The Credit Crisis has not hit Japanese banks: they have learn their lesson back in the '90ties, which are always called the last decade of Japan. But any debt with short term adjustable rates will become very expensive. The Credit Crisis is about oversupply of credit and thereby 1) substantial drop in balance sheet values (actual values are only 50%) and 2) many defaulting borrowers. So trouble on the balance and trouble in the daily account. These two problem with one reason (over supply of money) must be bottomed before we can aspect anything substantial of the financials. They're just crippled now. And thanks to Murphy's Law: these correction will not be a joyride, but will hit the economy severely. Leading the financials into a new (bankruptcy of companies and persons drive) write down wave. And on top of that as desert: sharp price rises of energy and minerals hits the economies severely, just as they should give the financials to power to recover. Financials will not stand all these headwinds by themselves. They need governmental support. This can be done by nationalization as they default (scarifying the shareholders) or by real substantial governmental equity support (not burning the shareholder, but only stopping paying dividend till the sky is blue again). If they will be nationalized, stock of financials will be worthless, times that the Fannie Mae shareholders gets dividend even when the company is brook will soon be over. Regards the method (nationalized or governmental equity) it will cost a lot. The US Administration will let their own taxpayers (higher debt) and the world (less value, higher risk) pay the bill instead of decades of recovery. The main question in all of this is: how long will the world stay funding the now 482 billion (half a trillion) governmental budget shortage of the US Administration? And will the world finance all the governmental equity that comes on top of this huge yearly deficit? Otherwise the funding of the government and the problems of the financials can only be down by dollar watering, which will cause inflation as governmental burden on top of income tax, in a time that everything due to Peak Everything already has become more expensive. In short: Credit is the possibility to purchase when you don't have the capital. The Credit Crisis is the situation after a period where this beautiful tool has been used excessively with no relation to real economic values. That's the credit crisis in the early '80ties and that's the credit crisis today. Only the current Credit Crisis is beyond expectation big in size and can not be solved as done in the '80ties. The current Credit Crisis needs severe heavier treatment. The changes that the Credit Crisis will lead to a Currency Crisis (fall of the dollar) and/or a Governmental Crisis (individual States that leave the federal USA) as result of that are big. The problem just can't be treated by normal economic grow/healing due the size of it, it needs governmental capital otherwise the financial world of the US will collapse, but in return it could lead to the collapse of the USA. The Credit Crisis is mainly about pushing good things to far. Banks has made some management improve proposals, where the replacement of the initial bonus of the CEO by a long term (proven real realized profits) bonus one of the more than fifty future crises preventing measures is. Where to go from the situation that all banks are feed (live on and live by) governmental funded equity? This between face can not be held for long. The government will buy any asset the banks want to loose. The whole industry will be washed from their debts. There is no other solution to it without less bigger economic treats to the economy. It's gambling with the dollar, but maintaining the USA brand in the world. The capital demands to the restructured banks will be created with printed money to prevent foreign SWF's (Sovereign Wealth Funds) to take over the whole US banking industry for a dime. The future for the restructured banks is not good due to the Energy Crisis. The fact that due to the Energy Crisis the main economy activities will move to local economies is something the are not prepare and suitable for. Only the banks that are able to facilitate local branch offices will survive longer than 5 years their rebirth, the other just will dye a silenced dead, like an old man who used to be great, but isn't anymore. Everybody with a mortgage that could not pay for it will get a mortgage payment rescheduling. But as the economy slows down, jobs are cut, house builders lay off all jobs (houses enough in the US for the next decade), the impact of the Energy Crisis grows and destroys the complete mobility industries of car makers, car dealers, truck makers, truck dealers, transport companies, plane builders and airlines for the start. This payment rescheduling will hit almost any US mortgage and some mortgages will have multiple of these reschedules. It's gambling with the future of the US, but it's the only solution. The real gambling with the future has been done in the two and half decades before 2007, when the US left their production focus and start to focus excessively on consumption by credit. The problems only came to surface in 2007, they were made in the two and a half decades before 2007.
Author: Gijs Graafland
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