Why the Worst is Yet to Come.

[JRScott]

What do you mean, don't know what to do?

We've known what to do all along, it's just that there is no political will to do it.

FORCE THE BANKS TO WRITE DOWN ASSETS TO MARKET VALUE - that includes writing down negative equity loans in EVERY SEGMENT, including residential and commercial real estate, as well as everywhere else. NO EXCEPTION.

Then LET THOSE BANKS THAT CANNOT HANDLE THEIR ACTUAL REVISED BALANCE SHEETS FAIL. Right now. Tomorrow. LET THEM FAIL. No government support, no bailout, no nothing. Shareholders get wiped out, no matter who they are. Employees in banks lose jobs. All the stink and ugly that gets attached to it. The dollar falls by 50% against the Euro.

BUT.

Think about the day after. Confidence is restored, because at least now everyone KNOWS where things stand. Recovery - real recovery - can being. People are no longer stressed about what will happen to them 3 years down the road when their loan resets, or spend all their time wondering if they should default (strategically or not), fretting and wasting all this energy that would otherwise be turned into being productive.

It will mean a few hard years. It will mean a reshaping of the entire landscape. It will mean waking up to no Band of America, no Citibank, no Morgan Stanley, possibly no Goldman. It will mean focusing internally, stopping wars even if they are not won yet so that resources can be preserved, becoming community-oriented again, probably a rapid increase of bartering as a form of exchange for a little while. It will mean credit will take a LONG time to flow again, but somehow, I think people will find ways to help each other. I see it all around me anyway, in little ways, like when I hired someone just before christmas to do some things for me that I could and normally would do myself simply because she was desperate and I'm not and it was nice to get them done for me.

But it will also mean we'll be back on our feet in just a few years, without making our kids into the indentured slaves they will otherwise become. And it will stop this insanity. Just get it over with. GET IT OVER WITH DAMMIT!

This would certainly help

[onwards]

are we headed for a lost generation.?

I would think so, yes, unless some miracle happens and our politicians stand up and face the truth with courage and take the truly difficult steps of dealing with it. Ain't gonna happen.

social collapse??? are you inferring along those lines

Actually... that is the one thing I am NOT inferring. I AM inferring the strengthening of social bonds at the community level, some loss of individuality as a (somewhat glorified) value, and a lack of interest in government. I am also inferring a rapid reduction in globalization - not as a policy, but simply as a matter of folks turning in to themselves and those around them more. I infer much reduced mobility, with families congregating, and even having multiple generations living in the same big houses together. We might see intentional communities flourish, as they are the modern evolution of the large family concept mixed with individualism (well, I'm honestly a bit biased here since we're sort of in the process of creating one ourselves, but that's a different topic for a different forum).

But I think people will remain people - and most people I know are good and honest and caring when it comes to those around them. We do what we can and what makes sense, and the world has stopped making sense for many already and even more to come. So society will strengthen, just not in the way, say, a trader would appreciate.

[backtoschool]

What do you mean, don't know what to do?

We've known what to do all along, it's just that there is no political will to do it.

FORCE THE BANKS TO WRITE DOWN ASSETS TO MARKET VALUE - that includes writing down negative equity loans in EVERY SEGMENT, including residential and commercial real estate, as well as everywhere else. NO EXCEPTION.

Then LET THOSE BANKS THAT CANNOT HANDLE THEIR ACTUAL REVISED BALANCE SHEETS FAIL. Right now. Tomorrow. LET THEM FAIL. No government support, no bailout, no nothing. Shareholders get wiped out, no matter who they are. Employees in banks lose jobs. All the stink and ugly that gets attached to it. The dollar falls by 50% against the Euro.

BUT.

Think about the day after. Confidence is restored, because at least now everyone KNOWS where things stand. Recovery - real recovery - can being. People are no longer stressed about what will happen to them 3 years down the road when their loan resets, or spend all their time wondering if they should default (strategically or not), fretting and wasting all this energy that would otherwise be turned into being productive.

It will mean a few hard years. It will mean a reshaping of the entire landscape. It will mean waking up to no Band of America, no Citibank, no Morgan Stanley, possibly no Goldman. It will mean focusing internally, stopping wars even if they are not won yet so that resources can be preserved, becoming community-oriented again, probably a rapid increase of bartering as a form of exchange for a little while. It will mean credit will take a LONG time to flow again, but somehow, I think people will find ways to help each other. I see it all around me anyway, in little ways, like when I hired someone just before christmas to do some things for me that I could and normally would do myself simply because she was desperate and I'm not and it was nice to get them done for me.

But it will also mean we'll be back on our feet in just a few years, without making our kids into the indentured slaves they will otherwise become. And it will stop this insanity. Just get it over with. GET IT OVER WITH DAMMIT!

[onwards]

In reality, if the banks were allowed to fail, our economy would collapse.

Ah, my friend, and this is the rub, isn't it? we have managed to convince nearly everybody that this would be the case, and we've done such a terrific job at it, that the almighty himself is turning green with envy at the fervent nature of this new faith. The masses, academia, and rich people all droning on in one voice... "too big to fail, too big to fail".

Well, I don't see it this way. If failing banks are allowed to fail then the result is that failed banks will have failed, no more, no less. Of course, there will be severe repercussions, although I will argue that they might not be as severe as many imagine. There are PLENTY of smaller and even a couple of large financial institutions that are well-capitalized EVEN IF FORCED to write down every bad loan to market value. More importantly, failed banks do not mean that the money itself - that important tool of trade - has disappeared. The vacuum they create will be filled almost overnight by new banks willing to loan against the deposits made by those who no longer have them at the big institutions. It's not like everyone will suddenly go back to putting money under the mattress.

There will be reduced credit - that's why I mention the return of bartering as a form of trade for a little while - but it will be temporary. Note, however, that with our tax money no longer used to prop up the failing system we will have some of it available to provide temporary relief to citizens in the form of treasury checks - short term credit welfare, if you will, until new and healthy institutions begin functioning. Following that, credit will be available but only in a healthy sense, meaning asset prices will revalue much more conservatively (lower prices), people will have to stop spending like there is no tomorrow, certain sectors will get hit badly (retail comes to mind) while others gain (manufacturing), China's economy will fail (because the US will revert from being so consumer-oriented, severely damaging China's exports), and our GDP will go down about 30%. The US will lose prominence but only for a while, as we begin the inward process of rebuilding. And the dollar will likely begin to strengthen once the tremors are over.

I don't see any of this is negative. Of course, if you live in New York or DC you see this as the ultimate horror story. And you control the channels that dispense information to those same masses, so you do what you can to protect against it. Shame, really.

[backtoschool]

Ah, my friend, and this is the rub, isn't it? we have managed to convince nearly everybody that this would be the case, and we've done such a terrific job at it, that the almighty himself is turning green with envy at the fervent nature of this new faith. The masses, academia, and rich people all droning on in one voice... "too big to fail, too big to fail".

Well, I don't see it this way. If failing banks are allowed to fail then the result is that failed banks will have failed, no more, no less. Of course, there will be severe repercussions, although I will argue that they might not be as severe as many imagine. There are PLENTY of smaller and even a couple of large financial institutions that are well-capitalized EVEN IF FORCED to write down every bad loan to market value. More importantly, failed banks do not mean that the money itself - that important tool of trade - has disappeared. The vacuum they create will be filled almost overnight by new banks willing to loan against the deposits made by those who no longer have them at the big institutions. It's not like everyone will suddenly go back to putting money under the mattress.

There will be reduced credit - that's why I mention the return of bartering as a form of trade for a little while - but it will be temporary. Note, however, that with our tax money no longer used to prop up the failing system we will have some of it available to provide temporary relief to citizens in the form of treasury checks - short term credit welfare, if you will, until new and healthy institutions begin functioning. Following that, credit will be available but only in a healthy sense, meaning asset prices will revalue much more conservatively (lower prices), people will have to stop spending like there is no tomorrow, certain sectors will get hit badly (retail comes to mind) while others gain (manufacturing), China's economy will fail (because the US will revert from being so consumer-oriented, severely damaging China's exports), and our GDP will go down about 30%. The US will lose prominence but only for a while, as we begin the inward process of rebuilding. And the dollar will likely begin to strengthen once the tremors are over.

I don't see any of this is negative. Of course, if you live in New York or DC you see this as the ultimate horror story. And you control the channels that dispense information to those same masses, so you do what you can to protect against it. Shame, really.

I agree with everything you say onwards, but I am just looking at it as a realist. China owns us. They will not allow us to tank their economy. Period. Whole business sectors that rely on loans will fail if we accurately value assets, and that will drastically increase unemployment as well. It would be a scenario that would very much look like the Great Depression, and we were there last year and decided not to play it out. It could be argued in either direction that the Great Depression was not that bad, that people still loved, had families, went to the movies, etc.... But, I think we have been trained as a society to prevent that type of collapse from happening again, and we have been programmed to believe that it was a bad thing that happened. So, we have cultural biases as well that will prevent us from letting it happen again if at all possible.

[DeadManCrawling]

Onward,

I agree with much or most of your thoughts.

In fact, I feel that our actions, as a nation, will ultimately lead to this type of failure anyway. Americans are too damn obsessed with this "way of life". The idea that anyone and everyone should have what they WANT and have it NOW, is a major culprit, along with banking greed and so many other things. I think it is this culture that will ultimately force us to back away from unbridled capitalism in favor of something far more moderate.

I do not predict social collapse, at least not in my eyes. It is very possible we will see a government collapse, or a change to a variation of our current form that emphasizes moderation and self-sufficiency. Some would view this-government collapse-as the same as societal collapse. I view it as a different outcome because I agree with Onward. I think that the result would be a few years of extreme suffering while economies are recreated on a local and regional scale, before expanding further. The end result, I think, would be tightly knit communities of people with far different expectations for the future than what we have now.

Certainly, a great many would suffer, possibly even die, but those things are already happening under our noses. Like so many other things, it would simply be pulled from the shadows and become obvious to everyone. However, I also think this is going to happen, whether it is slowly, over years, or in one catastrophic failure like the government defaulting on its debts.

If this IS what we face, or will down the road, I would rather see it happen as soon as possible, take our lumps, and hopefully preserve some sort of future for our children and coming generations.

We probably, though, will do all we can to push the burden onto their shoulders, as we preserve our false sense of security and credit. That way we can continue to buy plasma screens and talking refrigerators on credit. Hey, THAT is the American dream, right?

[Flamingo]

(Snip...) Americans are too damn obsessed with this "way of life". The idea that anyone and everyone should have what they WANT and have it NOW, is a major culprit, along with banking greed and so many other things. I think it is this culture that will ultimately force us to back away from unbridled capitalism in favor of something far more moderate. (Snip....)

Your paragraph above reminds me of a vanity plate I saw on a brand new Corvette in the parking lot (2002) owned by one of my co-workers... it was "MeMeMe" which basically sums it all up. That person has since gone under due to high debt load, cutbacks and loss of income. Many Americans were/are in the same scenario (gotta have it right now and have the best!) and when one little wave rocks the boat, the debt load sinks it...

[justbroke]

The Reality is that AIG floated so much paper for Municipalities, it truly was an entity that couldn't be allowed to fail. Literally. Hopefully, the regulators should be finding ways to take AIG apart, so that this type of issue can't occur again and we can actually allow failures to... fail.

I know I'm not the first to say it, and I won't be the last. I blame this whole problem on all of us, but I put the majority of the responsibility with The Congress. They are their for oversight and to protect us from ourselves. When the cash was flowing and all the fat cats were fat, dumb and happy... no one cared less. Now, that the well has run dry... now comes the blame game.

Alot of this could be solved by voting the sitting Congress out and seating a new Congress. Let's put people in Washington who work for the people, not for Unions and Lobbyists! Case in point... I just read that The Congress has reduced the tax on "Cadillac" plans -- which would be taxed under the new Health Care Bill -- because several (auto) large Unions have chimed in and thrown their weight around. That tax was going to be used to help pay for this, already, outrageously price package. Talk about not working for The People. I wish these Congresscritters would get a backbone, but until we vote in a new bunch... it's business as usualy folks.

[backtoschool]

The way that things will change will be at the local and the individual level, and this is happening now. People are quietly changing the way they live. I am an example of this. I just accepted a job as an analyst that pays one third of what I made on Wall Street in an average or bad year, and one pays one quarter of what I made in a good year. I have been offered jobs that pay more than the job I took, but I deliberately chose this job for several reasons.

It is a small local boutique firm comprised of Wall Street refugees like me, that is located in a scenic downtown of a midwest college town. I can walk to work. Everyone at the firm shares the same values and commitment to being part of a solution, not part of the problem, moving forward, and we are all in Michigan to help seed the economy and help rebuild from the ground up.

I have downsized my lifestyle so that I will be truly comfortable at this salary. I am actually living better than I did in New York, and I am much much happier. I think many people are downsizing their lifestyles like I am and finding happiness in simplicity.

I am willing to take less salary so that I have time to volunteer, to pursue my creative interests, in other words, to have a life. All of my co-workers have this same commitment to living life differently this time. There is a formal mentoring program at the firm where I will be able to devote a certain portion of my time to giving back to the community.

This company tries to invest responsibly in projects and packages that will aid growth in a responsible way. They are funding some of the green-initiatives that will eventually help put auto-workers back to work, as well as other seeding initiatives.

I thought long and hard about how I wanted to live my life post BK. I truly believe that we are just at the beginning of our economic downward spiral, and I would like to think that by downsizing expectations, and learning to live holistically and responsibly, we can slowly rebuild at least our local economies to be more stable, and more productive. Eventually this will trickle up and we will heal somewhat from the mess we are in. People can still have productive, happy lives at the individual level, even as our country continues its tailspin. If we build back up locally, as several others have mentioned in this thread, I think we can survive America's downward spiral.

[onwards]

China owns us.

I beg to differ. Please explain how they "own" us. All they own is $2.3T of government paper, but very few real assets. And remember, the only reason they have amassed so much of it is because they have been proactively devaluing their currency for years. In fact, this is also the main reason why chinese exports are now over 10% of the world's in general, recently bypassing Germany to become number 1. If the Yuan was properly valued, things would have much easier time solving themselves.

My question to you: if it's good for the Chinese, why isn't it good for us? if WE devalue the dollar, effectively partially defaulting on our government debt, all they can do is see their reserves shrink by the percentage of devaluation - say, 50%. Cry me a river.

I will say, however, that we are doing a damn good job at making sure they do own us in the future. I really would like for that to stop.

They will not allow us to tank their economy.

And how, prey tell, will they stop us? it's all fear, but they are trying to decouple already by transitioning to the Euro as a reserve currency, and buying gold as another alternate. Right NOW we still have some serious leverage. In the future, after they dump our treasuries, effectively forcing us to default anyway but on their terms, we would have a much harder time recovering. There is no avoiding it; it's just a question of timing.

EDIT: you do realize that with the current and projected deficit, we are at their mercy for refinancing our short-term debt anyway? the US is technically insolvent at this point. It's just a matter of when they pull the plug - unless we do it first. Just like filing for a Ch11. Let's restructure this country's finances - and let the world sort itself out.

Whole business sectors that rely on loans will fail if we accurately value assets,

Some segments will suffer greatly, like retail (which means services, which is why I am mentioning a 30% drop in GDP - which is HUGE).

Some segments will gain, like manufacturing, because we will have little choice but to start making stuff here again. Everything elsewhere will be too expensive for us to buy with dollars for a while.

and that will drastically increase unemployment as well. It would be a scenario that would very much look like the Great Depression,

That's where I differ from you. I don't think you're right. I think we will shrink in some senses quite dramatically, and lose our "number one" place in the world at least for a while, but I don't think you'll see the great depression. The circumstances are completely different.

[backtoschool]

I beg to differ. Please explain how they "own" us. All they own is $2.3T of government paper, but very few real assets. And remember, the only reason they have amassed so much of it is because they have been proactively devaluing their currency for years. In fact, this is also the main reason why chinese exports are now over 10% of the world's in general, recently bypassing Germany to become number 1. If the Yuan was properly valued, things would have much easier time solving themselves.

My question to you: if it's good for the Chinese, why isn't it good for us? if WE devalue the dollar, effectively partially defaulting on our government debt, all they can do is see their reserves shrink by the percentage of devaluation - say, 50%. Cry me a river.

I will say, however, that we are doing a damn good job at making sure they do own us in the future. I really would like for that to stop.



And how, prey tell, will they stop us? it's all fear, but they are trying to decouple already by transitioning to the Euro as a reserve currency, and buying gold as another alternate. Right NOW we still have some serious leverage. In the future, after they dump our treasuries, effectively forcing us to default anyway but on their terms, we would have a much harder time recovering. There is no avoiding it; it's just a question of timing.

EDIT: you do realize that with the current and projected deficit, we are at their mercy for refinancing our short-term debt anyway? the US is technically insolvent at this point. It's just a matter of when they pull the plug - unless we do it first. Just like filing for a Ch11. Let's restructure this country's finances - and let the world sort itself out.



Some segments will suffer greatly, like retail (which means services, which is why I am mentioning a 30% drop in GDP - which is HUGE).

Some segments will gain, like manufacturing, because we will have little choice but to start making stuff here again. Everything elsewhere will be too expensive for us to buy with dollars for a while.



That's where I differ from you. I don't think you're right. I think we will shrink in some senses quite dramatically, and lose our "number one" place in the world at least for a while, but I don't think you'll see the great depression. The circumstances are completely different.

A great depression in this day and age of course is going to look very different than the "Great Depression" of the 1930's. We are no longer as much of an agricultural economy and the world makeup is very different. But the 25-30% unemployment, and the inability of banks to lend will look very much the same.

This recession looks very much like the Great Depression in regards to industrial production as well. If you look at curves of how industrial production dropped in the Great Depression, and how it is dropping now, the curves are quite similar.

What makes this recession different from the Great Depression in my opinion is that we have much less deflationary pressure now than we did then.

As to China, well I am leaning towards agreeing with you. The problem is that China is a potentially hostile military state, and I am not sure we want to provoke them to the point that you suggest. But I agree with you that we are insolvent as a nation and that the only way to truly fix this is to restructure our finances and rebuild.

[DeadManCrawling]

I agree with most of the previous posts. However, I would add that in addition to our nation being insolvent, we are exacerbating the problem almost daily or weekly. All the fiddling around by government to prop up more and more sectors of the economy will eventually lead to a sovereign default if we cannot get out from under this cycle of taking on ever more debt to pay off existing debt.

I think we are all in agreement on that point. The government is doing what an awful lot of us did--essentially transferring huge balances from one credit card to another. But, government, just like us, is beginning to see higher costs as the buyers of these debts demand higher returns to justify the risk that we might default. This is, or was anyway, unthinkable, that a nation of our size and power, could even be considered a candidate for sovereign default.

The only ways I see out of this are all doom and gloom, at least for a few years. The piper is calling, and we will have to devalue our currency in a controlled fashion and voluntarily give up our lifestyle, or the open market will devalue it forcibly in the near future. I see no other solution.

I am shortly going to post a new news article from Forbes about sovereign default. The article is rather dry and not exactly good reading, but it is stark in its realizations, if you can get past the tedium of language. That, too is a factor in all this: the average person is utterly bored to death when it comes to reading and learning about esoteric concepts involved in economics and finance. So, the ignorant masses look to the "experts" to tell them what to think and how to live. Problem is, the "experts" all have conflicts of interest and political motivation, even if they are not supposed to. There is really only one group that controls economic theory in this country: The Federal Reserve. And it is their, supposedly unbiased and nonpolitical viewpoints, that permeate economic theory in the US. The wolf is in charge of the hen house, as it were.

One way or another, we WILL solve this. Whether we are the force guiding the mess, or trying to, is the underlying question, I think. Will we do it purposely and hope to contain it, or will it be taken from our hands and forced on us by our creditors?

[JRScott]

The Reality is that AIG floated so much paper for Municipalities, it truly was an entity that couldn't be allowed to fail. Literally. Hopefully, the regulators should be finding ways to take AIG apart, so that this type of issue can't occur again and we can actually allow failures to... fail.

I know I'm not the first to say it, and I won't be the last. I blame this whole problem on all of us, but I put the majority of the responsibility with The Congress. They are their for oversight and to protect us from ourselves. When the cash was flowing and all the fat cats were fat, dumb and happy... no one cared less. Now, that the well has run dry... now comes the blame game.

Alot of this could be solved by voting the sitting Congress out and seating a new Congress. Let's put people in Washington who work for the people, not for Unions and Lobbyists! Case in point... I just read that The Congress has reduced the tax on "Cadillac" plans -- which would be taxed under the new Health Care Bill -- because several (auto) large Unions have chimed in and thrown their weight around. That tax was going to be used to help pay for this, already, outrageously price package. Talk about not working for The People. I wish these Congresscritters would get a backbone, but until we vote in a new bunch... it's business as usualy folks.

Didn't reduce the tax on the cadillac plans for most folks. They just gave the union an exception til 2018, no doubt with the hope of making it permanent. Yesterday during the White House Briefing a reporter asked about the change stating the President's promises to keep out special interests from the discussions then asking if this kowtowing to the Unions wasn't just giving in to special interest. Gibbs said No, how he can think its not is beyond me, clearly these folks live in doublespeak and doublemeaning.

I see the Unions as nothing less than any other special interests, I mean have you ever seen the United Autoworkers golfcourse, ever wondered why someone representing the workers is paid as much as a bank exec?

[Leopard]

Capacity

Onward,


I do not predict social collapse, at least not in my eyes. It is very possible we will see a government collapse,


Yes, as long as neither extrmist right/left fringe is allowed to dominate the discourse..We are a center center right nation IMHO

We probably, though, will do all we can to push the burden onto their shoulders, as we preserve our false sense of security and credit. That way we can continue to buy plasma screens and talking refrigerators on credit. Hey, THAT is the American dream, right?

Im 61, and had a moderately successful career in corporate America in sales & product management.. Within the boundaries of the latter job, market planning, I did incorporated some of my philosophical chops with regard to CAPACITY,,,in that

since the 70's Ive believed that the planet has EXCESS manufacturing Capacity..that in the totality of all nations and all men..we have the capacity to feed n clothe all peoples of the world. and to quote Lenny Bruce, develop a factory that makes left nostril inhalers with your team logo on it, and find the niche market wh'od consume it..in spades..provided and thats a big... P..that political groups didnt interfere to deny these things to others as a political weapon.. ala Rwanda ..MY core belief is that we could as a planet, Make every thing everyone "needed" for survival..if markets were, like water efficient and allowed to seek their own levels... Naturally, in some circles, like Johnson & Johnson -one of my employers), this view cause eye rolls;
" son..the market is always growing..dont ever limit your concepts..SALES are ALWAYS rising..hafta think BIG"...dont wanna hear that "the market is limited crap" the big boys were always expansive...in between golf n tennis , and rarely loathe to rationalize when the numbers didnt meet the reality


and here we are..2010...and another of my core beliefs is that unless eevry mothers son..wth wifey n spawn in tow, traipse off to KMART or WAL MART every goddamn weekend dropping $50 on "stuff" and on plastique...

our economy falls on its ass.. recall ObamaMama's quiet comment of a year ago..

"Please spend" dont everyone close up their wallets all at once...

please spend............

So the new frontier is to retire debt..the polar opposite to the notions that drove the economy for the last 60 yrs....

n so here we are

[banca rotta]

I agree with this in spirit, but it is not feasible in reality. In reality, if the banks were allowed to fail, our economy would collapse. That is why we bailed AIG out last year and let AIG secretly funnel much more bail out money to the banks than we ever publicly admitted to. (In fact we are so concerned with this information about AIG getting out to the public that the documents are sealed until 2018)

Banks all around the world never fully-accounted for the losses they would have to take if their loans stopped paying off at expected rates because they were insured against these losses from AIG. If the banks had to account for those losses, they would have to start stockpiling reserve money. This is what regulators were trying to prevent by bailing out AIG.

If the banks had to stockpile reserve money, this would cause the economy to freeze up.

Some banks would try to meet their reserve requirements by selling balance sheet assets. Those assets, however, would sell at very steep losses, and the flood of assets into the market place would make prices of those assets plummet and losses too steep to survive for some banks.

Other banks would attempt to meet reserve requirements by essentially stopping lending. Some of this is still going on in the economy as we speak. This would starve the markets of credit.

One of the ways we are doing this is by allowing companies like AIG to funnel money to the banks, and by allowing banks to keep their toxic assets on their books at false prices.

Sounds like CNBC jargon.

Most of us no longer buy it (not that we really ever did).