Thoughts on What happened and What it Means?

To view what happened from a political view like what we see taking place on talk radio, such as blaming the democrats in Congress for requiring banks to lend money to low income earners for home purchases is probably not going to yield an accurate view of what forces caused the financial panic of 2008.

I am not sure why but the conservatives seem to be determined to blame everything on the Democrats, Unions, and socialized thinking. Their thoughts boil down to “If only the free market was allowed to work then everything would have been fine”.

Similarly, the Democrats see the same events and blame tax cuts, the Reagan and Bush Administration’s lax regulatory or de-regulatory actions as what allowed or even encouraged a financial community to engage in a credit boom and nearly worldwide bust.

From looking at what happened, and many things happened, I am not sure you can really logically trace it back to the Democrats. That’s unfortunate because it be a readily implementable solution – vote Republican. We are not so lucky.

In fact viewing the financial collapse through any political view is probably a hindering move and it doesn’t seem to get you to any cogent explanation of what happened.

How To View the Modern World
This is a grand or super Macro vision of the state of the globe. We have the West an area of financial innovation, of democratic institutions that may not be working so well.

Into the mix we have probably peak global oil output, however with a shrinking world GDP we can put the effects of that aside for a few years.

We have China, a mercantile driven economy. The Chinese decided to engage in massive industrialization and have found they like being the dominant manufacturer in the world. They like the vast sums of money that they made and for awhile the global corporate CEOs also liked the fact that they could boost profits, off of cheap Chinese labor and a pro business environment.

The Chinese embarked on a calculated path of vendor financing with the U.S., they understood if goods only flow out of the country then their currency would strengthen and it would hurt their manufactured goods, so they bought US agency debt, treasury bills, and the USD directly as currency reserves. This balanced everything for many years it made everyone happy, what is wrong with that? Sure there were loosers in this, like the environment, the US manufacturing workforce, but on balance it was a happy world.

The US Fed the situation with every lower interest rates to get they system kick started whenever it fell into recession.

However there were grotesque distortions taking place, many I was never aware of.

OK, we now know that low interest rates to spur the economy distorted the housing industry. We know that the calculated buying of US Debt on the surface distorted the trade imbalance between the US and China. We know that ultra low interest rates buoyed the U.S. but over stimulated the Chinese economy due to currency pegs, we know that these imbalances were balanced by Chinese Central Bank purchases of U.S. debt. We know that this may be coming apart and we suspect these artificially stoked economies consumed more than they should have, mainly in the West.

So what comes next, the U.S. consumer is tapped out, so what will the Chinese do? Do they continue to find a way to allow the U.S. consumer to buy goods? I don’t the answer to this.

The U.S. needs some way to fund the coming debt issuances, how will this be accomplished. Since it is a known problem, I suspect that is a problem that someone is trying to solve.



Distortions Then and Now
In the early 2000s the low interest rates led to distortions in the market, it helped spur growth which Greenspan wanted but it led to abnormally low returns on capital, so investment banks went for leverage, well we know how it ended, aren’t we back at it again?

What are the distortions of Zero Interest Rate Policy (ZIRP), there must be some, likely many? I hear the USD may be the new carry trade, gold prices continue to surge, what else?

Now all the problems that eventually came to characterize the financial crisis were not known in the years before the crisis, I think we all heard from Roubini stating housing, commercial real estate, credit in general were all in bubble territory, but I do not recall anyone saying that the investment banks and banks like Citi were leverage 100:1, I never heard about CDS or that AIG had basically become a concentrated risk counterparty for a lot of this bad debt to be.

We knew about the carry trade from Japan and heard about speculators buying the Swedish Krona a higher yielding currency, but nothing about how the ARS market or money markets or the function of SIVs and how huge these had become.

So while we knew some stuff, we didn’t know a lot of what was to come. Are we not basically there again.