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Financial news I consider important, with my opinion, which is worth as much as you paid for it.
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Sunday, August 31, 2008

Perpetuating US financial issues

America is NOT serious cleaning up financial issues is a borderline reckless charge to make.
After all the media and talking, America HAS to be cleaning up it's act, right?

Lets break it down, issue by issue, lets start with the original blame game on the financial debacle we are witnessing. To level set, as of today we are all aware that there was mass fraud in lending, America continue debt spending beyond most expectations, and an inflation rate of 10% annual. (likely to hit 12%)

Interest rates artificially low from 2001 through 2007, "causing the bubble", continues
In a normal market interest rates would rise to reflect higher risk in lending, and to curb inflation. Reality? Fed lowers rates to the point of putting the US dollar further at risk and "enabling" the bad behavior just a little bit longer, hopefully to lay it on the next presidents/administration lap. USA debt is purchased at these low rates since there is severe risk in every direction, and logic is USA debt is the best of all evils to preserve wealth. The "reasoning" for low interest rates has been if interest rates rise, the economy will crash. Probably right, but giving heroin for free doesn't incentive the drug addict to change its behavior. Strong discipline must follow holding interest rates low to give a grace period to secure fiscal stability. At some point, foreigners purchasing our debt may be cut off. We are squandering this final opportunity for cheap debt, as discussed below.

The Real Estate bubble was amplified by mass fraudulent mortgages, and it continues
This one seems pretty straight forward, in the hype a hair dresser could buy a 700K house making 25K. Looking back, not a bright idea. In American tradition, once a problem gets recognized "the cops" come in and force the behavior to change.
To my surprise, this time, the behavior didn't change but has been accelerating 42% first quarter in 2008? Oh my god, how big of a hole can we try to dig for ourselves?

Companies have debt "off the books" causing credit market crisis, and it continues
A NEW financial class of debt was created called Level 3 assets where created around 1999-2001 that not valued by open market trading, but by "computer models". Once this was recognized as not accurate, the credit markets completely halted. The solution seems obvious, go back to basic, honest accounting and properly value assets according to world accepted practices. This is scheduled to start 2010 into 2014. This still doesn't solve current accounting issues. Further, the U.S. Federal Reserve’s new lending program, investment firms such as Goldman can use Level 3 assets to secure highly liquid U.S. Treasury loans. This is a delay tactic in realizing true value of companies and assets/debt.

My Spin:
What message does this send to the world of US responsibility, the ones buying our debt? Even if the world continues to prop us up, this behavior will NOT lead to becoming a strong, financially strong work leader. Warren Buffet published his version of this line of thought on "Squanderville vs Thriftville. I remain a pessimist on the USA fiscal health until we change the behavior that got us here.

P.S. - Don't worry, we are all insured
FDIC has 45 billion dollars in reserve insuring 4.5 trillion dollars of deposits and it's desperately trying to raise funds. Yes, you read that correctly. It is probable that US will print money to insure deposits, but this will increase inflation, so technically your money is insured, but what will it be valued at for purchasing power? FDIC expects significant increase in bank failures in the next year, as well as industry critics.

Bonds are the foundation of debt lending, and bond insurers are at risk of failing, requiring continued influx of cash to stay afloat. Many existing monoline bond insurers are in danger of failure, as well as the FDIC. Warren Buffet has setup his own Bond Insurer to cherry pick bonds that need a new insurer. But what happens to bonds not re-insured in the event of a bond insurer failure?

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