Monday, March 09, 2009

Relative small number of "failures" spread to global collapse


So, how can this be? We have a global financial collapse, based on the failure of a small number of companies, triggered by foreclosures of homes mostly in relatively few counties around the country at first.

Monday morning, March 9, Anthony Faiola reports in the Washington Post (front page), “U.S. Downturn Dragging World Into Recession: Report Says Global Economy Will Shrink for First Time Since 1940s,” link here.
The report is from the World Bank, but the closest story that I could find is by David M. Theis, “Crisis Reveals Growing Finance Gaps for Developing Countries: Research shows poorer countries are short of $270- $700 billion for 2009”, link here.

Today, Adam Shell in USA Today has a story, “Stock market recovery likely will be years in the making”, here, as he points out that it took the market 25 years and a World War to recover from the Great Depression (maximum drop of 89%). And in August 2001, my employer had paid a motivational speaker at a sales conference to predict a 35000 Dow by 2005!

But on Friday March 6 Bard Heath had reported “Mortgage collapse started in few areas: Half of foreclosures in only 35 counties”, link here. The article has maps that highlight Southern California, Arizona, Colorado, Florida and Michigan.

How can an event in a relative small number of areas and relatively few companies (AIG)bring down the world economy completely? Because we had built up a credit bubble (and Ponzi Scheme) not bolstered by increased real wealth. We pretended to have collateral for "debt obligations" when we had none, and issued insurance ("credit default swaps") in direct violation of all insurance fundamentals (including insurable interest). It just took one pin prick to blow it up. And lots of people were hired to go out and sell this scheme and make quotas. Are we all equally guilty? David Callahan had predicted all this in his 2004 book “The Cheating Culture” of extreme capitalism. Or call it “market fundamentalism” as George Soros terms it. What we created was the financial equivalent of a malignant melanoma.

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