The Downward Cycle (Not Spiral) of the World Economy

Recession? Yes. Depression? No. Or at least not yet. What we need to decide as people living in America, and subsequently the world at large, how are we going to let this financial crises affect the way we live our lives. This goes beyond spending less and saving more. We must decide if we are going to give up and give in to the tide of negative information that is flowing from the web and every media outlet or stand and fight.

Greed on Wall Street and the power of Hedge Funds had been accepted for so long that you cannot blame these corporate chieftains alone for the current crisis. It was our trillions of dollars that flowed into 401Ks, IRAs and public equities that gave them fresh powder to accumulate more and more. It was us that demanded better returns and bigger dividends that forced some to stretch the numbers or bite off that big acquisition to maintain growth rates. The emperor had no clothes, we all knew it and know one said anything about it. The reason everyone kept quiet because most were making money at the same game. Sure it was nowhere near the $3.7B the hedge fund chief John Paulson made in 2007, but it was good for us on our scale. Just remember this when you begin to advocate prison time for the CEOs of the companies that went bankrupt or folded under market pressure. If this was a partnership, we all would be held accountable for losses incurred by the company. Are you ready to face up to a Congressional panel?

The point I am making is that finding someone to blame at this point is useless. Let’s point fingers after this crisis has abated. From the looks of it, we are not even halfway through it. What is not being fully considered is the number of ARM loans that are up for rate increases in 2009 and 2010. They should hit right after the Treasury has exhausted the first $700B and walks back up the Hill to get more cash. The problem with that is the new President will not want to push another $700B without stronger stipulations and convents which will take even more time and thus extending the pain. (for everyone) Someone needs to make sure that Neel Kashkari and Hank Paulson (1) Do not spend the cash too fast and (2) Make sure that it is spent wisely. It is uncertain how this lam duck period from November 4th to January 20th will affect the market. That is still 2.5 months for Hank and the Boys to burn though a lot of dough. They have already allocate 36% ($250B) for one initiative and it has done NOTHING to calm the markets. President Bush has already approved the Treasury to receive another $100B immediately. This is particularly disturbing because Bush knows nothing about the financial industry and Hank Paulson has proven that he knows nothing about politics or designing grand plans to fix complicated situations. The comedy of this reminded Mark Cuban of Rube Goldberg. What will not be funny is when American based company begin to layoff employees in massive waves to secure their profit margins. Some will offshore these jobs to India or China but most positions will be lost forever. Look at how the airlines did it a few years ago. They insisted that when times improved, employees would get their jobs back. What happens when times don’t improve to the degree that you are expecting? More layoffs come down or worse bankruptcy proceedings start.


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