$Billions of paper assets evaporated last week, and more of the same will follow.
Defaults have already triggered freezes and mega-BILLIONS of write-offs on financial derivative "pseudo" investments in the US, Germany, and France. When will similar moratoriums on redemptions of such “investments” spread to the UK, Japan, China, India, Korea...?
I’ve been thinking about shoes. Actually I’ve been thinking about global anxiety, the US housing bubble, a giant octopus, liquidity, debt remarketing, volatility, and tap dancing.
We had another week of financial anxiety worldwide. Investment funds were frozen. BILLIONS of paper assets evaporated. Global stock markets spiked and valleyed... only to spike and valley again. More of same will follow.
You see, the interrelated and systemic dilemmas which came about because of the worldwide reach from a “pending” implosion of the US housing bubble continued to be the story on page one.
For more than a decade the overbuilding of America’s housing sector ran amok. When the dot com bubble burst (only to be followed by the precipitous equity market declines after 9-11), interest rates were pushed to almost zero as a quick fix (or solution) to the problems. To keep our economy growing, real estate became the next big thing—surpassing even the building boom fueled by pent-up demand of the baby boom generation following World War II. Some fix! One greed-driven “irrational exuberance” was replaced by an even bigger one. THUD! Did the other shoe finally just drop? If not, then when?
Up through the 1950’s, the valuation of properties had pretty much held its own since the Great Depression and people were happy if their homes were worth about what they paid for them—after all, they had been living there and raising their families there all those years, right? Things were stable. The money supply didn’t fluctuate much. Interest rates were steady and not manipulated. The stock markets traded within a finite range (always below the magic 1000). There was some small appreciation in share price over time - justified because the companies behind the stocks (and their sales) were actually growing in real terms. Inflation wasn’t even a consideration. There were periodic recessions, but that was the invisible hand of the markets re-adjusting themselves. The world was at peace; if for no other reason than had the world’s super powers gone to an all-out war, EVERYBODY would have been toast—literally!
In the 60’s and beyond, “something’s happening here, and it just ain’t exactly clear.” Hollow suburban conformity gave rise to a counter-culture which evolved into some “hybrid establishment.” The pattern of materialism to idealism morphing into a newer consumerism continued. The role, “responsibilities,” and meddlings by our governments grew. Change was accelerating. One segment/ sector/ nation saw what another had and wanted it, too—NOW! This was not greed; if so, “greed is good.” “Plastic” the one word of the future; not as a petrol-based material for products, but as a means to consumptive ends. “Charge it” was now the mantra to get all you ever wanted (and more). This was true for individuals, for families, for corporations, and for government as well. Community, investment, and central bankers were more than willing to accommodate by lending/ supplying the fiat money (that's inconvertible paper money made legal tender by a government decree), or by the plastic money to boot. “Go for it!”
Tentacles of this giant octopus extend globally as we now count on the entire planet to recycle the dollars they already hold into financing more of our debt.
Wall Street saw the market possibilities and hopped on the bandwagon—creating a whole new class of pseudo investments, the financial derivatives. These “opportunities” were not a chance to buy into actual commodities, assets, or companies. They “entitled” the investors to a piece of somebody’s or something’s debt—really the flow of future payments on that debt. This system provided a bottomless supply of credit/liquidity and promoted seemingly endless growth, consumption, and “prosperity.” The housing pyramid bubble is but the latest (and biggest) incarnation of this scam. US addiction to debt far surpassed our own domestic ability to print money. Tentacles of this giant debt octopus extend globally, as we now count on the entire planet to recycle the dollars they already hold into financing more of our debt.
All is well... IF and ONLY IF payments are being made. Well, guess what...? Defaults have already triggered freezes and mega-BILLIONS of write-offs on these investments in the US, Germany, and France. When will similar moratoriums on redemptions of such “investments” spread to Australia, the UK, Japan, China, India, Korea...
THUD! Did another shoe just drop? Or is this “housing bubble octopus” only still tap dancing?
I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.
Copyright 2007 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at firstname.lastname@example.org
Copyright © 2007 The Baltimore Chronicle. All rights reserved.
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This story was published on August 13, 2007.