Let's take a look back at what's happened over the past year. The Federal Reserve has cut rates from a low 5.25% down to a ridiculous 2%. With inflation rates running higher than 2% it means that the real rate is actually negative and the money is free.
In December the Fed created the Term Auction Facility (TAF) that allows the banks to swap billions of dollars worth of mortgage securities for treasuries every month. This was supposed to be a temporary facility when created but has not yet stopped and the amount of money now lent every month has grown significantly.
In March the Fed engineered the bailout of Bear Stearns taking 30 Billion dollars worth of their bad debt on their books and placing the company in the hands of J.P. Morgan at a fire sale price.
In the spring United States citizens received checks in the mail to the tune of $168 Billion to try and stimulate spending in the economy.
As the housing decline accelerated and Fannie and Freddie began to topple the Treasury stepped in standing behind $6 Trillion worth of their guarantees on their real estate loans. The greatest bail out in the history of the world, shattering what America used to know as its former self, and creating a nation of communism for the rich only.
The Fed and Treasury have provided the market with the comfort that they will protect any major company that is troubled no matter what the cost.
After all these efforts throughout the year, we can turn and look proudly at where our economy currently stands:
-The stock market this year is down over 15%.
-Unemployment just hit a new multi-year high running over 6.1%.
-Inflation just hit a 17 year high with the government's understated numbers.
-Foreclosures are hitting record highs month after month and appear only to be getting started
-Home prices this year have fallen over 15% nationwide
-Credit card debt is surging and auto loans are starting to default at an escalating pace
So my question is? What would have happened if the government and the Fed had not taken these actions? What would have happened if they allowed the market to work itself out, can you imagine how bad things would be right now?
I try to think of it this way to help describe the state of our country. There is a dam at the bottom a stream that runs down a mountain. The dam protects a small village on the other side of the dam. Every few years the dam needs to be opened to clean the excess water out of the stream from the rain. If they let it build it would destroy the village because it would be too much water at one time. The dam opening is equal to a recession. The homes that were built strong will survive, and the ones that were not are wiped out so newer and stronger ones can be built.
The last time our gates were allowed to be opened was in 1991 and the water has been building every year since. It should have been allowed to open in 1997 but Greenspan would not allow it. It definitely should have been opened in 2001 but Greenspan refused. He wanted the villages to have uninterrupted prosperity forever. And here we are in 2008, and the the gates have still not been opened. The amount of water now built up on the otherside will absolutely destroy the village when it gets through.
The only problem is the dam is starting to break because of the amount of water pressing on the other side. There are small holes starting to crack and water is starting to seep through. Helicopter Ben Bernanke and Hank Paulson are frantically running around trying to plug every single hole as it cracks. They do this so the villagers don't see the water and realize what is happening. If they knew how much trouble they were in there would be a panicked evacuation from the city.
There is no stopping this water from getting through eventually, and at this point the government will do anything it can to prolong it from happening so it doesn't happen on their watch. Will it pour through by the end of the year or will it come on McCain/Obama's term? I don't know. I only can try and protect myself and the people I love in the village and try to position myself to take advantage of the opportunities that will be presented when the flood breaks through. There will be mass panic unlike anything you've ever seen.
The people in the village carry on with their day and talk about how much Sarah Palin loves her kids and the wonderful health care that Obama will bring into their lives over the next few years. This is more important than discussing the dam that is trembling over their heads above.
Interesting interview from the famous Jim Cramer today as he discusses why all these banks need to be saved. Why all these holes must continue to be plugged. He is probably one of the most bullish analysts on Wall Street but he understands what is happening and says that if everyone is not protected we will immediately be faced with Great Depression number 2. (The flood)
It's going to come at some point and every time a hold is plugged and the problem is postponed the water builds, and builds, and builds.......