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All is Vanity See other All is Vanity Articles Title: The Crash, The Disowning of McCain and the New War with Iran The following is my take on the current situation we now face. I'm not sure if it's correct, but it's good and scary if it's even partially correct. I would be interested in some feedback on the theories presented below. What is happening in the economy seems simple, it's just that it can't be discussed without stepping on Republican toes losing access to government. Hence the double talk and murk we see from our news sources. Seven years ago, at the onset of the Bush administration, consumers had assumed a debt load that was very close to their maximum debt load. This was long term debt, i.e., mortgages, car loans, education loans and such. Debt that would extend five to ten years and beyond. The assumption of this debt wasn't unusual or irresponsible, as in the past the idea was that promotions, other wage increases and inflation would eventually allow the leveraged borrowers to manage the debt. In addition, the rising real estate market, driven by artificially low interest rates - and not by genuine market forces - gave an aura of false confidence. Over the next seven years of the Bush terms, real wages declined for the first time since WWII and real inflation - as opposed to the CPI - roared along at a rate of nine to twelve percent per year and real unemployment rose. To a large extent, the massive deficits generated by the Bush tax cuts had the effect of devaluing the dollar, which in turn increased the price of oil which in turn increase the price of domestic products such as food and utilities. Imports from countries other than China with its currency pegs increased as well. The net result is that a significant and growing percentage of consumers can no longer support the debt load they responsibly assumed at the start of the Bush term. This inability to support the debt load gives rise to what has been code named "debt deflation". Consumers can simply no longer pay all the bills so they walk away from a few. Cars and homes are returned to the lenders and credit cards and school loans go into default. This process is not a secret. Investment banks have histograms of consumer earnings and debt loads. They also have realistic figures on real inflation and real unemployment. With this, one can calculate the monthly expected value of new defaults. The rise in the curve is both radical and alarming. Something that has never been seen before. Each month an exponentially greater number of people will simply be unable to service their existing debt. This is the root basis for the panic in the investment community. But it's actually worse than this. The loans that middle America is increasingly unable to pay have been chopped up and sold off in mixed bags of securities. A single mortgage is divided among many separate bonds to minimize risk to investors. At the onset of the Bush administration, these packaged loans were considered very safe and given very high ratings - AAA. But now, with increasing numbers of consumers unable to meet their debt obligations, these securities are fast becoming junk. Investment banks such as Bear Stearns bought vast amounts of these securities. But it's worse than this. They didn't take ten thousand dollars and buy ten thousand dollars worth of consumer debt based bonds, they took ten thousand dollars and borrowed ninety thousand dollars and bought one hundred thousand dollars worth of consumer debt based bonds. They leveraged themselves with borrowed money. Had the investment banks limited themselves to an unleveraged buy, i.e., if they had simply bought ten thousand dollars worth of bonds with their own money, they could ride out the dip in bond prices. As the bonds went to junk and as the price went to nothing, the banks would have the option of simply sitting on the bonds and collecting interest until the economy improved, consumer income increased and the housing market revived. The bonds would presumably regain their value. But in a leveraged buy, i.e., buying one hundred thousand dollars worth of bonds with ten thousand of your own money and ninety thousand borrowed, the investment banks can't ride out the plunging bond value. The guy who lent the 90K will demand that the bank put up more money, more than the initial 10K, to cover the cost of the drop in bond prices. If the value of the bonds drop to 10K, the lender will demand 90K to cover the drop. This is called a margin call and it happens immediately. The bonds drop by 50% in the morning, a margin call for the 50% is made at lunchtime. Consumers can no longer meet their debt load. The prices of billions of dollars worth of bonds made up of consumer debt are dropping like a lead balloon and the margin calls are coming in. The banks cannot meet the margin calls and are going insolvent. The fed is now lending them money, with he junk bonds as collateral, to prevent an implosion, but the Fed's reserves are about half used up. The past two months burned half the reserves. And the Fed doesn't have an unlimited license to print money. At some point the Chinese and Japanese will order a halt at the threat of dumping their treasury bonds and destroying what's left of our currency. As far as I can see, no effective remedies can now be put in place in time to avoid the collapse. Bush's plan seems to be to throw enough money at the problem to push the collapse off onto the next administration. And I suspect that this is why the Republican controlled media has put such an effort into painting John McCain as an outsider. A person who is not a true conservative. This groundwork will allow the Party to disown McCain when the collapse takes place and give the party a chance to save their ideology, i.e., "Conservative principles of deregulation didn't fail, McCain just isn't a conservative - he isn't one of us and we told you that last year". This may also be the root cause for the renewed interest in starting a nuclear war with Iran. If the collapse cannot be pushed off onto the next administration, a new world war would obfuscate the culpability for the economic melt down. Instead of trying to blame the problems on Bill Clinton after 7.5 years of Republican control, Republicans could respond that it was logical that the economy was destroyed and the middle class wiped out - the new world war would be the culprit.
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