The Black Political Review

Economic Crisis 101

Economic Crisis 101

By Cireal Americanus

After 8 years of non-stop financial partying, the U.S. is now waking up and asking that all too familiar question, “Where am I?” and “How did I get here?”. This was not a party just for the “Elite” of the Finance Industry but for every American. If you got financing of a car, a house, college tuition, or through a credit card/line, thereby living outside your means you too were enjoying this financial free-for-all.

This party would have continued had the Foreign Bond Markets not forced the U.S. Government to stop the music and turn on the lights. This occurred when the Foreign Bond Markets refused to purchase any U.S. Financial Products, i.e. Bonds, Asset-backed Securities, Securitized Assets, etc., because of what the Market has termed a “Crisis of Confidence”.

This all started when various lenders gave Sub-Prime Loans to buyers because of poor credit histories or for amounts far beyond what they were qualified to receive, i.e. High-Risk Mortgage Loans. These Sub-Prime Loans were then bundled together, through a process called Securitization, “Structured” in a way to make them attractive to investors and sold into the Local and Foreign Bond Markets in spite of the High-Risk Sub-Prime Loans they contained. Since there was no “oversight” for Structured Product content and no accountability to the Originating Financial Institution beyond the sale of the product, Banks played a proverbial financial “hot potato” with loan packages; buying for profit and quickly selling them to eliminate liability before these loans started to default.

These Bonds were backed with a psuedo-insurance policy called a “Credit Default Swaps (CDS)” which guaranteed the value of the bonds and reimburse any loss to the buyer/investor. Since these CDS’ generate a consistent revenue stream they are attractive to buyers in the same Markets as the structured assets they cover thus adding another variable to the ever increasing complexity of this problem.

Given the loss of jobs to foreign competition, corporate downsizing, and a weakened dollar many of these High-Risk Sub-Prime Loans are in/going into default thus causing their value to significantly decrease. This decrease is causing the Financial Institutions and investors to exercise their CDS’ to protect against their losses. Given that CDS Market is a $62 Trillion Dollar unregulated Market, you have many companies unable to fulfill their financial commitments thus being forced to close their doors or succumb to a buy-out from a larger company, e.g. Merrill Lynch, AIG, Lehman’s, Wachovia, etc. This has caused many Foreign Investors and Financial Institutions to refuse to purchase any Financial Products from the U.S. for fear that these products will prove to be a worthless investment when these Structured Assets are properly valued to the Market.

This is why the $840 Billion Dollar bail-out was needed. The bail-out is focused at buying many of these bad loans in the Market to allow financial institutions the opportunity to get this bad debt off their books and focus on developing means to strengthen their existing assets

Given this financial crisis, the average American is left with a few options:

  1. Don’t panic – resist the urge to make rash moves or react to hear say.
  2. Educate yourself – become aware of the activity in the financial market place and its trends.
  3. Develop a global investment mind-set – look for companies that have a solid presence in the Global market place vs. solid U.S. presence.
  4. Live within your means – avoid taking on any additional credit obligations and work to eliminate the ones you have.
  5. Seek expert advice – align yourself with a certified financial planner and/or accountant, Tax Attorney, etc.

Given the complexity of this crisis, a bit of prayer and vigilance seem to be the truest answer to this Economic Crisis.

 

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Comments on: "Economic Crisis 101" (4)

  1. Actually, I studied a little economics in my day and operated a small business development company. The present financial slide is attributed to some of what you say about the sub-prime loan market but this seem to be a scape-goat for the excessive credit in the American market which is not supported by any real income.

    The real income is necessary to support expansion and the growth of business. Credit can do this only if it has enough time to be repaid by real income multiplied by the payback over t-1; t-2 i.e. t+3 divided by inflation. Since the American worker has been deprived of the advantage of real income the idea that sub-prime is the culprit is a farce. The reason that deficit spending [debt financing] works is because it was used to create real income which was then taxed to pay the debt. The real income comes from GNP or GDP what ever you wish to call the productive activities of the American or any economic system.

    Debt used to pay debt is a vicious cycle which the American economy is caught. There is never owner ship in such a case. The idea of a mortgage which does not reduce principle is just another form of rent. This leaves the accounting equation at A=L and the E factor is always zero or negative. This trick called financing simply increased the statem value of the asset and the so call sub-prime cost of interest was higher than what would have been charged at prime. Much of the theft can be seen in the managed cost of the arrangement.

    The scalawags with the golden parachutes and sons of the robber barons side bet and made their markets as they went. The little excesses which could have been used to soften the fall by expanding the productive markets were plowed back into expanding the housing market where by the housing stock was over active and over valued beyond any collective buyers ability to absorb it by collective real incomes. Surely these guys were thieves because they indicate that he earned in one year enough to by his golden parachutes for 15 million dollars. He absorbed the salaries of 300 workers who may have a base salary of $50,000 and would have to lay off 600 who would earn a salary of $25,000 and there is lots of talk about $250,000 as a protected common middle class salary. What joes you know making that kind of money.

    The so-called middle class and that guy who is always pissing and moaning about their demise —you know that Lou Dobbs fellow—are not real or so far from the real world that an economist would laugh. The middle class i.e. of the real estate owners class benefited from the section 8 vouchers because there was a wealth transfer at a market rate far above the real income of those given the vouchers however, for a while this benefited the real estate owner who actually owned the property but did not effect the true transfer the wealth to those speculators wishing to join the middle class.

    Actually that middle class has shifted in America and does not represent the blue collar supervisory directory but are those planners and individual who can still protect the wealth of the ruling class in this country. These are men like the presidents be they the Bill Clintons or sons of the Bushes and the Titans who believe that their duties are to protect the wealth created by individuals inside and outside the united states of America. The shift of the debt curve and job shifting and international trade are their weapons of choice. They are rewarded with the status of millionaires when they are successful.

    hopefully we will get into discussing that area under the demand curve which represent welfare benefits to monoply activities: A protected monopoly which is unregulated makes profit by restricting production to raise the price of its product. “It makes a profit but the gain in profit from monopolization of a market is less than the cost to consumers as a result of the higher price. Therefore there is a net social loss from a protected monopoly. ”

    Much of the problem result from these kinds of arrangements where the American is but a colonial product i.e. [wage-slave] which can be manipulated by a class of individuals who control the production of capital and see real income of the worker as a part of their capital mix in a neo-manorial society. Every thing else is just myth and shadows and propanganda which is far beyond the study of Economics 101.

  2. Wow. A complete thought…I appreciate receiving this feedback from you.

    I agree with your perspective on the credit paper upon paper shuffle with no “real income” to support it. I would also agree that it was many factors that lead to the Bail-out need, i.e. Corporate Greed, Trade Deficit, Weakened Dollar, Lack of oversight, spill over of a Lack of Confidence in the US paper (based on Market manipulation and the Iraq “so called war”), etc..

    I would not, however, look at the real estate lending market as having a small part to do with the Crisis we currently are going through. The Market is real and the crisis no joke. How we got there is a point we can discuss. I will say that it is much bigger than just the sub-prime market but a direct resultant of the Lack of Confidence the Investment community has in the paper we have.

    I also realize that both our statement are true looking at the crisis from our different perspectives, i.e. Capital Markets (me) and the consumer markets (you).

    To that end, I would also recommend you read a book entitle “Economic Hit man” by John Perkins to understand the planned severity of this occurrence.

    Because we no longer have the Mono-polar economic power we had, the global financial powers have no loyalty to any one country, party, race, etc. The same way we, the US, economically enslaved other Less Developed Countries the Financial powers are enslaving us with Debt we could never hope to pay back for generations to come. When the financial obligations are not met, the payment is exacted through other means, i.e. commodities, power, access, etc.. Hence the “Security and Prosperity Partnership of North America” a.k.a. North American Union. Two topics for further review.

    This plan entails the erosion of the middle class to facilitate this outcome. And you have folks voting for McCain the fueling this outcome in spite of the fact that they are no where near the middle class.

  3. Your analysis is a good one and before I read the suggested text let me say that the Capital Market are being develop in the global sense by using technical resources in cheaper overseas labor markets. The present Chinese market expansion is one in point. It is tied to a strong demand for global energy. Our markets have a strong need for the cheaper consumer good from the Chinese marked. Our strong Commodities export serve as capital in the sense that it may drive a trade surplus which can enhance the American wealth. However, commodities are ruled by multi-national corporations which find no promise in advancing middle-class American wealth. Now I realize that this is a open statement and does not differentiate between the markets be they fuel from the ground or precious metals or grain. We are still strong in various aspect of the raw materials that mother earth has given us freely and more grudgingly recently.

    The American citizen must turn to intellectual property. His mind is what is left to him for mining, developing, and finding the buried treasures. This primary point of basic wealth must be explored on a larger scale. We must promote the idea that we have the vision to think our way out of energy crisis; feed our nation; and provide for the people by finding new ways to products which will create new wealth. The patent and trade mark process and add the thief of trade secrets; we find the most trying processes for the visionary but if we are to survive we must face self and find our solutions. Leaders must inspire and promote the proper direction but the people must understand and act on our best solutions. By all means the people must see the 2008 election as a model of the power and capacity of the people and turn that example to economic development of this country and the political promise of 2008 will become the first step in establishing the promise of this nation.

  4. Harrison Terran said:

    If you ask me, unemployment should be tackled from the bottom up – Although much unemployment arises from changes in the global economy, a creative approach at a local level can often mitigate such losses, and National policies can’t be relied upon to deal with local issues. However, it is essential that politicians and administrators seek advice from specialists in the economic crisis, as some counties have already done with positive results. For example, the Orlando Bisegna Index, apart from measuring the intensity of the econonomic crisis in many countries, have developed a program which has helped various counties with debt problems, business failures and unemployment, thus improving the economic condition of many families. You wouldn’t call a doctor to fix your leaking roof. But every day we allow non-specialist politicians take decisions for us which determine whether or not we’ll have bread on the table next month!

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