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This Time is Different, or will The Next Financial Crisis Be Even Worse?
- Australia
- Barack Obama
- Barney Frank
- Ben Bernanke
- Ben Bernanke
- Commodity Futures Trading Commission
- Countrywide
- Debt Ceiling
- Dick Fuld
- Eastern Europe
- Fail
- Fannie Mae
- Finance Industry
- Financial Derivatives
- Freddie Mac
- goldman sachs
- Goldman Sachs
- Housing Bubble
- Ireland
- Japan
- Lehman
- Lehman Brothers
- Main Street
- Paul Volcker
- Quantitative Easing
- Restricted Stock
- Restricted Stock Options
- Russell 2000
- Smart Money
- Too Big To Fail
- Unemployment
This time is different? SPX pushing aggressively last two weeks on low volumes. Shorts getting squeezed, and hedge funds returning poor performance. After the almost 100 points rally in SPX from the lows seen 2 weeks ago, everybody is “sucked” right back into the market, all trying to achieve returns in a panic fashion. Volumes are low, and CFTC also reports of dramatically lower volumes. Vol was bought in panic 2 weeks ago, while now some 10 days later, people are puking vol again. As thetrader has argued, the market won’t go down until all the momos are long, preferably geared to max levels (getting close).
The bounce off the 200 day moving average, we argued would happen, 3 weeks ago, has reached it’s full potential, and we will start looking for some cheap vol at these levels. Earnings season and debt ceiling are around the corner. Below 10 points dealing with the issue of “nothing has changed”, and the next crisis will be even bigger than the last, as we have not learnt anything. This time is not different. Courtesey of Smart Money;
1. We are learning the wrong lessons from the last one. Was the housing bubble really caused by Fannie Mae, Freddie Mac, the Community Reinvestment Act, Barney Frank, Bill Clinton, “liberals” and so on? That’s what a growing army of people now claim. There’s just one problem. If so, then how come there was a gigantic housing bubble in Spain as well? Did Barney Frank cause that, too (and while in the minority in Congress, no less!)? If so, how? And what about the giant housing bubbles in Ireland, the U.K. and Australia? All Barney Frank? And the ones across Eastern Europe, and elsewhere? I’d laugh, but tens of millions are being suckered into this piece of spin, which is being pushed in order to provide cover so the real culprits can get away. And it’s working.
2. No one has been punished. Executives like Dick Fuld at Lehman Brothers andAngelo Mozilo at Countrywide , along with many others, cashed out hundreds of millions of dollars before the ship crashed into the rocks. Predatory lenders and crooked mortgage lenders walked away with millions in ill-gotten gains. But they aren’t in jail. They aren’t even under criminal prosecution. They got away scot-free. As a general rule, the worse you behaved from 2000 to 2008, the better you’ve been treated. And so the next crowd will do it again. Guaranteed.
3. The incentives remain crooked. People outside finance from respected political pundits like George Will to normal people on Main Street still don’t fully get this. Wall Street rules aren’t like Main Street rules. The guy running a Wall Street bank isn’t in the same “risk/reward” situation as a guy running, say, a dry-cleaning shop. Take all our mental images of traditional American free-market enterprise and put them to one side. This is totally different. For the people on Wall Street, it’s a case of heads they win, tails they get to flip again. Thanks to restricted stock, options, the bonus game, securitization, 2-and-20 fee structures, insider stock sales, “too big to fail” and limited liability, they are paid to behave recklessly, and they lose little or nothing if things go wrong.
4. The referees are corrupt. We’re supposed to have a system of free enterprise under the law. The only problem: The players get to bribe the refs. Imagine if that happened in the NFL. The banks and other industries lavish huge amounts of money on Congress, presidents and the entire Washington establishment of aides, advisers and hangers-on. They do it through campaign contributions. They do it with $500,000 speaker fees and boardroom sinecures upon retirement. And they do it by spending a fortune on lobbyists so you know that if you play nice when you’re in government, you too can get a $500,000-a-year lobbying job when you retire. How big are the bribes? The finance industry spent $474 million on lobbying last year alone, according to the Center for Responsive Politics.
5. Stocks are skyrocketing again. The Standard & Poor’s 500 Index has now doubled from the March 2009 lows. Isn’t that good news? Well, yes, up to a point. Admittedly, a lot of it is just from debasement of the dollar (when the greenback goes down, Wall Street goes up, and vice versa). And we forget there were huge rallies on Wall Street during the bear markets of the 1930s and the 1970s, as there were in Japan in the 1990s. But the market boom, targeted especially toward the riskiest and junkiest stocks, raises risks. It leaves investors less room for positive surprises and much more room for disappointment. And stocks are not cheap. The dividend yield on the S&P is just 2%. According to one long-term measure “Tobin’s q,” which compares share prices with the replacement cost of company assets shares are now about 70% above average valuations. Furthermore, we have an aging population of Baby Boomers who still own a lot of stocks, and who are going to be selling as they near retirement.
6. The derivatives time bomb is bigger than ever and ticking away. Just before Lehman collapsed, at what we now call the height of the last bubble, Wall Street firms were carrying risky financial derivatives on their books with a value of an astonishing $183 trillion. That was 13 times the size of the U.S. economy. If it sounds insane, it was. Since then we’ve had four years of panic, alleged reform and a return to financial sobriety. So what’s the figure now? Try $248 trillion. No kidding. Ah, good times.
7. The ancient regime is in the saddle. I have to laugh whenever I hear Republicans ranting that Barack Obama is a “liberal” or a “socialist” or a communist. Are you kidding me? Obama is Bush 44. He’s a bit more like the old man than the younger one. But look at who’s still running the economy: Bernanke. Geithner. Summers. Goldman Sachs. J.P. Morgan Chase. We’ve had the same establishment in charge since at least 1987, when Paul Volcker stood down as Fed chairman. Change? What “change”? (And even the little we had was too much for Wall Street, which bought itself a new, more compliant Congress in 2010.)
8. Ben Bernanke doesn’t understand his job. The Fed chairman made an absolutely astonishing admission at his first press conference. He cited the boom in the Russell 2000 Index of risky small-cap stocks as one sign “quantitative easing” had worked. The Fed has a dual mandate by law: low inflation and low unemployment. Now, apparently, it has a third: boosting Wall Street share prices. This is crazy. If it ends well, I will be surprised.
9. We are levering up like crazy. Looking for a “credit bubble”? We’re in it. Everyone knows about the skyrocketing federal debt, and the risk that Congress won’t raise the debt ceiling next month. But that’s just part of the story. U.S. corporations borrowed $513 billion in the first quarter. They’re borrowing at twice the rate that they were last fall, when corporate debt was already soaring. Savers, desperate for income, will buy almost any bonds at all. No wonder the yields on high-yield bonds have collapsed. So much for all that talk about “cash on the balance sheets.” U.S. nonfinancial corporations overall are now deeply in debt, to the tune of $7.3 trillion. That’s a record level, and up 24% in the past five years. And when you throw in household debts, government debt and the debts of the financial sector, the debt level reaches at least as high as $50 trillion. More leverage means more risk. It’s Econ 101.
10. The real economy remains in the tank. The second round of quantitative easing hasn’t done anything noticeable except lower the exchange rate. Unemployment is far, far higher than the official numbers will tell you (for example, even the Labor Department’s fine print admits that one middle-aged man in four lacks a full-time job astonishing). Our current-account deficit is running at $120 billion a year (and hasn’t been in surplus since 1990). House prices are falling, not recovering. Real wages are stagnant. Yes, productivity is rising. But that, ironically, also helps keep down jobs.
You know what George Santayana said about people who forget the past. But we’re even dumber than that. We are doomed to repeat the past not because we have forgotten it but because we never learned the lessons to begin with.
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What I can't figure out is how they keep the ship running. It's like Scotty in the back room yelling "I canna give ya any more Cap'tain", and Kirk yelling back "Just a bit more Scottie".
My personal view is that it is considered bad form to crash the market in the Summer, it is just not done. Polite society waits until all the important people are back from the Hamptons so that they can be entertained by the "great unwashed" moaning and groaning.
the "next crisis" is worse. for now it's called "Greece, Ireland and Portugal." Neither the USA nor amazingly Japan have had this particular virulent variant. Global Central Banks: place your bets.
Naive of me, but I'll believe that point 8 indicates that some capitalism is working and a mess O little people are scrappilly putting together innovations in all sorts of....
Okay, never mind. Years of Regan's dumbing down of potential Bill Gates v. 4.11 in the "Education" system.
Good article! +700 club points!
The next financial crisis will be much worse. But the more important understanding is that crises after the next will not be primarily financial, but existential.
The predators have so destroyed the intellectual infrastructure of the world, virtually nobody with an inclination to be honest, ethical, benevolent or productive will be willing to risk their own time, effort, money, talent and resources to be productive beyond what they themself need to survive and be semi-comfortable.
Thus the entirety of what was called "civilization" will crash and burn... big time... and human life will spiral down the tube. That will not reverse until the predators-that-be and predator-class who currently rule the earth are exterminated. They laugh at the rest of humanity, who imagine talking-with or negotiating-with them (the predators) will have some effect.
It is them or us (predators or producers). They are willing to take actions against the producers, but the producers sit around like a bunch of clueless imbiciles wondering whey they can't persuade vicious predators to "lighten up". Human beings are abject failures.
"The predators have so destroyed the intellectual infrastructure of the world, virtually nobody with an inclination to be honest, ethical, benevolent or productive will be willing to risk their own time, effort, money, talent and resources to be productive beyond what they themself need to survive and be semi-comfortable."
+1000. I have seen this as clearly as yourself for too many years I care to remember. I am more in this position now, more than ever. There are predators presently and predators in waiting when chaos ensues economically or otherwise. Your comment is wise indeed and very few Cassandra's exist anymore to warn of the coming permanent changes.
http://www.youtube.com/watch?v=3g_osF4mXWU
Max Keiser [7-7-11] 'Europe's Neo Feudalism' Stacy Herbert and Michael Hudson [KR]
Great stuff JW.
The Keiser has spoken.
There are no developments anywhere that could lead a thinking person to believe we are not plunging into both economic and social disaster.
The stock market is up, though.
Thank GOD! when the Republicans stopped the Debt ceiling from being raised (which is nothing more than Forced Austerity to protect the Tax Cuts for the RICH) that the FED could Steal the Retirement Monies from the Federal Employee's to Prop Up the Stock Market!
***** "Take all our mental images of traditional American free-market enterprise and put them to one side. This is totally different. For the people on Wall Street, it’s a case of heads they win, tails they get to flip again." *****
The Corruption is so very much deeper than "We the People" know.. or worse, "We the People" do Not! want to know or be bothered because for far to long rampant striping of their wealth. Wealth to the Working man is the ability to take his family on vacation, buy his wife one tiny shinny thing and / or maybe, MAYBE! enroll his children in a Private School to better train them for the ways of the corrupt America!
Sooner of Later this system of robbing "We the People" BLIND! will come to and end. After 30 - 40 years of Hippies holding hands and talking has effected NO! change. Talking to Professional Talkers will NOT! protect your Children's Future!
Maybe we the People should use the Internet to collect enough monies to buy back our Government? Rope is Cheaper and leaves a longer impression on those who fill the shoes of the Treasonous Scum removed and prosecuted.
Congressmen and Senators on AVERAGE! Collect $4 Dollars for every $1 Dollar that "We the People" pay them. The Lobby PAYS our Elected Officials 4 Times More than "We the People" do.
We Pay them $100,000 and then the Lobby Pays them another $400,000.
If you were wondering why Corporate America was given Tax Breaks and Subsidies to erode the Manufacturing Base / Job Base / Tax Base (why do you think we are Broke! all those manufacturing jobs that would have been taxed by 1/3 are in China). 50,000 Jobs a MONTH for the last 10 years! a DECADE of 50,000 Manufacturing Jobs a MONTH! Shipped out of America! and they got Tax Breaks and Subsidies for DESTROYING OUR COUNTRY!
http://blogs.forbes.com/beltway/2011/02/14/intelligence-community-fears-u-s-manufacturing-decline/
Corporate America Bought and Paid for Washington DC! and NOW! Government now is looking to strip Grand Ma and Grand Pa! of their 50 PLUS Years of Taxation! When Social Security has a $2.6 Trillion Dollar surplus of IOU's!!!
http://www.disabled-world.com/disability/social-security/usa/social-security-surplus.php
Cuts? we need Cuts because of our Spending? Really? Shut the Fuck Up!
Will the next financial crisis be even worse?
I think this is the one and only time I will use the word "worsest".
Great review of the capitalistic system gone amuck. A deck of cards ready to collapse with the next Swan. Another scam has been college loans that have propped up the entire level educational system and led to tuition inflation. Students however are stuck for life because college loans are not forgivable through personal bankrupcy proceedings. It seems bankers have raped just about everyone including the taxpayer with bailouts. Who else can they swindle ? When they run out of suckers, the system implodes and it does not exclude the stockmarket
Applause. Thank you.
This is NOT a capitalistic system. As you make clear in your post, it is the bankster system, and yes it has run amuck.
The article speaks the truth, but nothing changes until the fraud at all levels is prosecuted and we put an end to "mark to unicorn" accounting. All those derivatives are worthless. When the holders come to collect, they will be paid in worthless paper. Rally on indeed. Got resources and like-minded neighbors? It works until it doesn't, at which point all leaders will act surprised as they twitter from their private islands. Rally on indeed, just hedge accordingly.
"Will The Next Financial Crisis Be Even Worse?"No. And i didn't even need a chart. Rally on
Should I assume that everyone knows there's a book with this title, "This time is different"? I'll just quickly mention it in case someone hasn't heard; there is such a book; the actual thesis is, no, of course, it's not different; it contains a lot of research your library may have a copy it's fairly interesting.