Tuesday, December 25, 2007

2008 : A Full-Blown Credit Crisis

The Fed and the European Central bank have been printing credit as hard as they can – lending extra money as fast as borrowers will take it.
The idea is to replace the liquidity that the markets are destroying…and prevent the free market from working. That is, the feds try to artificially increase the supply of cash and credit…so as to avoid correcting mistakes.
Fact, it’s almost impossible for an economy to correct mistakes when the price of money is going down. Instead, mistakes are typically made worse. Already, the feds have practically sunk the entire economy with too much debt; now they’re trying to put more debt into the system.
The worst is yet to come for the global banking system, which faces potential losses of more than half-trillion dollars from investments in toxic sub-prime US mortgage debt. The problems in the financial sector have spread on a global scale never seen before 1929. A painful adjustment faces the global banking sector over the next few months as losses are revealed and new capital is raised to repair bank balance sheets.
To defuse the crisis, the Fed, the European Central Bank, and the Bank of England are pumping enormous sums of money into the banking system, at below market interest rates, to prevent a “credit crunch” from triggering a global stock market meltdown. Central banks are working together to forestall any sharp tightening in credit conditions that might lead to a downturn around the world.
There is a Battle in the financial markets : Inflation vs. Deflation; Markets vs. Market Manipulators.
The equity markets clearly want to go down, they want to correct the mistakes of the past 25 years. Credit card defaults are alarmingly high, and U.S. job data give rise to the fear of recession.
As the crisis develop politicians are going to prescribe more regulations, more government programs, more central planning and meddling. And the public– who never seem to have a clue – are going to go for it. They’re going to believe that capitalism has failed, that capitalists are greedy and that we’d be better off having apparatchiks and hacks running the economy.

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