Wednesday, August 10, 2011

The Bubbly is going flat

The Dow took back yesterday’s run up and another 100 points besides, closing down 520. This mini-crash was driven mostly by rumors that the big banks are in trouble, especially Bank of America which is the biggest of the big and it has the smallest reserves for its size. BoA is also on the hook for 62 billion in bad mortgages it sold to investors and only has 22 billion set aside to pay for this.

Banks have been making a lot of money running up the stock markets and from speculating in commodities, two streams of cash that seem to have run dry for the moment. These operations could be largely curtailed by the Dodd-Frank law depending on whether Republicans are successful in completely gutting the regulations currently being written or not.

Market bubbles have become a way of life over the past 30 years and as the American middle class, the host for these parasites, becomes smaller and weaker the cycles of “boom” and bust become ever shorter. The “boom” of course only works for the three tenths of a percent at the very top. The other 99.7% of Americans function only to put money in and not take it out.

Not that it’s impossible to make money, but most people buy high and sell low, the evidence is that gold topped 1800/oz today. The people buying think they are shrewd, the people selling are.  Of course the number of people who can even put money into investments gets smaller everyday while the parasites want still more, so they feed harder. That is to say the schemes become ever more outrageous.

How did any investor think that securitized sub-prime debt was a good investment? Oh, that’s right the ratings agencies said they’d examined the loans and they were AAA. Now we’re told that we have to accept the collapse of Western Civilization because countries that have no real economic problems are going to be unable to make good on their bonds and are being downgraded.

The reason they won’t be able to pay? Interest rates are going through the roof and why’s this? Because they’ve been downgraded by these same ratings agencies that gave us the last crisis.

Ten years ago we were told by the Masters of the Universe that the future of the United States was financial services and not those “dirty” industrial jobs. The world needed our “expertise” in finance and we had something that no one else had, the USD with a AAA credit rating to back it up.

Indeed it wasn’t long before 30% of corporate profits were coming from financial services. Wall Street firms were papering the planet from one end to the other and it was all champagne and caviar. That is if you didn’t look back in the kitchen, the food inspectors had been fired.

After the big crash it wasn’t fixed, the Federal Reserve just printed up 14 trillion USD and spread them around. The whole world complains but still pretends it’s not really a food poisoning, but it’s getting harder to ignore the bodies. People on the inside say 80% of financial services should be made illegal, these things used to be illegal. There will be no “recovery” until this is done, just bubbles of ever shorter duration until the champagne goes flat.


John said...

The base of the economy has gone from manufacturing to "the service economy": from washing each others clothes, to doing each others yards, to being each others personal shopper, to being each others financial adviser.

When the financial market is gone, we'll "prosper" by picking each others fleas, lice and ticks. Now THAT's service!

We can hope, at least, there will be no more mind-numbing TV.

John Puma

Anonymous said...

what percent of gdp is financial services.

prairie2 said...

The financial sector is about 9% (what you include can give you a bigger or smaller number).

Tony said...

Prairie 2, not to be difficult, but it appears B of A is in the middle of finalizing a deal to unload the mortgage weight around its neck.

you can google this phrase for more info:

[Sources familiar with the situation said that “the deal, finalized last Friday, will deliver the rights to process and collect payments on a pool of 400,000 loans with an unpaid principal balance of $73 billion.”]

prairie2 said...

The BoA deal is just a rumor and they still don't have enough money even if they unload the mortgages.