I was sitting at lunch last Friday with a number of local bankers and lawyers. They were involved in an animated, half jocular, half serious conversation (as men are wont) about the country's current financial melt-down. Looking to place blame anywhere but in their own policies and practices, most were disparaging stupid consumers who succumbed to "have it all and have it now" messages and the many loan and credit solicitations they've been receiving almost non-stop for a over a decade. Uh huh, that's right. Blame us for your preditory business practices. Typical.
I've posted before about preditory business practices here, and here. The subject is not unfamiliar to me and Pop Impulse readers. It was only a matter of time before the proverbial feces hit the fan in these scenarios, and it has now. Big time. I was struck by a point-on article I recently read in the Asia Times. Doug Noland, who does a weekly financial round-up for the publication, offered some truely alarming predictions - based on some good data and analysis. Read the article here. So let's quickly review.
The sub-prime loan crisis, now well documented and widely understood, is just the tip of the iceberg. Because banks and loan originators got involved in a classic, greed-fueled feeding frenzy they started securitizing their loan portfolios and selling these collateralized debt obgliations to large investors including but not limited to pension funds, school district investment pools, hedge funds and money-market funds. And we sold these mortgage-backed securities worldwide. Now, these securities have gone from an AAA rating to JUNK. That's right, worthless junk. This predictable turn of events has created massive losses in the financial sector that are now spilling over to other sectors, threatening market liquidity itself. This has lead some key financial observers to worry about a system shock to world markets.
Just today, I read in my local daily paper that the auto industry is now threatened by a dramatically rising rate of delinquency and default on auto loans. Makes sense to me as unemployment rises and families struggle to meet higher adjustable rate mortages on their homes. But there's yet another tie-in. Turns out that Chrysler's new owner, Cerebrus (you know, the three-headed dog that guards the gates of hell) Capital Management is also an partner with GMAC in Recap, one of the nation's largest mortgate loan origination and service companies. We're all way too familiar with their subsidiary, DiTech. Could Chrysler be in danger from the sub-prime crisis? Could we all?
The world is watching as we melt-down. And it's not a pretty sight. Vocal critics of US policies like Venezuela's Chavez and Iran's Ahmadinejad have loudly questioned the US dollar's continuing relevance to the world economy. And China, which funds much of our debt, is also re-evaluating its large dollar reserves. Even our allies like the United Arab Emirates are contemplating pegging their currency to a basket of other currencies - rather than directly to our dollar as in the past. Look, I'm not being paranoid here. There's plenty of reason for concern. By this time next year, deep into the presidential election race, I have a sense that the issue will again be: The economy, stupid.