Wednesday, January 23, 2008

The Age of Certainty Part I

"Amid growing fears of a worldwide recession, the Federal Reserve slashed a key interest rate by three-quarters of a percentage point on Tuesday, the biggest single cut in nearly a quarter of a century. Meanwhile, President Bush and congressional leaders pledged to work together on a stimulus measure that would inject about $150 billion in additional money into the economy. But many economists are skeptical over whether any measures can turn around a severe slump in the housing market and the subprime mortgage crisis, signs of growing unemployment and weakening consumer spending and the added blow of record high oil prices. "

The causes of the current crises

failure to manage the trade deficit
failure to address the housing bubble.
broader financial deregulatory failure,
failure to regulate in the housing market ...Robert Weissman

Unregulated free markets bring about inequality, they ruin the environment and they ruin the economy..... Robert Kuttner

Editorial Comment

The frightening thing for the American public is that the Administration and the Fed are in denial about how serious this crises is and what its causes are. The media is directing questions based on conventional wisdom. and every one is focused on a short term fix in an election year. Even people who have an idea of how serious this is don't trust the public with this information.

The decoupling of the world from the US has just started and it is still too early for the world to not feel the impact of a Recession in the US. So the drama being played out in the US is of strong interest to every one.

It is taking too much time for people in positions of leadership to recognise that it is the System that has broken down. I anticipate that world leaders in Davos will skirt the issue and barring people like Bill Gates, there will be far too much conventional wisdom bandied about. What makes me think that I can see what the smartest people in the world can't? I certainly have no monopoly on insight and I am sure to find others who agree with me but the main hurdle for people is fascination with "mainstream media". No media will predict it's own demise and not be able to have an answer to stop that demise. No media will give importance to people who predict this scenario. The challenge to the media is not rising to the occasion and explaining how a crashing stock market, exploding oil prices , falling dollar and increasing food prices is a temporary phenomenon.

It is not a bad thing that the leaders are in denial, because they are part of the problem. They need to be replaced, but unfortunately that will not happen without economic chaos.
There is no smooth transition out of this mess because the people who want to replace them are also part of the broken system.

For a year now , I have been predicting that the Dow will fall to 11,000. For more than four years that the dollar will equal 2 euros and for the last six months that there will be a major shift of wealth from the West to the East. What is happening today is not a bolt from the blue, it has been building up for some time now. There have been a lot of red flags on the way ( Enron was just one of them). The subprime loan crises is an even bigger red flag. If we ignore these red flags, we do so at our own peril. The response to Enron was Sarbanne/Oxley. It was like sweeping all the dirt under the carpet. The response to sub prime is likely to be to stick everyones head in the sand.

When people talk about volatility and uncertainty, they are talking in the language they have been taught. This is the age of certainty. What is happening today and will happen over the next decade is almost certain and very predictable. When great powers decline, they don't go without a lot of kicking and screaming. The kicking will come in the form of blood shed and the screaming in the form of Economic panic.

The Financial crises has just started. The Feds remedy is a panic response and the market can sense this. The Europeans are horrified. All indications are that there are more losses on the books of Financial Institutions in America but the Institutions themselves cannot calculate these losses. The fact that the Institutions cannot know the losses speaks to the complexity of the issue. Are there another 50 billion or another 100 billion? We are not talking small change here. This is after 100 billion have already been recognised.

To all those who are thinking the bottom of the market is almost there and equities are looking cheap, I say sit on your cash. The market has another 1000 points to go ( at least).

There is a re examination of risk taking place. Investments considered risky in the past have suddenly become risky and vice versa. Risk was evaluated by looking at the regulatory structure in place. The US was considered less risky because it was regulated and Emerging markets more risky because of poor regulations. We now know that the US was regulated only on paper. The regulators were put to sleep by going to bed with the people who they were supposed to regulate. In the Emerging markets while the regulations continue to be sparse, they are getting better but more importantly the values have outstripped the lack of regulations.

The role of Currencies has also become important. With the dollar no longer the stablising currency , investors must factor in currency risk even if they are investing within the US. A declining interest rate will batter the dollar even more.

There can be no more reliance on the rating agencies. AAA means AA now. The agencies have pegged their standard to US Govt. paper which they rate AAA. This paper by their own admission may no longer be AAA. The rating agencies have become part of the problem. They too have gotten into the same bed as the people they were rating. When the Regulators, the Rating agencies, the Media, the elected representatives and the Corporations are eating out of the same plate, none of them will want to drill a hole in that plate. The first person to even think about it will be called a traitor. There you have the problem. Who amongst the rats is going to bell the cat?


"We’re talking to Robert Weissman, co-director of Essential Action, editor of Multinational Monitor magazine; and Robert Kuttner, veteran economic journalist, author of the book The Squandering of America. " ... Amy Goodman

For a more detailed account go to .

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