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Trillion Dollar Meltdown

March 31, 2008

This is one big hole that the Fed has dig and then the Fed wants to come in and correct the mess that they’ve made. How cool of a paradigm shift, blame shift, is that anyway? Right after 9-11 the mantra was not let us forgive our enemies, not let us immediately go bomb someone (though we ultimately did), it was the GO SHOPPING cry and the charge was led by the president of the United States. And now we have what looks to be a one trillion dollar meltdown.

Who Wants Cheaper Auto Insurance?

And now we wonder what’s gone wrong? The home foreclosure meltdown is just the first domino to fall!

$1 trillion is the amount of defaults and writedowns Americans will likely witness before they emerge at the far side of the bursting credit bubble, estimates Charles R. Morris in his shrewd primer, “The Trillion Dollar Meltdown.” That calculation assumes an orderly unwinding, which he doesn’t expect. “The sad truth,” he writes, “is that subprime is just the first big boulder in an avalanche of asset writedowns that will rattle on through much of 2008.”

Hey, let’s clean up this credit mess so people can go back to the malls, oiut buying new cars, and of course everyone needs a second home- that cna afford one.

Expect the landslide to cascade through high-yield bonds, commercial mortgages, leveraged loans, credit cards and, the big unknown, credit-default swaps. The notional value for those swaps, which are meant to insure bondholders against default, covered about $45 trillion in portfolios as of mid-2007, up from some $1 trillion in 2001.

Wall Street woes will continue for some time.

This is not good news and when you add to that the vast sea of newly printed US$’s that are rolling off the presses as fast as they can, inflation is going to come and bite us very soon. And Charles R,. Morris said the hedge fund damn could break and there would be no way to put humpty dumpty back again if that happened.

Morris sketches a scenario in which hedge fund counterparty defaults would ripple through default swap markets, triggering writedowns of insured portfolios, demands for collateral, and a rush to grab cash from defaulting guarantors. The credit system would suffer “an utter thrombosis,” he says, making the subprime crisis “look like a walk in the park.” The Wall street game is a very dangerous one to play.

Are we having fun yet?

Written by Ernie · Filed Under Gold News 

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