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How Long Will The Current Financial Crisis Last? (Part 2)

As we have seen on previously, there is no shortage of theories on the above issue. Some experts surveyed by doitinvest are quite cynical, for example:

“I think that it depends on how much money is thrown at the problem and whether or not we see any real accountability of those that caused the issue to begin with.

My fear is that we will continue to see a buildup of failed policies as a result of the crisis and a dumping of massive amounts of capital to prop up companies with bad business models. In doing so, we will not prevent a collapse, but instead stretch the pain out over time. I believe that this is worse for the economy on a long term basis than doing nothing at all.

If nothing had been done, then we would have seen a massive collapse and possible depression, but the rebuilding phase would have given us stronger and smarter small financial companies. Companies that would be ran with the bottom line in mind, not those who were more concerned with stock profit manipulation. It is the small and mid-size business that made this country great, obviously the large companies lack the ability to compete.

Being a pure capitalist, what was done with the bailout goes against what this country was designed to be. We have shown the incompetent C-Class executives that we will gladly provide welfare services to them when they cannot perform in a capitalist market.”

Other experts seem to agree that the current financial crisis is 100% linked to the over-valuation of the US assets, especially to the morrtgages’ high values. The US needed new housing stock – though we are not growing at the rate of India (and other emerging economies), the US continues to build population.  And of course they say we shoud bet on US citizens’ proppensity to consumption, which is the largest in the world.

And their opinions come from the figures rather than from anything else: “‘Chicken Littles’ are running amok screaming the sky is falling the sky is falling… You either think this is like the Crash of 1987 – or you think this is like 1929. Real Estate is no different – it will bottom and bounce back.

Federal Housing Finance Agency orders Fannie Mae and Freddie Mac (FHFA is their new regulator) to purchase $40 billion a month of underperforming mortgage bonds – to promote greater stability and liquidity in the U.S. mortgage market.

Bank of America modifies (cuts interest rates and/or principal) 265,000 mortgages and 400,000 of acquired Countrywide’s mortgages – the largest predatory lending settlement, $8.6 billion. J.P. Morgan Chase will modify 400,000 borrower’s mortgages from their acquisition of Washington Mutual.

The current panic / crisis was a failure of US laws / regulations. Global Markets have fallen from $62.6 trillion [10/31/07] to $29.4 trillion [10/27/08] losing $33.2 trillion.

Our U.S. Laws which were written in 1933, 1934 & 1940…globally leading into Bretton Woods…

Markets will rebound. The G-7, G-20, EU, IMF & World Bank will meet in Washington on Nov 15 – Emergency Economic Stabilization Act of 2008 (EESA) a $700 billion rescue.

G7 agrees to recapitalizing banks with public and private funds, insure depositors and unfreezing credit markets. G20 commits to “using all the economic and financial tools to assure the stability and well functioning of financial markets” – they account for about 90% of global gross domestic product. IMF’s 185 member nations endorse a commitment to “use all available tools” to prevent systemic failure. World Bank agrees to help developing countries strengthen their economies, bolster their financial systems and protect the poor against the financial turmoil in international markets.

15 leading European nations commit $2.3 trillion and agree to a 14pt plan to aid troubled banks by adding capital through investment and by guaranteeing inter-bank lending. European governments guarantee all private savings accounts.

Markets are predicting the end of civilization as we know it – typical of a Panic – Those who cannot learn from history are doomed to repeat it – 1987, 1998, 2000, 9/11/2001, 2008 – Markets will rebound.

This is a Panic – most of the losses will be recovered shortly after the bottom. Buy Low – Sell High

After 9/11 ‘Chicken Littles’ were running amok screaming the sky is falling the sky is falling…and that the world would never be the same, months later life had returned to normal. The hysteria is deafening.

Maybe 5 million will lose their homes to foreclosure – foreclosed properties are quickly purchased.”

At last, but not at least, some of the experts forecast a longer than two years period. They count on the fact that the cash injection would only delay the catastrophe and that the crisis is systemic rather than self-regulatory. . It will be tougher for capital market, assets will be required to have healthy balance sheet. Banks & Financial institutions are concentrating on quality lending. Globally lending standard has been tightened and lenders are unsure about the health of the borrower balance sheet and therefore, may not be willing to offer liquidity which would continue to cause credit crunch. Meltdown has fully exposed the regulators.

Toxic Financial flaws require to be quarantined, which in simple terms means “clear the mess”. Therefore, I think the SOP’s, which is accounting procedure needs to be revisited. Strong regulatory measures are required to avoid future crisis. According to CEO of a large global bank “only half of the 8,500 US banks will survive”. So weaker banks are likley to suffer furthermore, as obtaining credit is the bigest challenge, though global Central Banks are there to help.

Imagine the size of US Economy is $ 14 Trillion. US Domestic debt already USD 9.5 Trillion, will jump to 11.2 Trillion. Out of which Mortgage a little over USD 12 Trillion, unregulated Credit Default Swaps USD 54 Trillion Greed is the real cause. The global economy has been intentionally inflated through borrowed money, which leads to Higher Global Growth, Higher Per Capita Income, Higher Consumer Demand, Higher Bank Deposit, Higher Lending, All was only possible due to Borrowed Money and when the Interest Rate moves either way or whenever the Limit of Two Counterparty are fully utilized. So nothing could have been done and the crisis is unavoidable.

Therefore, the bubble needs to be pricked so that the air can be passed off. I am expecting another big crack in the financial market sometime in the 1st quarter of 2009 due to year end balance sheet adjustment and large size maturities. So, 2009 will witness another difficult year and the crisis is unlikely be over until 2010. So, for the moment the answer is “NO”.
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