Uncertainty is creating and driving fear

The banks should be allowed to fail, for I opine that eventuality cannot be avoided.

The extent of these toxic loans is given in the Business Week article. The authors estimate US$7 trillion. I am on record as estimating it to be nearer US$8 trillion. The proposed bailout was for US$0.8 of a trillion and on the basis of that figure the world has gone into recession.

Contemplate the impact of 10 times that amount.

As a further perspective the US GDP is US$13 trillion per annum. I have seen two figures for the number of empty or repossessed houses in the US. One is five million the other is 10 million. I think the truth is closer to the lower figure and at an average loan of US$200,000 that’s about US$10 trillion. The US has built, during the last 10 years and throughout the Fanny Mae fiasco, roughly one million houses a year. The US economy is likely to be in recession or depression until the building industry recovers.

Locally, PM Kevin Rudd in his speech to the Press Club on October 15, 2008 stated the extent of the US toxic debt is estimated at $1.3 trillion. If his AUD$10 billion, bailout is predicated on that basis it is a case of “spitting into a hurricane”.

There is only one other dreadful fact. It is well known the sub-prime loans were loans made to people with no assets, no income and often bad or no credit rating. They had a low-start period of two years and were reported as up to an estimated 15 per cent of the loans market. They were on sold as sub-prime loans. It is acknowledged we were thought to be through that glitch by March of this year.

Now here is the real ugliness.

The next level of mortgage loans are Alt-A loans. These loans comprise a reported 40 per cent of the US housing loans market. These loans differ from sub-prime loans in that they were given to people with no assets, no income but with a credit rating. They had a low-start period of five years. They are about due to start making their appearance ... everywhere. They were on sold as prime loans and it is these that, I believe, caused the collapse of Lehmann Bros.

No one knows how many of these Alt-A loans are parcelled with “fair dinkum” prime loans so all such “assets” held by businesses, banks , financial institutions, city councils, universities, government bodies and governments across the world are suspect. And that’s the cause of the non-lending by the banks.

In the current climate uncertainty is creating and driving fear. If certainty was encouraged and all the facts generally well and widely known that fear would be replaced by a dreadful terror.

Everybody owns some of the truth, but often bits and pieces of the truth obscure the whole truth. This article covers the history of this thing as I’ve watched it unfold over roughly the past eight years.

Politically it won’t matter who the Americans elect at the next election for they’ll get a right wing government which supports the status quo. The Republicans are the representatives of Southern rich elites and the Democrats are the representatives of Northern rich elites ... both are beholden to their respective bankers.