If one goes back to when Greenspan's tenure as Federal Reserve Chairman started, there are four consecutive bubbles he created in order to perpetuate his theory of "perpetual prosperity." If the leverage built throughout the system has compounded around the world as a result of the creative financial engineering through CMOS, CDSs, derivatives, and other forms of leverage caused the tremendous run-up in prices from commodities, to equities, inflated earnings, real-estate, and consumer prices over Greenspan's tenure from 1987--2006, then the clearing / deleveraging of the system will not occur in a matter of months or even a few short years. As we witnessed in Japan, the process is going on over 18 years after their market imploded. In the 1930s it took WWII to turn around the devastation. It is "always different," according to all of the pundits, but the reality is that in order for tremendous leverage to clear the system, defaults must be allowed to occur where new businesses are allowed to grow out of the ashes of the poorly managed carnage of the leveraged follies of the past. How many balance sheets have been exposed to the benefits / detriments of leverage and the fictitious earnings over the last 20 years. It paid to have leverage from 10 to 1 to as high as 140 to 1. In an era fostered by an ever increasing money supply ( Greenspan actually stopped reporting M3 so we would not know the amount of $s being created by the Fed), leverage was the way to paint the numbers for earnings. Creative CEOs realized that to compete they needed to have the derivatives and their underlying benefits in the age of easy money. Unfortunately everyone drank the Kool-Aid, and now the prescription for what ails the system is for a stronger dose of Kool-Aid. The systemic problems cannot be healed by encouraging more borrowing to get ourselves out of debt. Would you lend your teenagers more money when they had maxed out their credit cards in order to help them get out of debt? Have the financial institutions been honest as to the real nature of their exposures? Let's look at the carnage that has spread throughout the system starting with Bear Stearns, Lehman, WAMU, Wachovia, AIG, etc. This does not even reflect the "zombies," that have been propped up in order to get one last taste of the elixir such as C, BAC, GM, GE, WFC, F, etc. Are the bail-outs only a means of propping up the world in an environment where debt needs to be cleared. Moving the debt around in a massive shell game / musical chairs only mean that when everyone finally comes to the realization that the "emperor has not clothes," or that there is only one chair in a room filled with hundreds of believers, panic will ensue; and from that point we can move forward. We are just beginning to hear fresh whispers of trillions more in toxic debt, under-funded pension plans (public and private), life insurance policies that are at risk, etc. Where does all of this end? Massive tax increases disguised as stimulus? Printing presses running 24/7 in order to create more money (was this not how we got here in the first place)? New forms of quantitative easing by the FED? How creative, let's buy all of the underlying debt and put it on the Fed's books with the money they have created out of thin air and hope that they can realize a profit on their trade later? This is just another form of "creative financial engineering" that everyone now wants to point the finger at Wall Street. Can we really be on the road to recovery when the world is willing to take the same road it took to disaster? The definition of someone who is mad or insane is that they continue to the same thing over and over again expecting a different outcome from identical behavior. Let's realize we cannot repeal Mother Nature and the road to recovery is allowing the clearance of debt through uncomfortable means, and the creation of products that people need to survive and perhaps enjoy life. Rampant consumerism is over, growth maybe slower, but people will learn to adjust. There will be stellar companies providing real services and value. As the German's cleverly coined a phrase, "trees do not grow to the sky." I recognize that this treatise may seem dour and discouraging, but sometimes a reality check is necessary when the tree is really falling on one's head.
Ben
Ben
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