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User Info	Gov's next reaction to this mess; entered at 2007-12-02 02:50:11
Euphoria96 Posts: 1396 Registered: 2007-09-19	I want to restart a thread Ciga started about what the Fed is going to do next. The world has this huge problem. The problem is that the banking system has given out so much debt, that the consumer is now tapped out and can no longer afford to pay back the loans. This includes credit cards paying 20% or more interest, low teaser rate and interest only loans, home equity loans, ect... What has to happen, is that housing falls back to normal levels (2-3 times median income, or about 200K) But there is a huge oversupply of houses so housing is likely to overcorrect. This means that banks hold loans that they bought for 600K but they are only worth 200K. Not only this, but the banks borrowed short term, with commercial paper, and lent long term. With the commercial paper market almost dead, banks are having to find ways to get money. So how do we solve this problem. The banks need to get cash somehow. The best way is to increase the profit spread of loans. This means banks borrowing costs need to go down. Lowering the Fed rate is one way to accomplish this. A recession would help because people would stop investing in stocks and put money in money markets. The banks could then get access to funding at 1%. However, a recession will also significantly raise the amount of defaults so there needs to be a balance. The banks can issue new shares of stock, and I'm sure Saudi and China wouldn't mind buying up more stock to control a large US bank. For foreign governments and billionaire investors, taking control of a large bank will prove to be a good investment in the long term because it gives you power and information. This power can be used to make their other investments more profitable. We're going to see consolidation of the banks. Those in a better position are going to profit off of weaker banks. I also expect some reaction from the Federal government. The opportunity for hyperinflation is gone and passed. Now the problem has snowballed into something very big. The US gov has talked about freezing adjustable rates under certain circumstances. This would help the houseowner stay in his house longer and pay interest, but all it does is buy time. Because at some point the houseowner has to start paying back the principle that he can't afford. But time is what the banks need right now. Tax cuts would help the consumer, but overspending would raise interest rates for banks to borrow. The US gov can't just spend willy nilly. Additionally, aggressive overspending would hurt the dollar only increasing the pain on the consumer, and ultimately on the banks. Right now, I see only two ways out of this. 1) The entire system collapses and we move into a deflationary depression. 2) The US gov tries to delay the problem by implementing policies which help in the short term but eventually fail and make things worse. I just can't see what the gov could do to save things, even on a short term basis. The problem is so huge, and its worldwide. And every week it conintues to collapse. So far, I've heard no viable ideas on what the gov could do to save things, or delay the problem down the road. What I expect to happen is that things get really bad. Unemployment goes way up. Cash become king as everyone is trying to sell off stocks, gold, whatever they have to pay back debt. The system needs to partially reset itself, but it won't reset back to zero. At some point, when things get really really bad, the gov is going to have to interact, probably by starting a war with Iran or Venezuela. This absorbs unemployment, it injects cash into the system as soldier's families spend the money in the US, it secures cheap oil, and it fosters energy investment at home in the the US. If you are the US government, you need to blame someone for the economy, you need a scape goat for citizens to pin their problems on. You'll also see massive gov spending on national energy projects, say wind mill farms in North Dakota, and solar reflector farms in the desert going up all over. Gulf coast oil drilling will go crazy, this again creates jobs and balances the trade imbalance. In the east, you'll see coal mining in the App Mnts. In the Rocky states, more coal mining. Alaska will be drilled for more oil. Farmers will see ethanol as a big boost. Politically, this spreads the work out all over the US and any bill would have a high likelihood of being passed, regardless if it makes long term economic sense. If Iran is the target, and oil goes crazy, this all fits together. And any hyperinflation can be blamed on Iran for messing with the oil supply. The public will not riot if they are worried about a greater threat. Hyperinflation, following a period of deflation, would be ok for banks. The banks however need to secure long term loans for long term lending. Lock in fixed rates during the deflation period. The wars would require great amounts of capital to borrow. Think of all the money that will need to be borrowed to build all those oil platforms in the Gulf of Mexico. The banks will make money from all the lending induced. The hyperinflation would also reduce the pain of anyone still oweing money. And the US debt should get better. Anyways, this is how I think things will play out. There are many possible roads ahead, and at any point the powers that be may head down a different path. In the short term, it sure looks like we are headed into that deep dark hole of a deflationary depression. We have confirmatory signals all over. Commercials massively short gold and silver, negative business earnings, massive financial write downs, very high public debt levels, high default rates, and mass media saying buy buy buy! The hyperinflation will start when the goldbugs have been so massively ass raped they give up, and the banks have had time to lock in long term rates on issued bonds, at low rates. When the Indian economy tanks, all their gold is going to hit the market forcing gold prices way down, $400/oz or lower. If we have a market crash now, we could be at war say another two years from now, right after the elections. I'd like to hear other's predictions on what is going to happen. Anyone thinking we go direct into hyperinflation first, I'd like to have an explanation on how money will be injected in the system and how you expect the Fed to reverse the downward momentum that's already in place leading to deflation. There also needs to be discussion on how the banks would be better off with hyperinflation rather than deflation.