I am disgusted this New Year. Like many of us I have watched the simultaneous destruction of real estate values, corporate entity values as evidenced by stock prices, as well as disruptions in the prices of almost everything. Fundamentally everything we knew turned out to be wrong. The question remains were we dumb or simply TRICKED?
As a result, trillions and trillions of dollars of wealth have disappeared from the planet. No someone did not win or steal this money, it has just disappeared. Think of your own home, If it was worth $500k, and you had a $100k line of credit available to you at any time. Great. Now a year goes by and that house is now only worth $350K and your line of credit no longer available. Did somebody out invest you and make the $150K difference?. No. That money is simply GONE. Multiply that by 100 million people and pretty soon you have real wealth destruction.
Now let’s look at your stock investments and or 401K. it too is down 30-50%. Did somebody win that by being on the other side of the trade? No. A stock could trade 10,000 shares and yet have 100 million shares outstanding. If at the end of the day those 10,000 dropped in price then the “value” of the 100 million share sthat were just sitting there dropped too. That also adds up to a lot of money.
Over 2 Billion people are being impacted by this process. Literally our definitions of “value” are being tested. Nothing is safe, from houses, stocks, bonds, energy and commodities all have simultaneously dropped in value. The impact of this is truly devasting and will ultimately have such severe economic impact that Al Qaeda will be envious. It is just being reported that this Christmas overall spending appears down by 8% in spite of a 3% population increase.
What is worse, is this was accomplished by probably fewer than 1000 people worldwide. A few politicians capitulate to allow crazy leverage for just 5 of the biggest investment banks. Imagine you work for an Investment Bank in NY. Over half of the companies revenues are paid back out as bonuses to individuals based onperformance. Well one day it is announced you can now borrow 30:1 as part of your investing strategy. Now you just have to find something paying .5% interest over your borrowing costs and leverage it up 30 times to get a 15% annual rate of return. Heck you can even create new financial products that give a meager return and still get the bonus!.Even better after you collect your bonus year after year, each new year brings another free lottery ticket at which you win big or breakeven. Talk about Nirvana. Oh well, 2008 sucks looks like only 1/2 a lottery pay out.
Sure a lot more than 1000 people profited from the situation. It was not the realtors or mortgage brokers who consipired to defraud financial instituitions. They were just playing the game according to the rules they were given. But this core group of 1000 enablers, then acted us pied pipers to lure millions of others to follow. They were CEO’s and analytic staff of financial instituitions, and politcal staff and elected leaders who were “encouraged” to change things to enable such a process. The sad commentary is the misery of billions of people being paid to enrich a few. Even worse are those of us who may not have been architects, yet still tried to play knowing full well something was wrong and the process was not sustainable. But for a few shekels we chose not to challenge authority.
I hope we learn a lesson.