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If you have any friends from Europe, chances are they may tease you about how America caused the 2008 financial crisis the world is now facing, and how America’s contagion is spreading through Europe.  It’s true that America bares a large part of the blame for its own financial woes, largely caused by irresponsible mortgage lending to sub-prime borrowers, and reprehensible INACTION by rating agencies and government officials.  But the brewing financial storm showing its head in Europe is about to get a lot worse.  Watch in the coming months as it sweeps through the continent with a vengeance that will make America’s own crisis seem insignificant.  Browse through some of coverage on the European crisis below:

• From a recent Bloomberg article, - “European banks’ lending to emerging markets is about 21 percent of Europe’s GDP and U.K. banks’ loans are around 24 percent of national output, compared with 4 percent for the U.S. and 5 percent for Japan”
• From a recent Christian Science Monitor article - Not my favorite publication, but they do sum up the problem quite well.  Emerging market interest rates are high, so emerging market citizens (Iceland being the most famous) take on mortgage and and other loans in euros, pounds, or Swiss francs.  Once emerging market currencies collapse, emerging market mortgage holders face little chances of repaying the loans denominated in euros. From the article, “Eastern European countries currently hold about $1.6 trillion in foreign currency debt, according to Morgan Stanley, and it’s overwhelmingly owed to Western Europe, whose large banks own 60 to 80 percent of Eastern Europe’s banking sector”.
• From a recent UK Telegraph article - Austria’s exposure to emerging markets is a staggering 85 percent of that country’s GDP.  What chance does Austria have in collecting those loans when the recipients of those loans are now all in line for IMF bailouts?  From the article, “Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc”




If you are currently holding european stocks or any accounts denominated in euros, don’t hold your breath waiting for the recovery…

Art Laffer just released a new book entitled The end of prosperity:

The End of Prosperity: How Higher Taxes Will Doom the Economy–If We Let It Happen by Arthur B. Laffer

The New York Times just gave him free publicity by allowing him to write his own pump piece about the book.  In the article, Mr. Laffer criticizes the administration on their $700 billion bailout and socialization of banks.  He calls for a market driven correction instead of government interference.  He cites several economic statistics in the article and in the book, but unfortunately, most of them are wrong.  In what seems to be intentional humor, he praises former president Clinton for “strengthening what had begun under President Reagan”.  Art Laffer was Reagan’s former economic adviser; many people now believe that Reagan was already undergoing severe head trauma caused by Alzheimer’s when he made that idiotic selection.

For additional information on Art Laffer, refer to:

• Peter Schiff schools Reagan economic adviser

Needless to say, this is one book I do NOT intend to buy.

If you think there is volatility in the U.S. markets, you should look at Iceland.  The country closed its stock market entirely on October 9th due to “unusual market conditions”.  When they re-opened a few days later on October 14th, the market crashed 76% in a single day.  Those frequent 5% up and down days in the U.S. market seem pretty lame in comparison to Iceland.

In the currency markets, Iceland is also struggling, with their krona down over 50% this year, most of the losses having occured in the last few weeks.  And if that were not enough, the country just raised their key interest rate a whopping 6 percentage points to 18%.  This came as quite a surprise for a country that had just lowered their rates from 15.5% down to 12% two weeks ago.

The high interest rates of Iceland were once the appeal to Everbank foreign currency certificate of deposit buyers, who targeted high overseas rates to invest their money in.   A note on the Everbank Iceland CD page now states:

We do not currently offer any product denominated in Iceland krona.   Due to the Icelandic banking crisis, currency trading of the krona has been frozen.  This effectively locks Everbank out of this market and prevents us from offering this currency going forward.  If you currently hold a certificate of deposit in the Icelandic krona with Everbank  please know that we are making every effort to receive payments in U.S. dollars upon maturity of your account.

So much for chasing the yields on foreign currency certificates… For those still in denial on the potential for other seemingly stable countries to collapse, you will be happy to know that Everbank may still offer certificates of deposits in the Mexican peso, the Czech koruna, the Indian rupee, the Danish krone, the Brazilian real, the South African rand, the Swedish krona and many others.  I’ll pass on those offers with my own personal money, however, and invest in the good old greenback from the U.S.A.

Here is a link to an excellent and concise 12 minute video from 60 minutes, in case you missed it this past week.

It began with a terrible bet that was magnified by reckless borrowing, complex securities, and a vast, unregulated shadow market worth nearly $60 trillion that hid the risks until it was too late to do anything about them.

There is no shortage of great books that explain the financial crisis in simple details that even a boob CEO from Countrywide, Citibank, Fannie Mae, Moody’s and Goldman Sachs (not a typo, even the Goldman guys turned a blind eye to the mess as it was created!) can understand.  Here is another one called Financial Shock from economist Mark Zandi, and it is definitely worth reading.  You can read chapter 1 here for free and decide for yourself if you want to purchase it.

Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis by Mark Zandi

I just found this interesting piece to share.  Take a look at the Financial Times snapshot below that lists the top foreign banks in order of the ratio of their assets as a percentage of their countries GDP.  If the United States government deemed its own Bear Sterns, AIG, Lehman, Freddie Mac and Fannie Mae to big to fail, then failures in the in the list below could cause quite a bit of economic disruption in their own countries.

To date, the blame of the current financial crisis is all pointing to the United States.  And most of the freefall in financial shares is occuring here as well.  The European Union has stood strong against interest rate cuts, and according to a recent report by Bloomberg,  they are expected to continue holding the line on interest rates.  But in this tightly linked global economy, it’s hard to believe that the irresponsible lending that caused the current crisis occured solely in the United States.  Perhaps Europe is just doing a better job of hiding the mess they are in.  And if that’s the case, then the banks listed above could cause serious turmoil in their respective countries when the truth starts to leak out.

The bailout bill failed to gain enough votes yesterday, but all indications predict that a substantial package will pass both houses in the coming days or weeks.  But even if the bailout bill does pass, what’s next?  The Commerce Department recently reported on September 24th, that sales of new homes dropped by a seasonally adjusted 11.5% from July to August.  Year over year sales were down 34.5% from August 2007 to August 2008, and inventory of unsold homes still sits at 10.9 months.

Even if the entire financial industry is wiped clean of all their existing bad debt, they still face the grim prospects of how to garner new business going forward.  The old game is over.  Consumers are wise to the crooked real estate agents, rating agencies, banks, builders, appraisers and mortgage agents.  They are also terrified of continued weakness and falling prices.  The ones not scared are just not qualified to borrow substantial sums of money to buy a house.   Housing prices, especially in past runaway appreciation markets like California, Florida, Seattle, New York, Chicago, Las Vegas and other large cities are destined to see continued weakness.  With weakness comes more foreclosures, more walk aways, more short sales, and more bank losses.

It took a decade or more to get into this mess, and it sure is not going to be over with a single $700 billion check!

I was not at all surprised by today’s 777 point drop in the Dow today.  What I am surprised about, however, is that Jim Cramer still manages to brainwash his viewers into thinking he has a clue.  There are countless examples of Cramer’s ignorance, but the two videos below pretty much sum up his lunacy.  In the first clip, he is kissing up to Ron Paul for his brilliance as the only one in congress that understands the financial issues.  In the second clip he is justifying the bailout, the same bailout that Ron Paul is vehemently opposed to.

The bear market and correction we are facing was a long time in coming.  We have been living on borrowed time in this phantom credit and over leveraged economy for far to long.  The market drops we are witnessing are a direct result of the credit crunch and the de-leveraging it is forcing on the economy, and there will be more blood on the streets to come.  Regardless of whether an amended substantial bailout  is passed, the path of least resistance is DOWN.

Jim Cramer praising Ron Paul for his views on letting the market self correct:

Jim Cramer justifying the $700 billion bailout of the financial markets:

The Geldpress bookstore has a new category titled “BAILOUT NATION”:

Books related to reckless economic policy, failed policies of the past, housing bubbles, financial crisis, bank failures, long term capital management, other insane bailouts, the great depression, the national debt, savings and loan crisis, and more.  The latest round of financial bailouts are nothing new.  These reckless ideas have been going on for decades, and will continue indefinitely as long as we let it.

Just click on the BOOKSTORE tab to get started.  There are 5 pages of bailout books to choose from.  Among those I recommend most are:

Everyone knows you can’t squeeze blood from a turnip, but it hasn’t stopped Paulson and Bernanke from trying.  The American economy today is built entirely on speculation and irresponsible consumer spending.  Housing prices, especially on both coasts, and in large cities (Chicago, New York, Baltimore, California, Florida, and more) will continue to go down no matter what the intervention is.  The consumer is tapped out, and the easy credit days are over.  Perhaps one day in the future everyone will realize again that it is just a market sum game, but until that time we will continue looking for blood in the turnips.

The latest measure from the government is to ban short selling in 799 financial securities, and to expand the purchase of toxic securities from all of the incompetent financial firms that got us into this mess.  The full details and the exact wording of the far reaching bailout plan is yet to be released, but it does seem to have bipartisan support, and the support of the biggest moron on Wall Street, Jim Cramer.  Jim Cramer’s philosophy, if you remember, is to celebrate the counterfeit boom in the housing bubble based economy, and then scream and cry for interest rate reductions and bailouts when the house of cards comes falling down.  Jim Cramer apparently never saw the mess coming 5 years ago when he pumped up the stock prices of every bank, brokerage and homebuilder during his nightly shows.  Despite the obvious warnings, in the form of minimum wage workers everywhere receiving $500,000 home loans, the ignorance of the “experts” and “leaders” is purely astonishing.    The list of those “experts” and “leaders”, in random order includes:

• Alan Greenspan - After 911, he aggressively jacked down short term interest rates to 1%, and encouraged everyone to take loans they could not afford.
• George Bush - Utterly clueless.  Up until yesterday, he was still in denial of the financial crisis, and wondering how much more of those phantom surpluses he should give back to taxpayers.
• Phil Gramm - Completely gutted the Glass-Steagal act in 1999, and replaced it with the Gramm-Leach-Bliley act, allowing commercial banks, investment banks, and insurers to merge, and setting the stage for the largest bubble in world history to occur without oversight.
• Suze Orman - She claimed on national TV that “nobody could have seen this crisis coming”, and urged homeowners nationwide to move to Seattle to buy even bigger houses they could not afford.
• Henry Paulson - Worked for Goldman Sachs as they helped create the mess, and now the biggest sponsor of the largest bailout of Goldman Sachs and other financial institutions.
• Moody’s corp - They are called a rating agency, but in reality they only have one rubber stamp, with three letters on it - “A A A”.
• Jim Cramer - He is famous for his arrogant “They Know Nothing” rant, when in reality he has been completely ignorant of the housing bubble since its beginnings.  He preached for years on how the idiotic investment banks and homebuilders were the best investments.  And when they got in trouble for insanely stupid loans and ridiculous leverage, he cried how the “Feds know nothing”.  And now he supports the largest bailout in history to save his buddies at Goldman Sachs, at your taxpayer expense!

The additional details of the current bailout will likely be apparent in the coming days.  But don’t expect it to be the last bailout, or the last set of rule changes to the market.  Housing prices are still extremely unaffordable, and need to come down, and come down A LOT!  But these very necessary collapsing housing prices will wreak additional havoc on the economy.  More jobs will be lost.  Consumers, who surprised everyone by spending what they didn’t have over the last decade, will suddenly be cut off from easy credit.  Federal, State and local tax revenues will plummet.  Everyone will feel the pain of the idiotic economic policies of yesterday.  And the ranting over the bailouts will continue for years:

From the Daily Reckoning,

They’re missing the point completely. It is not “flaws” that are being exposed - it’s the whole consumer economic model and the whole generation of jackass economists who created it. They rejected the insights of classical economics. Instead of encouraging saving and capital formation, they thought they could nurture growth by luring consumers to spend more money.

From the UK Telegraph:

What is causing widespread anger is that those who should have exercised greater caution have already banked the gains from the good times and have a nest egg to sustain them even if they do lose their jobs….Perhaps most of us, at some point or other, have dipped our hands in the pool. Where did we think all that cheap money was coming from? With people borrowing 10 times their salaries, there was always going to be a settling of accounts.

Professor Bennet Sedacca

The Federal Government just declared war on short sellers.
Will it help the real economy? No sir.
Will it help the value of my house? Nope.
Will it blow up hedge funds? Yep.
Is it a selling opportunity? You betcha.
Will the rally last ? No.
Will earnings increase? Actually I think they will fall.

From Lea Pickard, former SEC official:

The securities and exchange commission can blame itself for the current crisis.  The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

English Al Jazeera:

The roots of the panic in financial markets around the world are deep and complex but they lie in the convergence of three factors. Millions of people pursuing the “American dream” of home ownership, politicians and regulators who dismantled a system of financial safeguards and then ignored warnings of impending disaster and financial markets and institutions disregarding risk in their headlong pursuit of profit.

Speculation Economy book, by author Lawrence Mitchell:

American businesses today are obsessed with the price of their stock, and no wonder. The consequences of even a modest decrease can be so dire that some executives would rather damage their corporation’s long-term health than allow quarterly returns to fall below projections. But how did this situation come about? When did the stock market become the driver of the American economy? Lawrence E. Mitchell identifies the moment in American history when finance triumphed over industry. He shows how the birth of the giant modern corporation spurred the rise of the stock market and how, by the dawn of the 1920s, the stock market left behind its business origins to become the very reason for the creation of business itself.

The Speculation Economy: How Finance Triumphed Over Industry (BK Currents (Hardcover)) by Lawrence E Mitchell