Big Economic Bombs Set To Go Off........ SOON

I have been telling friends and family for some time now that the residential mortgage market and housing market were just the first in a series of a chain of economic bombs that were set off. The economic bombs have already been launched and the probability that they miss their target are in all likelihood impossible and the devastation they will cause will be inescapable at this point, and the reason being is that they are all interconnected. Much the same way snow is added to a snowball as it is rolled around on the ground, as this financial crisis rolls down the economic mountain it will inevitably roll over all the different macroeconomic underpinnings that are interconnected by the institutions that develop the financial products to be marketed to consumers to consume.

As I have stated previously, the Fed is the one who brought the monetary policy to a point where the allure of easy access to extremely cheap capital was just to strong a temptation for people to handle. The lender's were able to devise products that were just to complex for most people with the financial acumen of a fourth grader to get their heads around, never the less they took the financial plunge especially since everybody else was doing it. Now their were people who played the game flawlessly and were richly rewarded, and there were those who played the game well but got to intoxicated by all the easy money and didn't realize the party was coming to a end and had that one last flip that made them financially pass out. Now that all these shitty mortgages had been closed and sold to investors like Goldman, Merrill Lynch, Bear Stearns, JP Morgan, Citi and the list goes on. These firms packaged the shitty mortgages in pools and sold them as bonds to other investors seeking income. Some of the bonds paid better yields than others and this was based off of the quality of the pool of loans that comprised that particular bond, these different levels of quality were called tranches. Then there were the side bets of the insurance bought in the case of defaults on the bonds. Everything was going to be fine as long as people continued to make their payments on time and the housing market continued to go up so the house could be flipped to the next buyer at a higher price and the game could continue this way indefinately.

Well the problem that tossed the preverbialy monkey wrench in the plan was that real people who had no financial qualifications to buy a house were now able to move out of an apartment and purchase their very own home for $150,000, ah.... dreams do come true, with a 5.5% 3 year arm that was scheduled to reset to 9.75%. When this first set of mortgage resets hit the streets that is when the keg ran out. Party over. Now it took a little while for people to start sobering up and putting on their clothes and realize they were partying naked and this was not monoply money they had been playing with but real money they were on the hook for. That was when the little snowball started rolling down the hill. Barely noticable as rolled past people still playing the game, but eventually it could no longer be ignored and then it became a monster and even though you saw it coming it was so big you couldn't get out of it's way. It slamed into you and leveled you financially. Now the big firms saw this happening and new all to well this would happen, because actuarilly the diligence had been performed to statistically place a percentage on the number that would default. This is known as risk management, somewhere around 10% was perfectly acceptable and even counted on in projected earnings. Their problem came when that 10% turned into 70% - 80% of all the subprime loans made during the early 2000's.

So now nobody is getting paid, mainly bond holders of these mortgage backed secruities who were sold the bonds under the premise that they were super safe because after all your house is your most valuable and important invest and you are going to pay that bill come hell our high water. Well in the end the terms of the loans were never really disclosed to the people who bought the bonds so when the payments stopped coming they stopped buying more bonds which left all the Investment Brokerage firms with literally trillions of dollars worth of loans on their books that nobody was paying for. Bye, Bye Bear. Bye, Bye AIG. Bye, Bye Lehman....Merrill, Wamu, Indymac, National City and countless smaller other players.

Now my original thought about the bombs in flight as I write this. With the credit markets frozen, capital can almost not be found. And with no way to pay for anything, we as a nation are addicted to credit and can not live like this. What to do? Start living off Credit Cards. When you max those out and start getting $1800.00 monthly bills, stop paying those as well. What about Christmas retail? Nobody has any money, better stay away from the market after Christmas or be short because the only thing Santa is going to bring is a bag full of substantially lower priced stocks. Then there is the commercial mortgage market, same game as residential only bigger. To top all that off, the residential mortgage fallout is only about halfway done. Meaning housing prices will continue to fall and defaults and foreclosures will continue to rise.

So you have residential still a factor, Christmas retail numbers are going to suck so bad, people are going to question whether the stores actually were open during the month of December. Then will either have the commercial mortgages to absorb or the the Credit Card Defaults to work through.

And nobody is evening questioning where the Fed is getting the trillions it is pumping into these bankrupt companies. I assume that question will have to be answered before this is all over and if the answer resembles what the financial markets have put themselves through........... I imagine the economic fallout from that will make this look like the local ATM at the bank ran out of money and ruined your plans for a kick ass Friday night!!!!