Most, if not all central governments of the world’s developed, generally rich, countries are getting set to unleash stimulus packages unlike the world has ever seen before. All totaled, there will be trillions of dollars spent by their own agencies to restart the global economy. It may or may not work. It may actually prolong the problem and make it worse in the medium and long run.
Our economies have been brought to their knees by the worlds banking community. The banks have recklessly lent money they should not have and never asked the important “what if” question. What if real estate markets soften and the underlying assets of these loans become worth significantly less than the money lent against them?
Well we now have the answer to the “what if” question. The answer is fairly straight forward. The world economies will go into a free fall, credit availability will be largely nonexistent, unemployment will sky rocket and global economic depression is a distinct possibility for the first time since the 1930’s. Not a very pretty picture.
How did this happen and why did the experts not see it coming. In effect, banks around the world effectively gifted tens of thousands of dollars to people that simply turned around and spent the money. This created unsustainable demand for all things consumer based such as cars, electronics and houses. These people would never have purchased all of these things had the banks been more responsible in their lending.
I suspect the experts did not see it coming because they simply were not looking for it. The world was comfortable that banks would be responsible and ultra conservative in their lending practices. There used to be a time when banks required that borrowers inject equity into anything they lent against. Usually the equity injection came in the form of a down payment. Somewhere along the way they simply lost the plot and started to lend based on nothing more than a stated income formula with virtually no back up and no substantiated proof of ability to repay the loan.
So here we are, collectively scrambling trying to understand what type of mess we are in, how much money do the banks need to dig out of the hole and where is the money going to come from? Aggravating the problem is the fact that banks have become ultra conservative in their lending so the pendulum has swung the other way. No lending means the economy grinds to a halt, there are less buyers which means greater downward pressure on house prices and yet a bigger problem grows by the day.
Let’s start with what type of mess are we in. A very, very big one is the most succinct answer. Like all other businesses and people for that matter, most banks have more liabilities than assets. They are what is commonly known as illiquid. They do not have money to lend because they have to absorb huge cash losses on each and every house in the world that goes into default because the value of the house is less than the outstanding debt owed to the bank. The economy is grinding to halt because cash is no longer flowing freely as it should and needs to for capitalist markets to survive.
My guess, and it is only a guess but I suspect the number will amount to about 5 trillion dollars when the dust settles. Most of the first couple trillion is coming directly from the banks themselves in losses for houses under water. The next 3 trillion dollars will have to come from the governments. And we will know the government is actually the taxpayers. The governments learned a valuable lesson from the great depression. They must increase spending not contract as they did during that time. At least that is the working theory given they are not really sure as we are clearly in uncharted waters.
So the 3 trillion dollar question will now become if the worlds governments are going to kick start the economy with massive capital injections can they be trusted to control the expenditures and get real value for our money over the next few years or will they mismanage the entire program and all the usual suspects will get rich and the taxpayers will write the check?
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