Let's look at some big numbers. Last September, AIG, the insurance giant, was given an $85 billion loan by Uncle Sam 's Treasury Department. It was secured by an 80% equity interest which, without any additional information, sounded pretty good at the time.
A month later, the Fed gave AIG another $37.8 billion loan and, if that wasn't enough, it also gave the company access to an additional $20.9 billion, which would come about as a result of the Fed purchasing certain assets.
Then, in November, everything was restructured into a $150 billion ($150,000,000,000) deal including a $40 billion additional cash infusion from the $700 billion bailout fund. In the process, the initial loan was somehow reduced in size to $60 billion. It was also announced at that time that up to an additional $53 billion would be used to buy some of AIG's mortgage backed assets.
If this is confusing, don't worry about it - it doesn't matter. Let's just move on to some smaller numbers.
Today, the common stock of AIG reached a new 52-week low of 73 cents which, when multiplied by the number of shares outstanding calculates out to an aggregate capitalized value for the company of - voila - about $2 billion.
But don't let this bother you, either. It's small potatoes. Assets, in general, have been disappearing faster than rabbits at a magic show and, unfortunately, it's no illusion.
For example, $27 trillion has disappeared from the world's capital markets over the past nine months, based on an extrapolation of the latest data from the World Federation of Exchanges.
Incidentally, there have been many attempts to quantify the size of the number "one trillion," since it became the new "one billion," but the one I like best goes like this: If you had started putting aside $50,000 per hour on the day Christ was born and continued to do so ever since, 24/7, you still wouldn't have a trillion dollars today.
It is indeed a lot of money, and it is mind boggling to realize that twenty seven times a trillion dollars has simply evaporated in the world's stock markets.
In addition, the aggregate value of all homes, in just the United States alone, has dropped by eight trillion dollars over the past three years, a figure that is roughly equivalent to the total retirement savings of the baby boomers, who, coincidentally, begin to reach the age of 65 next year.
And against this backdrop of rapidly disappearing wealth we see an American consumer - the person accountable for 70% of the U.S. GDP - saddled by $2.6 trillion in consumer debt and $12 trillion in mortgage debt, with many of the mortgage balances now higher than the underlying value of the properties involved. And, to top it off, this consumer's job security is rapidly heading south while he or she is reading in the news that President Obama's new stimulus package will bring in an extra $8 per week.
In short, at this point, 14 months into the recession, the situation is bleak and there is still no light at the end of the tunnel. Some economists are beginning to predict that there has been a sea change and that life in America will never return to what it was over the past six decades.
I think I may be just old enough, however, to believe that nothing lasts forever, that eventually the pendulum will swing back and restore the good old reckless greed that has gotten us to where we are today.
And - if you're young enough - maybe next time you can get on that gravy train.
Dave McGill, News Correspondent
Dave's column, "The Contrarian," generally published every Friday, to Gather Essential News will sometimes present a contrary view to various aspects of the news, or an alternate take on the conventional wisdom of the day, and will often appear on other days of the week
Dave has been a senior officer of an eastern insurance company, involved in economic projections and investment strategy, president of a Midwestern mortgage banking company, and a financial consultant in Southern California, serving clients in the field of commercial real estate development.
You can find all of Dave's "the contrarian" columns at: http://gather.com/thecontrarian. Keep up with Dave's other postings and Gather activity by joining his Gather network at: http://atadaskew.gather.com. You'll find Dave and other News correspondents, plus celebrity content and plenty of news experts at: news.gather.com.
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Marilyn
Hello Jeff. Jeff?
Let the banks fail. They knew whereof they did.
Bail out the homeowners.
Wilka
Let's call it what it is, it's a depression. You know about derivatives yet Dave?
Excellent article and nicely written, as usual! I don't find it all that confusing or hard to believe. This is the result you get when markets start to go, hones start to foreclose and there are 50 trillion dollars worth of credit default swaps guaranteeing those investments. Go ahead, laugh. I think it's kind of humorous too.
Had those credit default swaps been called insurance like they were sold to be, the insurance commission would have been regulating them and would require certain dollars worth of backing to make good on those things. But no, we had a great Republican administration who believes in letting the market and financial industry handle and police its self!
It would be a great idea if people would just sit down and go on strike if they could afford it. Go on strike until money can be evaluated and reset in some kind of just way. And it really is terrible that so many billions of people cannot afford it, because what that really means is that the world is still run basically on slavery.
And when there is slavery somewhere, what gall we Americans have to think it is not going to show up at our doorsteps at some point.
However it's still easy come easy go, as one needs to be careful still and always.
For some unknown reason this all started to fall apart after Bush cut the taxes in 2002 and created some unfunded war in Iraq for no apparent reason tho.
It still makes a difference who one votes for also.
All that has changed is in how we are thinking about things. All that has changed has to do with accounting records. The supply of currency hasn't decreased. It's all in our heads, people. It's all in our concepts. It's all in the nature of the money we use. If we change the nature of our money all these problems simply cease to exist.
I know, you are used to thinking of money as something real and tangible. Something that you can hold in your hand. But in case you haven't noticed, almost none of your money is like that. Your money, just like your debt, is just a computer record being saved in memory, disk, or tape. It is only as real as we make it in our minds. We can change this thing we call money so that it can't do these things to us.
Read Invisible Hand to see how.
Or visit www.nopom.info .
Before this downturn, the last time the Dow was below 8000 was 2003. So essentially we've lost 6 years worth of wealth. Painful, certainly, but not the end of the world.
It will come back. Even if you think this IS like the great depression, and the statistics don't remotely support that yet, and it takes 10 years for the Dow to get back to 14,000, you'd still make about 7% a year between now and then. Would you take 7% growth a year?
One dollar at a time.
Great article, Dave.
As you saw with Enron in the extreme cases of fraud there is a lot of inflationary value given to stock.
I never trusted the stock market once I learned how it functions.
It is another way to make everyday citizen pensions, savings and investment pay for the failures and big bonus of their executives.
I think we would be better off investing in land.
All I see now is that the people mostly suffers, add insult to injury, the crooks collect billions and we collectively pay them for doing it.
The banks receive our tax dollar to do business on a regular basis and charges us interest ''on our tax money.'' I like their business, get money out of thin air and pay millions for bonuses, banks should be regulated big time since they are not private they are public as the public money they use.
I would also like to get some money back from the big corp builders who made huge money selling homes for more than they were worth.
I would like to see in jail a few bankers and senators who did not fulfill their duties in oversight of the financial markets.
I have been scrambling since 2004 when I saw this coming and begin to sell what I owned before too late. Luckily I am still able to sell a home in my area but it takes longer and they are now at a normal price versus the inflated speculative cost.
It happened because money was cheap, in 2002 the feds flooded the market with money and in 2004 you could have a loan at 4.5 %. Thank Bush for that, maybe they were trying to distract us from the war failures and while the deficit was growing a false sense of prosperity was creating the bubble.
It is important to realize the feds manipulation affect the markets and a president could use that for its advantage. I would get rid of them and then we can have a better control over the financial institutions.
Because nobody and nothing stays "on top of the mountain," forever, either, unless you mean the higher power...
As for the money, that was deliberate, pre-meditated, large scale theft, no doubt about it.
If you want to talk more about all this and/or share anything else, stop by http://www.sharing-circle.com
Dave, I am going to be simple minded for a sentence or two. This is how the rich get richer. Tis the way of the wealthy to amass more wealth. make a bottle of pepsi a nickle (the price sixty years ago) and the dollar figures you quote would be divided by 34, and that 79 trillion would be less than 2 and a half trillion. I think that will be the next step.
President Obama promised us transparency, and we are waiting for it. Of course, he promised "We the people" 5 days to review the "Porkulus" bill on the Internet before he signed it, and then reneged on the promise. But, we have to press for the transparency, or we will have a kleptocracy, just like they do in Illinois.
Please keep writing about where the money went. Those of us who give a damn about our country want to know.
My ESL students all are really up in arms about what has happened to their home country's economy - Germany, Brazil, depend upon a healthy, wealthy US economy.
Greed will always try to make things rise but greed will also always cause things to fall.
The way to look at this is that all that time, all that theory, was flawed, it was delusion, and the stock market now that it sees the results of it in the light of day is falling to where it should have been all along. This is like a big long caffeine and sugar high.
I expect the DOW to drop back to around where it was at the time Clinton was elected - about 4000, with some additional margin for inflation, so maybe 4-5000. I'm no expert on this but that is my guess based on what is real in terms of productivity and the amount of debt we have.
The real question is: are we going to get the fascist society that is being pushed by the Republicans. Are they going to be able to basically force people in the developed world to give up their lifestyles so that the poorest most desperate people in the world can be exploited so everyone can be equally enslaved?
Social Security money gone-highway funds gone- medicaid- medicare owe billions of debt. people in California and Kansas are told there is no money to give them their tax return.
I truly believe that Obama's stimulus bill and other actions will go a long way to settling things down and letting us realistically evaluate assets. The housing bubble bursting was inevitable. There was no excuse for what the banks did in lending and packaging bad mortgages - these were criminal and fraudulent actions in my opinion and they should be prosecuted.
One of the quickest ways of returning to stability would be to return to the rule of law - that would go far in renewing confidence in the market and in the government. We need to prosecute those who fell down on their fudiciary duties in this mess so as to line their own pockets. It's not revenge, or class warfare - it's simple justice.
Your comments are very accurate. The reason for the difference in publicity, that very few people are hurt by increasing values. It is really the harm done to people and corporations that attracts attention.
Greed has certainly been a factor in our financial problems. But that's the greed of all politicians, no matter which party, the greed of some businesses, and definitely the greed of a majority of Americans. We're also selfish people who care only about ourselves, and obviously not even about our kids and grandkids, since we've now saddled them with a huge debt. It's no wonder the rest of the world hates us. We are spoiled brats.
What James is saying in response to my post was that nobody is hurt when the market it up, which is of course pretty much true, with minimal exceptions.
Every-time he announces one of his billion dollar plans the stock market falls.- down 200 pts. today. But i am convinced the General and his army of socialist are very happy with the plunging economy- whyyyy- More people for the General to put on a government check.----VOTERS-VOTERS-VOTERS-- OBAMA, PLEASE PAY MY MORTGAGE!!!.
The worst part is having to dodge the disgusting crap and the bodies that are falling from above!
Oh, I understand that completely. It's just by doing that, he's making the situation worse - driving down consumer confidence is NOT a good way to rebuild an economy.
If all the big brain in the country are not sure what the market will do or the banks how is the president supposed to know?
I think we are getting worried too much about things we do not know, best to work and live as usual and solve problems as they appear.
In my area people are still buying homes and the economy is not as bad as other places.
Obama has to do something, and he cannot do anything to radical, either left or right, which I what I suspect must have happened in the 1920's. Only in the 1920 there was hope, who is going to invest in the US, we have neither a great labors force, or a market that can afford to buy anything, and whatever is remaining the people with money are waiting to scoop up as soon as it looks possible.
We need a New Deal, but Republicans will not have it, they are strangling the American people and have no intention of helping anyone. It's no wonder that their rhetoric has not changed.
It does occur to me that we would have gotten more return on our military investment had we invaded Mexico and shot all the terrorists there. Hindsight is always 20-20.
Even if you believe that to be true, which is debatable, there are ALWAYS good investments. If nothing else, you can sell short on the stock market, which is essentially betting a stock will go down, and profiting when it does. There are also stock options, which do the same thing in a different way.
Additionally, there are plenty of investments that work just fine regardless of what the market does. For instance, tax free municipal bonds are a great deal right now, many highly rated ones paying as much as 5% tax free interest. It blows a CD rate right out of the water.
Final point I'd make is this: I'd much rather be buying stocks right now than back when the market was at 14,000, regardless of if and how much worse you expect things to get.
Didn't you mean to say "...now worth more than..."?
I agree with the comment by Larry M. above, that it is all in how we percieve it. Money has no value. Which means the value we assign to it is arbitrary and always fluctuating. That is the basis for inflation: the value of money devalues. When we are feeling bullish everything continues to rise in value and money drops. When our confidence is shaken (or blown up and then dragged through a cesspool as is currently the case) then everything drops in value. This is why oil is now about $35/barrel instead of $145/barrel. We didn't discover a bunch of new oil, extracting the oil we have didn't become easier and cheaper, we just lost confidence and started cutting back out activities, so demand fell, and the price (value) dropped.
Its all an illusion. That doesn't make the pain any less real, though.
PARTLY through speculation. A large part of the rise in oil prices was due to vastly increased demand in China and India. Speculators made the mistake of assuming those trends would continue, driving futures higher because of fear (that everybody seemed to share) that the supply of oil was peaking and would be unable to meet current demand EVER again. That seems like forever ago, now that it's down to $40 a barrel...
"One problem with this is that when speculation becomes the way that money is made, when bubbles are the rule and not the rare exception, there can be no stability or productivity in the economy."
This is VERY true. I believe the rise of what I call the "internet day trader" has made this problem highly exacerbated. A lot of people acting on what could be described as "the herd mentality" flocking to the next big thing (dot.coms in the late 90's, real estate/housing after that, etc etc) has increased the swings a lot. If these people would have had a little more advice from people who had seen some bubbles before, they might have known better. The warning signs were definitely there in both cases.
When real estate prices are growing VASTLY faster than the incomes in the area where the real estate is located, as some point reality has to come back. You can't have a neighborhood of 3 million dollar homes where the average household income is $45,000. You can't do well long term on a stock where you're paying $115 a share and the company has yet to see an annual profit in its entire history. (Amazon in 2000). But somehow "the herd" had convinced itself that anything dot.com was going to go up forever (it's all different this time!), or that there was no ceiling to home values, in spite of all the logic that should have been telling them otherwise.
Then when the bubble DOES burst, brought on by the underlying economic truths, the euphoria "the herd" did have is rapidly replaced by outright panic. Everything they believed was exposed as a lie...and they flee the market completely. The result - the market they were artificially inflating collapses.
However, having said all of that, there are still a very large number of reasonable and practical long-term investors, and a lot of financial advisors that still do the right thing and keep people in the market when times are down. THEY are the reason that the stock market is still around 7300 and not lower. I would say that most of the people who are going to get out already have.
I will add that I have never sold short, and my company doesn't even allow the buying and selling of options, and even if they did, I wouldn't do it. They are inherently speculative, and don't fit my company's idea of investing with quality investments and holding them for the long term.
"Another problem is that most Americans cannot invest, they are shut out of being able to do that so they do not. "
Patently false. The vast majority of American adults have SOME kind of investment, whether it's a 401(k) at work, and IRA, mutual funds, a 529 savings plan for their kids' education, or individual stocks and bonds. Even CD's are investments.
Since when are bubbles defined as "wealth?"
Any "wealth" that exists on paper, isn't really wealth at all. No one whine when home values rose, WITHOUT REASON, they just accepted the idea their "wealth" was never ending, and that the underlying reasons for such "irrational exhuberance" would continue forever.
People are fond of saying "the American public did NOTHING to cause this recession." That's either a bald faced lie, or a statement of supreme ignorance, take your pick.
Just like the greedy stockholders of Enron, no one complained when they thought they were getting rich, but boy did they learn to cry and pretend to be a victim when their greed bottomed out.
Go ahead and shed your tears for the greedy fools of the world, fool......
Like most of your words, it will just be a futile waste of time.
As for the loons who think social security in its present form (how has that changed in the last few years) will be around in the long term future, you deserve what will happen to those who trust their financial future to the government. If I could bail on SS, even now I'd do it. My losses would still have been offset by the idea I would have control of it and the dividends.
Look here to understand more fully.
http://www.gather.com/viewArticle.jsp?memberId=505111&articleId=281474977536560
What we are now seeing is the mother of all rummage sales. The wealthy - including those who took the money and ran from the mess they left behind - will come out of this much wealthier. The major corporations in the Pharma, oil and defense industries, all of whom started amassing cash some four years ago will be exponentially larger on the other side, assuming they make the right decisions, unlike those made by B of A and Wells Fargo.
With many stocks like B of A's at $4 and many more under $10 this is an incredible time to invest. The key, of course, is to avoid those that will go bankrupt, but if you can be astute enough or lucky enough you can start creating future wealth. As always, diversification is critical as the companies with cheap stocks are not all likely to go bankrupt, and one winner, one big winner, can make up for the losers and still eventually put you in fat city.
As just a quick "off the top of my head" example, look at a company like Proctor and Gamble (PG). Here's a stock that was over $70 a share last October, trading now under $50. PG is definitely a company who's not going anywhere, and whose business is pretty recession proof. Additionally, they're paying a 3.3% annual dividend, and they've raised their dividend every year for the last 50+ years. So you know you can feel pretty safe about getting that 3%, and as the economy recovers, PG will too, meaning you'll essentially make money on both sides.
IF stock isn't your thing, as I said, tax-free bonds are a great deal right now too. Many AA and AAA rated muni bonds right now are paying over 5% annual interest, and every penny of that interest is federal TAX FREE, many also state tax free depending on your state. I'll bet that EASILY beats whatever CD rates you'd find at your bank right now, and of course those are taxable. The 3 year CD rate I saw last week was about 2.8%.
I could go on. Point is, there's no question this market free fall really hurt. The ones I feel REALLY bad for are the people who were in their early 60's and still had a relatively aggressive portfolio, thinking they'd retire this year or next. Or worse, people who JUST retired and now have to go job hunting again. But for those of us with some time to wait out this mess, buy now and you'll look like an unmitigated genius in 5 years.
The man who allegedly bilked investors out of $50 billion says he should be allowed to keep his $7 million penthouse as well as $62 million in assets because they are held in his wife’s name and not connected to his fraudulent activity. Bernard Madoff and his wife, Ruth, are trying to prevent seizure of their Manhattan penthouse, $45 million in municipal bonds, and $17 million in a Wachovia bank account. According to Manhattan Federal Judge Louis Stanton, “They maintain that some of the assets … are unrelated to the alleged Madoff fraud and only Ruth Madoff has a beneficial ownership interest in these assets.”
Sure makes Capitalism and Wall street attractive dosen't it!
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http://www.gather.com/viewArticle.action?articleId=281474977868895&grpId=3659174697254624
See if this might fit into that category of "Disappearing wealth". I was just absolutely disgusted when I read the news article on Yahoo News earlier today! Seems to me that history just might be ready to repeat this power play from the Feds. These sick jokesters are some of the "Blackest-hearted" I could ever think of!