Ouch! The Market is in Turmoil (Again? Yet?)

Well, AIG just about went under and was bailed by the Fed. But the price was high. 11% interest on an $85 billion loan and government control with ownership (I think that's the word) of 80% of the stock.

What we are experiencing, the experts say, is "deleveraging" or the unwinding of debt. It is definitely going to take a while for this process to run its course. It's going to take a few things to happen to reach the end of this process. The banks, brokerages and other financial institutions will have to admit their mistakes and sell or "write down" the value of the distressed assets that were purchased with borrowed money. Debt will have to be reduced by paying it off and that may require the sale of other assets. These financial institutions will also have to build up their reserves, or capital cushions, which have eroded by the losses on the distressed assets.

Come to think of it, these are exactly the same things that the American consumer needs to do; face up to the fact that that McMansion that was purchased with borrowed money isn't going to appreciate at 10% or more per year and is, in fact worth less than the value of the loans or mortgages outstanding. Then start paying down credit card, equity loans and other debt. Finally, stop spending so much and begin a savings program. I know, this will be very, very difficult. You won't be able to purchase that new car this year, or a new iphone, or that new model flat screen 120hz LCD TV. or a blue-ray disc burner, or a new digital camera, HDTV movie camera, that trip to the Mayan Riviera for Christmas or the latest Media PC . Gee, life sucks!

I was driving home tonight and listening to NPR and later to PBS. One of the commentators asked one of the experts if he had looked at his 401(K) lately. I decided I won't! I have the same dread I did only a few months ago, when I would open it up and discovered that it had jumped by a few percentage points. I could not see the "why for " these large increases. I wasn't aware of some fundamental shift that would cause profits and the value of these companies to simply go up and up. So I had a dread as my perspective was that once the people who were bidding these stocks up got cold feet, these same stocks would plummet. Well, they have more than cold feet. They've got the flu!

So today they said that people were rushing for gold, treasuries, etc. As a consequence gold went up by $90 and treasuries were yielding 1%.Home building at 1991 levels! said the headlines. Well, it seems that everyone who could afford a house had bought one and many who couldn't did the same, anyway. So I guess there are no more qualified buyers.

Wharton in the article "Will the Levee Break? An Ocean of Bad Debt Rises despite Fed Rescues" gives a pretty good summary of the current situation. Professor Joseph Gyourko made the statement regarding residential homes "The excess supply will wear off by the end of 2009, but not before.... The end of this debacle keeps getting put off and put off."

Here are a couple of interesting articles at Wharton:
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2050http://knowledge.wharton.upenn.edu/article.cfm?articleid=2052

Daniel Gross had a September 8 Newsweek article entitled "Get Ready for the 'Pain of Paying'" and I think it summed the current personal credit situation pretty well. See:
http://www.newsweek.com/id/156342/output/print

[Note added September 18: Goldman Sachs Group, Inc. was quoted in the WSJ: "Residential mortgage losses alone could hit $636 billion by 2012...triggering widespread retrenchment in bank lending. That could shave 1.8 percentage points a year off economic growth in 2008 and 2009 -- the equivalent of $250 billion in lost goods and services each year."]