I consulted with the girls in the office on this one as they are really good with numbers and vain competitive creatures,  that they are they insisted that we do a poll on which one had the best body. You can find that poll here.   Now lets get back to the financial crisis. Sorry for the diversion. Having type 2 diabetes and E.D. they all pretty much look the same to me. 

Please note I have just completed the first Major Update of this page in several months which can be found at the bottom of this page under the August 20/2009 entry

 

First of all we need to understand that there is no possibility of explaining the financial crisis on one webpage in a few dozen words. So forget that. 

Consider that all the experts who run our financial systems and large corporations and who get the big bucks to do so well were all wrong in that this was not supposed to happen. Our Governments who are tasked with providing a stable environment were finances and business can flourish have also been wrong. And finally our media who are tasked with informing us what is happening and what might happen were wrong too. 

This website approaches life by searching out bullshit and suggesting a better way. So we will use the same approach here. 

There was certainly a lot of bullshit in the way large companies are being managed specifically the huge compensation packages executives are receiving even when their organizations are loosing money or going under.  An obvious example is when the executives of the big three auto companies went to the US congress begging for handouts but they arrived in private jets. 

There is a lot of bullshit associated with banking specifically the large spreads between the banker's prime rate and the rate of interest banks charge their customers. 

There is a lot of bullshit in governments when a government can make more in taxes on an automobile than the profit a car maker earns on the vehicle itself and the consumer is required to pay the high sticker prices. 

There is a lot of bullshit in the media where it reports news that is in the best interests of the owners of the media. Media ownership in Canada is concentrated in the hands of only a few very powerful people with vested interests. 

Looking at the entire economy one begins to appreciate that what we are seeing is a massive and very rapid redistribution of wealth on a scale never seen before in history. The old saying that the "rich get richer and the poor get poorer" seems to fit here. Trillions of dollars of wealth are being redistributed. 

The obvious question is ..."Where is it all going?" 

Now lets just consider for a moment what wealth is. Wealth refers to having riches including money or assets. Wealth is a noun and is also used as an adjective i.e. "wealthy"  example the wealthy man drove a Cadillac and smoked a cuban cigar. Wealth can be used in a very broad sense to include social relationships or education. As an example of that a wealthy society would have an educated workforce which would be an asset. Wealth is one of those words that have a broad meaning but most people have a good understanding of what it means. From an accounting perspective "owner's equity" or "equity" is equivalent to "wealth". 

So if you add up all your assets and subtract all your liabilities you have one measure of your wealth. Unlike science and the study of energy where it can neither be created or destroyed in any reaction wealth contains subjective components. You need to understand this. Lets take a mining stock. If you purchase the stock for 10 cents and the mine strikes an ore body suddenly the value of the stock shoots up. The reason for this is that there is a subjective opinion in the stock market that when the ore is actually mined the company will make millions and the share value will reflect this new value. So based on this the market ":discounts" the news that is takes it into consideration and investors are willing to pay more for the stock and the values increase. Suddenly wealth has been created. Now consider the same mine when it is announced that the government where the mine is located has just nationalized the property. Suddenly the stock plunges. Wealth has been effectively destroyed. 

 

When I suggest that what we are seeing is the largest re-distribution of wealth in the shortest period of time in history what am I really saying? 

There are a few major factors which contributed to the financial crisis we see today. Essentially the US real estate market reached a zenith and suddenly demand for the product collapsed. Some say it was caused by ultra high energy prices which took too many dollars out of the economy but whatever the reason the market collapsed. Others say it was the loss of manufacturing jobs to China and the steady loss of dollars going into the Chinese economy. One might ask then how other world economies became involved?  How were they effectively linked to the collapse of the American real estate market? 

The linkage was an investment vehicle called commercial paper or more properly asset backed commercial paper derivatives. Here billions of dollars in mortgages and loans were bundled into an investment vehicle called derivatives and sold to domestic and foreign banks. Good returns were made including good commissions and the banks purchased everything that was offered and demanded even more. So banks and mortgage companies extended mortgages to borrowers with less than acceptable finances. Some didn't even have jobs! Some had poor credit ratings or no credit ratings. These loans over five trillion dollars worth were called "sub prime mortgages" The thought likely was who cares the market is going up anyway so if the rascals don't pay we simply foreclose and sell the property for more than the value of the mortgage. In fact that worked well until suddenly the market turned and millions of mortgage holders defaulted and the suddenly the trillions of dollars of sub prime derivatives were worth nothing.  In other words wealth had just been destroyed. Trillions of dollars of it. Enough to challenge the liquidity of some of the world's largest banks. It was a financial disaster on monumental proportions. 

 

Now how to fix this situation. And here is where the bullshit enters again. People need to realize an important fact about the loss of wealth that caused this meltdown. That wealth has been destroyed. It's gone. All of the associated problems including liquidity in our financial systems, recession, job loss, share value loss are associated with that loss of wealth. There is no quick fix that will bring that wealth back despite the fact that politicians are suggesting that they can do that by injecting taxpayers money into the system as a stimulus. What they are doing right now is transferring wealth from the taxpayers to the very institutions that caused the losses in an attempt to repair the damage when in fact all they are doing is transferring the losses to the taxpayers who will be stuck with the resulting debt and interest on it for decades. 

 

The public seems blissfully unaware of this situation. The media is offering up several red herrings for them to concentrate on such as:

1. Blaming the big three auto makers - in fact the big three are not selling cars because of the meltdown in the economy they did not cause it. If the economy was back on the tracks where it was prior to the crash the big three would be selling cars and be in a healthy financial position. 

2. Blaming the CEO's for their high compensation packages -in fact their companies made billions of dollars for their shareholders and all was fine as share prices were locked in a long bull market and everyone was making money. 

3. Blaming George Bush George gets blamed for everything that goes bad and gets the credit for nothing that goes well. Never has a President been vilified in the press before like he has. In reality historians will likely give high marks to the Bush presidency once you remove the partisan political remarks from the equation. 

4. Barack Obama will save the world. One wonders how one person will be able to solve all these problems yet the public has raised Mr. Obama to god like status and expectations are higher than for any previous President. He can certainly talk the talk but can he produce a solution. If he can't and things get worse the people will turn on him in the same way they have turned on George Bush. Editors note: since writing this Mr. Obama's approval rating has plunged to 51% exactly as predicted! and continues to trend down. 

5. That we cannot let the big companies fail because that would cascade through society and cause huge job losses and likely a depression. This is the biggest red herring of them all as it excuses the government leaders from spending all the treasure in the land and running up horrendous deficits for future generations to pay off.  But is this premise true and should we reward mistakes by bailing these firms out? As an example in the auto industry there are dozens of brands and hundreds or even thousands of options and vehicles which get poor mileage, are expensive to repair and purchase and which are in some cases not even reliable. And yet taxpayers are now supporting these industries. Something is wrong here. And something is wrong when financial institutions loose money because of poor business practices and are again supported by the taxpayer. The big company failure will make things worse story plays on the fear we all have of things going from bad to worse. But is it a case of things going from worse to better if they do fail? I suggest that in many cases that might be the case. 

6. That we can trust our experts for advice on what to do in these times. Clearly this one is false. Our experts did not predict or prevent this meltdown. Our experts were predicting $200/bbl oil for 2009 and now oil is selling in the $30 range. Our experts were telling us to invest in Canadian asset backed commercial paper. This paper collapsed and has been frozen since the summer of 2007. Our experts were telling us before the general election that our economy was in just wonderful shape thanks to their wise decisions and then two months later they admit the economy is on the skids, the dollar is in the toilet, manufacturing jobs are on life support, desperate measures are needed and we are back to large government deficits for the first time in over 15 years. So they can't be trusted. Our financial advisors who make money when we trade stocks in our portfolios are telling us it is time to buy. Can they be trusted? Or are they just engaged in churning our holdings to generate some commission income? 

The Fix Here is what I think will fix the situation and I state this from a Canadian perspective however you can apply the same ideas to every country:

1. Manufacturing  We need to make things again and we need as a first step to recover 50% of the internal market for ALL manufactured goods. We can still keep the markets open to international goods however 50% of the market needs to be kept for Canadian goods manufactured by Canadian workers.

2. Government Regulations and Taxes Canada is over regulated and over taxed and the entrepreneur has been the target of government regulators and tax authorities for decades and this needs to stop. In many cases we see levels of government collecting more in taxes on items and services than the entrepreneur and business person actually makes in profits. This has been one of the reasons companies have gone offshore to buy products for retail sales because taxes and regulations and costs are lower in those jurisdictions. 

3. Banking Canadians are being ripped off by the banks as the spread between bank prime and rates charged to clients have become outrageous. The Bank Act needs to be modified to place a cap on these charges so that banks must operate within this range and offer better value to their customers. ATM charges are one horrible example, credit card rates another. ATM charges are now in excess of 20% for a customer who wishes to take $20 from their accounts. 

4. Canadian Ownership This is a big problem in Canada as many of the major industries are all foreign owned. There needs to be a cap on foreign ownership of any Canadian business of 49% so that control is retained here. Otherwise we are at the total of foreign interests and all the profit from Canadian operations flows out of the country. We could look to Mexico for some ideas on how that could be accomplished. So we don't need to look very far. If we use our car assembly plants as an example not ONE plant is Canadian owned. This is ridiculous for a country of 33 million people. 

5. Canadian Elections Our electoral system which was designed for a two party system is no longer functioning to elect a government. We need a run off system to determine which party receives a majority of the votes and which obtains power to govern the country. The partisan games played in the last few years are not helping Canada and the system needs to be fixed. The concept of a runoff election is not a new one and several countries in the world use it. 

6. "The Best Book Every Written on Business in Canada" More people should read Marcie's book "Your Very First Billion" as it is the first book to ever explain how business works here. Our publishing company published it and it is a unique and very readable approach to business that is both very informative and fun to read. We have this book on sale on deep discount until January 1st 2009 as a special Christmas gift to all the Author's friends. For more information and to purchase your copy visit here. 

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Those are my thoughts for now and lets see what you think will happen. I have set up an online poll to share opinions on the world financial crisis and here are the details: 

Update December 17th 2008  

The question now is are we headed for a depression? Or will the recession last a year or two and things will start getting better again?  Time for some feedback from you. As we are all in this together each of us has a vote on what might happen. I have put together some likely options and choose which condition you think most accurately describes what will happen next.

MAJOR UPDATE AUGUST 20TH 2009   It has been several months since I updated this page but now is the time to review the situation and see if we can get it right. Basically most of the previous statements were spot on. Where I would like to concentrate now is the state of the world's 1.14 quadrillion dollar derivative problem which I now believe is at the heart of the entire world financial system weakness. First of all it is very clear that central banks and governments do not wish to engage the public on the dangers of the derivative problem. There is the very real fear that if they do there will be runs on banks and the entire system will collapse. The media has played along with this obviously because they make their money from a vibrant financial system and if it died so would they. 

Here is the problem. Derivatives are not shown on balance sheet accounts so nobody really knows who is holding what and what the values of the derivatives are. Even worse the offsetting investment vehicle the credit default swaps held by counter parties as hedge investments are in the same boat. They are off balance sheet accounts so nobody really knows how healthy these companies are. There is talk about "toxic assets" and these refer to derivative investments with no value and there is no way to remove these assets from investment portfolios. The entire situation is quite scary. I have attempted to describe it in a few words here but you really need to review the links we have on our bank page to gain a better understanding of the problem. 

A consensus is developing in the USA that Mr. Obama is not the savior of the economy that everyone had originally hoped for. I predicted this. Now we see his popularity rating trending down and hitting 51%.  He is spending huge amounts of money however there appears to be no or very little improvement. He talks the talk but walking the walk has been the problem with Mr. Obama. At this approval rating his entire reputation is now at risk should even one major disaster occur and that could cause huge discontent in the American public. I would not want to be him right now. 

Will things get better? The IMF has just announced that the recession is over. Is it? My concern is not with the technical recession figures it is with the lurking derivative monster which could implode any day and take the entire financial system down with it. The recession is merely a symptom of the underlying loss of wealth associated with the toxic or valueless assets being held as derivative investments. 

What will happen? I don't know. I do know that the government, banks, media and big business are all lying to us and attempting to paper over the very real cracks that exist in our world financial system. Only banks and governments can create wealth at the stroke of a pen. And the banks have been using those pen strokes to create wealth with derivative investment vehicles based on valueless assets for too many years. They collected huge commissions selling them. It would be somewhat like selling swampland in Florida as building lots then bundling the mortgages on this swampland into derivative investments and selling those as the mortgage holders defaulted. At some point in the process these assets need to be written off and the loss taken. Right now companies are not taking the losses and are continuing to declare profits when in some cases they are technically bankrupt if they took the losses.  It is rather complex. 

My only advice is to look over some of the links and make up your own minds. But don't believe everything our governments and central banks are telling you because they aren't telling you the whole story. 

Update August 24th 2009  Today, based on approximately a dozen different inputs and indicators I realized I had a clearer understanding of where we are and where we are going. What has happened over the last year is that the world economy including that of Canada and the USA has lost in excess of 50 trillion dollars of wealth. To almost everyone this is an incomprehensible volume of money. As a result of this in terms that most of us can understand demand has decreased and prices have fallen. Because demand falls sales have fallen too and that means revenues have fallen. In order to balance off the lost revenues companies and governments have had to reduce expenses and of course when they do that demand falls again with the additional unemployment. Somewhat like a dog chasing its tail.

Update September 9th 2009  Today I checked out the unemployment rate in the USA and looked at its' chart for the last few years.  Right now it is at 9.6% The rate has doubled since Obama took over. The rate of change is trending upwards at an alarming rate. And yet when we listen to the news coming out of Ottawa all we get is government spin telling us how wonderful our Canadian economy is. 

What I try my best to do is look at real information and form a conclusion. I avoid spin. And what I see here is certainly not good. It is in fact -a disaster! A rolling train wreck that cannot go on indefinitely without the economy falling into a depression. 

Then I looked at the stats can page for the Canadian unemployment rate. It is practically the same as in the USA and is in a word hideous!

If you think I am being unreasonably panicky about our financial situation look at both these graphs and you decide. Look at the trends and rate of change. Then think ahead a quarter, a half year and a year. Welcome to panic city. 

 

 

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