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The merits of helping Citigroup are debatable, but what the development portends for the future is not. Crash and burn. There is no other way to define the banking industry at the moment. Throw in insurance companies buried in credit derivatives like AIG and it is a full scale boondoggle. The government, largely led by Ben Bernanke who is an expert on the Great Depression of the 1930s, has been taking seriously proactive steps to cut off the failures. Despite their best efforts, the future looks grim. Give some thought to how we got to this point. We started with the subprime mess. This then led to banks failing on loans to banks that were insured by credit derivatives. At one point or another, companies like Lehman Brothers, Washington Mutual and so on bit the dust. Companies like AIG and Citigroup only survived because they were able to get in on the government handouts.
What is the common thing about all but one of these failures? They happened before the downturn. Citigroup technically is happening now, but the failure is based on asset problems earlier on. Regardless, the banking industry was living on the knife’s edge before the economy started lurching. What is going to happen now? The economy has been fairly stable for the last 20 years. There have been some ups and some downs, but nothing particularly notable. This has led to a certain risk comfort level for individuals and businesses. As they became more comfortable with risk, they took on more of it in the form of debt. With the economy slowing down dramatically, that minor risk is now a major problem. We are going to see many people and businesses unable to meet their obligations. For a perfect example, look at the auto manufacturers. There are plenty of problems with the big three, but the bigger issue is they have long lived on the edge. When demand for their cars slowed with the economy and high gas prices, they went over the edge into a freefall. General Motors is a huge company, a stalwart of the US economy. It is on track to run out of money and fail in 2009. Many people think the death of GM is not a matter of months away, but a matter of weeks. There are many other businesses facing similar dire circumstances, but they are not big enough or sexy enough to get mentioned in the media. The end result of all of this is we are entering a feedback loop with the economy. As banks fail, people worry and stop spending. Businesses see a downturn in revenues and can’t meet their debt obligations. People are laid off leading to less spending and so on. If you are not already alarmed, there is one thing that should wake you up. The federal government has passed a $700 billion dollar bailout for the banks. It is now talking about another $700 billion bailout for the economy and the political parties are not arguing about it. If the Republicans and Democrats in government are not looking for the opportunity to stick the knife in and twist, hell just might be freezing over! Article Source: Stephan Teak, EzineArticles.com No comments have been added to this post yet. Leave a comment |
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