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Collapse Has Begun!

By David Vaughn      Printer Friendly Version
Sep 23 2008 2:54PM

I believe I remember vividly that I wrote at the beginning of this decade around 2002 or 2003 that it would be under President George Bush’s watch that the financial collapse would begin in earnest.

It is a historical fact that the few years following 1929 witnessed the addition of 10,000 or so new millionaires in the US. I suppose these were those out of debt and who had prepared for the events of those days. Those days are now repeating themselves once again in our humble generation. Our nation today is definitely hurtin’ for certain. And the blood is running in the streets!

"Gold posted a record two-day rally, topping $US900 an ounce, on surging investor demand for a haven from credit-market turmoil." "Central banks in the US, Europe and Japan led a global plan to pump $US247 million into auctions to ease the worst crisis facing financial markets since the 1920s.” "The world's financial system is under assault. It's going to take a long time to repair. People are full of Treasuries, and gold looks like another logical place to go." "There's been a shift in market psychology,' said Ralph Preston, a futures analyst at Heritage West Futures. "This is pure momentum buying. We'll see gold at $US1000 next week." "Since the second quarter of 2007, banks worldwide have posted $US518.1 billion in losses and write downs related to investments in subprime mortgages. The Federal Reserve has orchestrated takeovers for Bear Stearns, American International Group and Fannie Mae and Freddie Mac. Lehman Brothers filed for bankruptcy this week.", September 19, 2008

Remember the story of Yertle the Turtle? Of course you do. An old Dr. Seuss classic. In the story this one little turtle in his small little pond made the decision that he would become the richest turtle of all. Not content with merely catching flies with his tongue and enjoying the cool and clear water.

"It's a shame that greed and stupidity aren't illegal", 9-19-2008

Most other turtles in the pond were happy but that greed from ole’ King Turtle wasinfectious. And who were those first little turtles who first began to bear the pain?

"Six months behind on their mortgage, Dave Evans and his wife, Suzie, packed the contents of their modest blue house here into a rented truck one day in July. The move came after weeks spent alternately crying and searching in a frenzy for somewhere to go. "At the end, it was so close we could have wound up on the streets," Dave Evans says."

Generally, the folks at the very bottom of the food chain are those who begin to hurt first. And the poor middle class turtles at the very bottom of the stack carrying the greatest weight on their backs are the first to cry out.

"…Yertle (banks & financial institutions), the king of them all, decided the kingdom he ruled was too small."

Dr. Seuss

Now you tell me if the above line doesn’t sound like the banker and financial elite of the past 20 years? And the mentality of today’s financial market makers? Already wealthy as King Midas yet they are still not content. They want more. Much, much more. They want the world and beyond. Greed, greed, greed…

"President Bush asked Congress on Saturday for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis." "…would be the most sweeping economic intervention by the government since the Great Depression…", 9-20-2008

Wow! This crisis sounds for real! How about a further and real dramatization of the real time events of this past week or so.

"SLAM. Slam. Slam. Slam. Like a scene from a gathering of Mafia dons, the doors of 30 black Lincolns slammed shut as their besuited occupants stepped out into a Manhattan downpour – and into a global financial storm." "That storm broke yesterday, with stock markets tumbling around the world.” “The collapse effectively began at 6pm last Friday. The place: the offices of the New York Federal Reserve. The occasion: an emergency meeting of the most powerful figures in American banking and finance aimed at staving off a massive bank collapse." "Cookies and coffee arrived. Then ghoulish crowds began to gather, reminiscent of those that had assembled in Wall Street 80 years ago as the stock market crashed." “The United States is now in the throes of its biggest banking crisis in 70 years, stirring terrible memories of panics, bank failures, bankruptcies and mass unemployment. First Bear Stearns had to be rescued. Then the government had to take over Fannie Mae and Freddie Mac, the two largest US mortgage providers. Now Lehman Brothers.” “Indeed, just ahead of the market collapse, Lehman underwrote more mortgage-backed securities than any other firm." "They may have driven their banks – and their shareholders – into enormous losses. But the former Masters of the Universe will never know what it's like to live in a subprime home." "I think the least we are going to have to learn from this is that the whole of the financial sector simply cannot return to where it was before.” "It is terrible. Death. It's like a massive earthquake. It's final. Everybody is just finishing up.", 9-16-2008

And to sum up real well just what has happened this past week or so?

Ian L. Cooper, Gold World, 9-20-2008 - “…we learn that as much as $1 trillion could be needed to avoid an imminent meltdown.” “Worse, let's not forget these legendary institutions... each completely blown out of the water:

  • Lehman Bros. and Bear Stearns... gone.
  • Freddie and Fannie... now government-owned.
  • Morgan Stanley and Goldman Sachs... their legs cut out from under them.
  • Washington Mutual... their grave is being dug at this very moment.
"All in the last 3 weeks... " "And if Washington Mutual fails, it'll need billions from the FDIC to cover depositors." Ian L. Cooper, Gold World, 9-20-2008

And as I stated before all of this has centered around greed, greed, and more greed

"I’m ruler…of all that I see. But I don’t see enough.  That’s the trouble with me." "If I could see high, how much greater I’d be! “I’d be ruler of all I could see!"

Dr. Seuss

So ole’ Yertle commanded all the other turtles in the pond to stand on one another’s back with Yrtle on top.

"Turtles! More turtles!” He bellowed and brayed. And the turtles ‘way down in the pond were afraid. They trembled. They shook. But they came.  They obeyed."

Dr. Seuss

And what is happening to the majority of these poor ol’ turtles who seem caught squarely in this massive financial mousetrap?

"It's all hands on deck," says Richard Yamarone, director of economic research at Argus Research. "Any and every entity, Treasury, the Fed and all central banks around the world are being summoned to right the potentially sinking ship. It's in everyone's interest that the financial, banking system is kept afloat."

And all these castles made of sand with the first drop of a gentle ocean surf and returning tide begin to fade away back into the sea.

"Came a groan from that plain little turtle named Mack." "Your majesty, please… I don’t like to complain, but down here below, we are feeling great pain." "That plain little turtle below in the stack.  That plain little turtle whose name was just Mack, decided he’d taken enough. And he had. And that plain little lad got a little bit mad. And that plain little Mack did a plain little thing. He burped!” “And his burp shook the throne of the king (banking industry)."

Dr. Seuss

And what is becoming the final outcome of many of these financial and banking institutions who watch as their kingdoms grind in the dust?

They become "…king of the Mud.” Dr. Seuss

"Stock markets around the globe plummeted again Wednesday after the U.S. government's surprise US$85-billion bailout of the world's largest insurer reignited fears of further fallout that could deepen what is being called the worst financial crisis since the Great Depression."  "As investors bailed out of stocks on Wednesday, they put money into safe havens including cash, gold and treasuries. Gold, considered a secure investment in times of turmoil, recorded its biggest one-day gain to date, surging more than US$90 an ounce." "Everybody is worried that the financial system is grinding to a halt," Hugh Johnson, a stock market strategist and chairman of Albany, N.Y.-based Johnson Illington Advisors, told the National Post. "The worry is that another shoe is going to drop from this centipede." "The question is how worried should people be," he added. "Nobody has a good answer to that question." "Morgan Stanley and Goldman Sachs Co., the only two Wall Street investment banks still standing now that the Lehman, Merrill and Bear Stearns Cos. names are disappearing, saw their stocks get hammered on Wednesday amid fears they would be the next victims to fall because of their exposure to risky mortgage portfolios." "Saddled with a portfolio of bad home loans, Washington Mutual Inc., the largest savings and loan company in the United States, is being forced to shed assets or put the entire company on the auction block."

And even the humble insurance company and humble money market fund seem to be caught in this horrendous web.

"A firestorm raged anew in world markets Wednesday after a huge US bailout of insurer AIG failed to quell anxiety about the health of the global financial system and sparked fresh political controversy." "Fears mounted that the US Federal Reserve's 85-billion-dollar (60-billion-euro) loan to rescue American International Group might not be sufficient to shore up wobbly financial markets." "…markets quickly reversed course as investors stampeded into gold, oil and safe short-term US Treasury bills.” “Around the world, nervous traders flocked to gold and …”

Well, our money is at least safe in the old tried and true and trusted money market account?

"Friday the Federal Reserve and Treasury announced separate but complementary moves to shore up what was turning into a exodus from the $3.4 trillion pool of money market funds."

Oh come on now! The conservative time honored mutual money market fund is at risk? Isn’t this the place we have for years been told to park our cash in times of financial uncertainty?

"I have never seen anything remotely like this. The money market was typically the one thing that always worked," said Luca Jellinek, head of interest-rate strategy in London at Royal Bank of Scotland Group Plc. "It's the cardiovascular system of the financial body. When this happens, it's like a heart attack."

And now the pied piper is coming to collect its children.

"In their bold response to the deepening financial trauma, the Federal Reserve and U.S. Treasury Department appear to have tossed aside the playbook that guided official thinking on the economy for three decades. As a wounded financial system teeters on the edge of the abyss, the economic consequences of allowing major financial institutions to take their market lumps became apparent."

David Vaughn
Gold Letter, Inc.



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