The Precipice

The 500-point drop in Wall Street yesterday was just an appetizer. Today could be where the fireworks truly start. AIG is on the brink of filing bankruptcy unless it gets help (i.e. a bailout) from the Feds. When Lehman Brothers filed for bankruptcy, it was for $639 billion… the largest bankruptcy ever. AIG would trump that with $1 trillion…. think about that for a second.  A lot of this is tied up with derivatives and other exotic financial instruments, and AIG defaulting on a basket of these weapons of financial mass destruction could trigger an unwind of tens of trillions of dollars of this crap.

From what I’ve been reading, the government made a decision to let Lehman go in order to save it’s final bullets for the real big boys like AIG.    There will be more failures coming after AIG… how much money will it take to keep putting band-aids on what is fundamentally a broken financial system?

In other news, if you haven’t heard, the Federal Reserve just pumped another $70 billion into the markets to try and keep things as liquid as possible.   Hard to believe, but right now that seems like a paltry amount.

Let’s see if Mr. Bush or Mr. Paulson come out and say that our economy is fundamentally sound today or later this week.  Their idea of ‘sound’ and mine are apparently radically different.     Call me a cynic, but as more pundits and government officals tell us to not panic, the more worried I get that the economic shit is truly starting to hit the fan.

We are overdue for a financial day of reckoning… perhaps this is the start of that process.   I’ve reached the point where I’m more interested in taking the major pain and getting it over with so we can move on and make things better for the next generations.

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4 Responses to The Precipice

  1. Rebecca says:

    My grandmother likes to say that when someone from the government keeps telling you not to panic, that is the best time in the world to do so. 😉

    But then, she lived through the depression, the war, the 60s and everything else so she knows a thing or two about upheavals.

  2. Bart says:

    Yeah… those of us who are younger have lived in a period of remarkable stability and economic growth. Many will not react so well to the idea that infinite growth and perpetual increases in standards of living are not guaranteed.

  3. onestraw says:

    Bart, would love to hear your thoughts on the $800,000,000,000 “plan”. Sweet mary that is a big number -something like almost $3000 for every single American.

  4. Dan says:

    I had a Finance prof in college (early 1990’s) who proclaimed the generation before us would be the last to do better financially than their parents. He also warned against racking up too much debt and said he paid for everything he owned with cash.

    Although I didn’t always heed his advice on racking up debt, I always had that thought of not living better than my parents stuck in the back of my head since then. Both his points hit home hard watching the roller coaster ride the market is on.

    It will be interesting to see how this plays out . One one hand you have the Boomers who are at or near retirement age and are facing the real possibility that their nest egg might suddenly not be worth what they thought it was. Add to that your point of young people that have only seen prosperity and facing the real possibility that the standard of living we have always enjoyed might vanish at any time without much notice on the other hand.

    May you live in interesting times as the proverbs says…

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