Saturday, November 28, 2009

Credit Crisis is Over, Excess Liquidity Crisis Begins

Just last week Dubai World announced it can't meet it's debt obligations over the next several months and has asked creditors to accommodate a 6 month "standstill" or postponement in debt repayment of about 60 billion dollars. (Joe, can I do that with credit card!) This announcement pummelled stock markets all over the world on Thursday with some European and Asian markets dropping between 3-5%. The US market dropped almost 2% when trading resumed on Friday. So how did this rapidly emerging economy of Dubai crash? (Joe party attendees at White House) Let's look behind the scenes.

Reason#1: In '95 the financial world was exuberant about the emerging market of Mexico, and invested heavily in Mexican debt which offered a yield of about 12%. Investment banks were all over this 12% offering like Tiger Woods on a fire hydrant at 2:30AM. 12%! Too good to pass up! Well, the bubble popped and the Mexicans had no option other than to default the debt (Jose, left with the check at the end of the mole-sauced meal, but no pesos with which to pay for it). Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, and Chase Manhattan (now part of JP Morgan Chase), who sprayed out money like water from damaged fire hydrants while ignoring the risks of possible default were on the verge of losing tens of billions of dollars. What happened after that? Robert Rubin, a Wall Street fat cat and executive of Citigroup lobbied for billions in bailout money. The Republican Congress told Rubin to take a hike but Slick Willy Clinton, who had formed strong alliances with Wall St democrats Rubin at Citi and Jon Corzine of Goldman Sachs (who recently lost a gubernatorial bid in NJ), committed bailout money from the US Treasury. (if Joe daddy says no, just ask JoAnn mommy).

This set a dangerous precedent on Wall Street as risk was being spread across taxpayers while reward was still privatized and dished out in large bonuses. Over the next four years, similar instances occurred 3 more times in the form of South Korean bonds, Russian debt and even private institutions which owed money to Wall Street banksters. In all three cases, Rubin was instrumental in siphoning money from the US taxpayer into Citibank and its Wall Street allies under the guise of "systemic risk to the financial world". (Where have we heard this recently?) Fast forward to 2008, when Bush's Treasury Secretary Paulson proposed hundreds of billions of TARP money (Joe up the ante) - ratified by Congress -to these very same investment banks to avoid "systemic risk to the financial world". So where does Dubai fit into this? It's the same thing here - emerging economy gets expansion money and then falls on its face and can't pay it back. NO problem, US Taxpayer to the rescue. So where is Rubin now, who was so instrumental in bailing out Wall St in the '90's? He's an advisor to Obama. Furthermore, Summers and Geithner, who were proteges of Rubin, are in Obama's inner circle. Any guess what will happen to this Dubai World debt if it can't be repaid in 6 months? (Joe Vitale, Bailout City BABY!) This will not be the last government to default bonds during this crisis.

Reason #2: A good chunk of the blame goes to Rubin, Clinton, Treasury Dept and Congress for establishing a bailout culture on Wall Street. But, the Fed is not without blame as it creates excess liquidity when rates are too low LIKE THEY ARE NOW. Indeed, these same investment banks can borrow at .25% right now from the Fed and chase high yields such as Dubai offerings during a time in which banks need cash. Who wouldn't take advantage of this cheap and easy money, especially when the losses are absorbed by taxpayers??? The Federal Reserve bank needs to be abolished if free markets are again allowed to work properly. Because of this excess liquidity, the credit crisis is over now, but a new crisis has emerged. A spending and bubble crisis. ALL OF THIS FREE LIQUIDITY IS CREATING BUBBLES AROUND THE WORLD as investment banks are sniffing out high returns with little regard for risk. Make no mistake about it, these bubbles will pop as we saw this week with Dubai. Then the real pain will begin. (Joe anything getting struck by SUV's at 2:30 in the morning) The Fed should be abolished. Wall Street must become responsible, and Pres Obama and Congress must get tougher on allowing markets to work freely. (Joe, for the good of the kid, tell him no occasionally) The recession isn't over, we're very much still in the thick of things.

So what does this mean for Joe? Joe is very wary of these so called "emerging market" bubbles forming after the Dubai incident. Joe has decided to stay away from emerging markets, but also wonders whether the stock market has become an equity bubble from excess liquidity. Other bubbles could include expensive commodities such as gold and oil. Don't get me wrong, Joe doesn't mind holding the check at the end of the meal (especially if he's eating a meal with JoAnn), but unless he's the one ordering the burritos, he shouldn't be shelling out the pesos.


  1. Amazing how the most successful presidency of the past 20 years, Bill Clinton's, appears to have done everything wrong.

  2. Alessandro, stay tuned for the next post. This is just the beginning.

  3. Jose' Ole'December 1, 2009 at 8:32 AM

    Why you pick on Tiger so much? Mr. Joe Should be ashamed of yourself. its not like he had anything to do with these bailouts... he didn't even want to speak at the inauguration.

  4. Hey, lay off Tiger. Even the best golfer in the world drives one into the rough every now and again.
    Ok, I agree with your bubble analysis. Dubai has always been a bubble, anyone with any financial brains could see that. But tell me how gold is a bubble. The Dubai bubble along with the US stock market bubble are founded on speculation where as gold has real intrinsic value. Gold is no bubble.
    Alessandro, are you kidding?


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