The Monetary Crisis X

jwr1947

Introduction
Life could be so easy, if the Central Banks would have done a decent job. I could be sitting here with some of my friends, sipping a glass of deep blue Trollinger with a darkskinned Lemberger and enjoying the deep red sunset. Easy living with friends is a luxury and regularly needs to be guarded against frosty night times, against burglary and robberies. Nowadays the times are getting rough. Recession and inflation are on their way. In fact I don't need too much luxury. I don't need very much at all. A warm room and one glass of wine with my companions seems to be sufficient. You don't have to be rich for these things. Lately I was thinking about these things, relations and relativity. I never had been speculating with money, but right now I felt some need to rescue some of my assets to be able to buy some more deep blue Trollinger with dark-skinned Lemberger. I discussed with some friends and we tried to trace back where the trouble started from. After some discussions we went back as far as the initiation point, which seems to be located in the central banks. Some say, well OK, some politicians may have ordered them to lower the credit levels, buth then again, after one more glass of wine, we decided that a central bank at least in the Netherlands should have resisted those foolish plans, which sometimes arise in the heads of eager politicians and bankers. If they couldn't resist that's too bad for them, if they are responsible for stable monetary conditions. These are the starting conditions for my study. I studied some crashes, crises and recessions. I found some similarities such as the four year periods and some standard costs for each individual citizen, which might help to plan the printing costs for extra banknotes. I was rather astonished about the costs for a crisis. All in all a recession seems to be rather cheap with 2000 US$ / citizen. The extra coins and banknotes for such a crisis may be printed any rainy afternoon. So where is the problem? I decided to dig a little deeper...

Scenarios
In fact most of these recessions start with cheap credits given to insolvent companies or individuals, who cannot resist to bring themselves in dangerous situations. As soon as they have signed a credit contract a point of no return has been surpassed. It's like starting an airplane, in which V2 (the safe takeoff speed) is called. This speed must be maintained after an engine failure to meet performance targets for rate of climb and angle of climb. Most houses need to be built on two salaries, which may be compared as engines. If one of the salaries fails the starting speed must be maintained for a safe flight. These conditions are well known in flying business and should be known in financing business. Sometimes however, in booming periods, people seem to forget the danger of adjustable rates, decreasing prices for real estate and layoffs in recession time. Unfortunately the learning from foreign countries and historical experiences isn't really practised. Why learn from others if you can feel how it hurts yourself? A few years after I left my hometown in the Netherlands to emigrate to Germany 1972 the Dutch government decided to start a program to which may have been titled "We want every Dutch family to own their own home. That's what we want". The program certainly has not been titled this way and probably has not been titled with an attractive slogan at all. It may have been named program number 11-4 or something like that. In fact it doesn't matter. It took some months to organize things, print the required forms and start an advertizing campaign. And in 1975 the program must have started rather successfully. That's why it was to be rather expensive. The problem however is that this experiment happened in a small country like the Netherlands. No US-American official probably ever heard of the experiment and its results. The results, the total cause of the housecrashes and the causes for this catastrophe have been published 19851, well before the US-American project house-credits for the everyone2, which had been initiated by president G.W. Bush in 2002. If any US-politician, US-banker or any responsible individual in the project would have studied the records for Dutch experiment, they probably would have aborted their experiment right-away. But now the dices had been thrown and the project was on its way. Many families now could afford a home of their own. Some even managed to buy up to ten houses with no capital of their own. These things had been experienced in the Netherlands as well, where the bankers were eager to allow 110%-120% mortgages, allowing the lenders to buy new furniture and cars with the help of the extra money, which had been given as an advantage compensation for the soaring value of their new homes... The Dutch should have known better. After all they had experienced several market crashes before. The Tulip mania or tulipomania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels, peaking 1637, and then suddenly collapsed. In later years other flowers, such as the hyacinth, also had high prices on the flower's introduction, which then fell dramatically. The high prices may also have been driven by expectations of a parliamentary decree that contracts could be voided for a small costthus lowering the risk to buyers. Anyway in 1975 the buyers didn't take the time to study speculation. In a booming market the greed overrides the mind and the catastrophe could take its course as it is taking course today again...

1 Source (Dutch language): Failliet op Krediet Pieter Lakeman, Pauline van de Ven (1985) 2 Source: George Bush: "We want everybody in America to own their own home. That's what we want".

1975: The Netherlands

In the Netherlands the Central Bank flooded the monetary market with cheap credits between the four-year period 1975-1979. Companies and families initiated an intensive speculation in business and real estate properties, resulting in a four year period of crashes between 1980-1984, destroying a total of 27,000 companies with 150,000 employees and causing a damage of 32 billion guilders. The value of real-estate decreased by 30-40%. In the Netherlands the central bank is not too famous for its leading power in monetary control and banking inspections. Inspections are rather simple and not very stringent. Bankers are allowed to act rather freely, which resulted in the catastrophic losses. In total the crisis lasted 8 years (4 years prosperity and 4 years degradation) in which the state lost 32 billion guilders (equivalent to approximately 15 billion dollars). A sum of 16 billion for a Dutch population of 16 million individuals (in 20003) corresponds to 1000 US$/citizen in 1985, which by now in modern inflated currency may be corrected to 2000 US$/citizen.

2002: Lehman Brothers Holdings Inc. (USA)

October 2002 presents George Bush4 Fannie Mae and Freddie Mac's a support house-credits for the everyone, resulting in a booming US-real estate market. Four years later the United States housing bubble peaked in the period 20052006. High default rates on "subprime" and adjustable rate mortgages (ARM) soared. After U.S. house sales prices peaked in mid-2006 and began their steep decline forthwith and may not yet have hit bottom as of 2011, refinancing became more difficult. In the years 2006-2008 prior to its bankruptcy Lehman borrowed significant amounts to fund its investing, a process known as leveraging or gearing. A significant portion of this investing was in housing-related assets, making it vulnerable to a downturn in that market. In 2008, Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis. A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages. A massive exodus of most of its clients, drastic losses in its stock, and devaluation of its assets by credit rating agencies resulted in a bankruptcy, dated September 15, 2008. The bankruptcy of Lehman Brothers remains the largest bankruptcy filing in U.S. history with Lehman holding over $639 billion in assets5.

2008: The Hypo Real Estate Crash (Germany)

In Germany the biggest crash has been identified in the Hypo Real Estate holding. Hypo Real Estate encountered financial difficulties during the liquidity crisis of September 2008, principally due to the heavy debt burden of its Depfa subsidiary and caused by the Lehman turbulence. In 2010 the debt remains of the Hypo Real Estate Crash have been transferred to the bad bank FMS Wertmanagement (FMS-WM), which 31th of December 2010 reported a balance sheet total of 358 Billion Euros. A sum of 358 billion Euros (equivalent to 500 billion US$) for a German population of 80 million individuals corresponds to 6000 US$/citizen.

3 Source: demographic of the Netherlands 4 Source: George Bush: "We want everybody in America to own their own home. That's what we want". 5 Source: Bankruptcy of Lehman Brothers

Similarities
In 2011 the crisis is still lasting and extending well over 2011, but we may observe a 4 years retardation period in which the bubble developed to full beauty. Degradation at least will also need at least 4 years. The Lehman losses specified as $639,063,000,800 6 for an US-population of 313 million individuals corresponds to a debt of 2000 US$/citizen, which is exactly the total loss for the Dutch experiment in the 1975-1985 experiment. The losses for the major German crash are 6000 US$/citizen which is considerably higher. A debt of a few 1000 US$/citizen seems to be a standard value for these experiments. The Dutch experiment exactly follows the same pattern as the Lehman catastrophe. Things start by a political speech announcing cheap credits for everybody's own home to be followed by soaring house-prices, overpaid mortgages, resulting in a crash of overpriced houses and long periods of wounds-licking. The German HRE-crash has been triggered by the Lehman bankruptcy.

Conclusion
Maybe the crisis should be culminating and reaching an end after the standard delay of four years. Theoretically the 4-year period of severe recession after the Lehman bankruptcy ends September 15, 2012, which is to be lasting for another 8 months or so. No guarantee can be given for the quality of the crisis' end, which may vary from a monetary reform to another booming phase of speculations. The advantage of the dollar seems to be rather clear. The US$ is to be inflating at the same 5%-rate as today. This may take some more years. Meanwhile it is difficult to predict the course of the Euro, which is being influenced by the dollar's course and inner-European difficulties. If however the US$-dollar crashes the catastrophe will automatically develop global dimensions. It will be hard to avoid the impact of a global recession or a monetary reform. In turbulent eras no certificates are to be trusted, which may be seen in the MF Global crash. On October 30, 2011, a unit of the New York-based brokerage reported a material shortfall in customer funds. Customer accounts with $5.45 billion were frozen Oct. 31, the same day the parent company, MF Global Inc., filed the eighth-largest U.S. bankruptcy. MF Global improperly mixed customer funds and used them for its own account for at least several days before the bankruptcy and even transferred funds outside the country. The best way to protect assets seems to be to invest a percentage in physical gold or silver, which up to today traditionally have been priced rather low by Fed-manipulations 7. These precautions may somehow protect assets against inflation up to a monetary reform at either side of the Atlantic ocean. As usual these notes are my own remarks and opinion, based on private investigations without any guarantee for correctness.

6 Source: Largest cases in the Chapter 11-List 7 Source the Gata-Committee (The Gold Anti-Trust Action Committee, founded 1998)