Unemployment rising.

[CARLHAYDEN]

Some of the best reporting on economic condidtions in the United States over the past few weeks has come from the British press.  The Financial Times has been the leader, but now even the Guardian outshines the American press.

Fears of a million layoffs a month in corporate AmericaHeather Stewart and Ruth Sunderland
The Observer, Sunday December 7 2008
Article history
As many as a million American jobs could be lost every month by next spring as businesses struggle to raise capital in financial markets consumed by fear, according to a new analysis.

November was the worst month in the US labour market since the oil crisis of 1974, as more than 500,000 US workers were laid off, according to official figures released on Friday.

But Graham Turner, of consultancy GFC Economics, says the rising cost of corporate debt is now flashing a red warning signal that far worse is to come over the next few months and job losses are heading for levels last seen in the 1930s Great Depression.

Corporate bond yields have rocketed since the credit crisis began as investors flee risky assets in search of safe havens such as US Treasuries. That effectively means many firms are being forced to pay eye-watering interest rates to borrow funds.

Turner says when the gap between the yield on high-risk company bonds and US Treasuries widens sharply, unemployment tends to shoot up - and current credit conditions are pointing to a doubling in the pace of layoffs, to more than a million workers a month, by spring.

'The correlation is holding up all too well,' he said. 'It's very disconcerting.' He added that the pace of layoffs already happening in the US 'is indicative of panic'. During the 1970s oil crisis the panic was relatively short-lived, he says. 'But the worry now is that this will just roll on and on.'

On Friday alone, embattled car firm General Motors, fund manager Legg Mason, and motor parts supplier Gentex announced plans to shed staff.

November's jobs figures were so much worse than analysts had expected that the Dow Jones share index actually rallied by 259 points, more than 3 per cent, as investors bet that Washington would have to launch a major new rescue package for the economy even before President-elect Barack Obama takes over the White House in January.

The scale of the layoffs in the US, which pushed unemployment to 6.7 per cent, could also point towards a further deterioration in conditions in the UK: David Blanchflower, an independent member of the Bank of England's Monetary Policy Committee and labour market specialist, warned recently: 'What happens in the US tends to be repeated six to nine months later in Britain'.

[InsaneTrollLogic]

Soon, we'll all be on the dole.

[Marokai]

Soon, we'll all be on the dole.

I have a totally off topic question; What's it like being a liberal in Wyoming?

[ChrisFromNJ]

The official unemployment rate is around 12%. That's the worst it has been since 1982, and it will get worse.

[CARLHAYDEN]

The official unemployment rate is around 12%. That's the worst it has been since 1982, and it will get worse.

Ah, Chris, where do you get "the official unemployment rate is around 12%"?

Is that for a particular community, as it is far above the most recently reported official unemployment rate, cited in the article I posted.

[Marokai]

The official unemployment rate is around 12%. That's the worst it has been since 1982, and it will get worse.

Ah, Chris, where do you get "the official unemployment rate is around 12%"?

Is that for a particular community, as it is far above the most recently reported official unemployment rate, cited in the article I posted.

There are some caveats with that statistic. The "unemployment" rate is only 12.5% when you add in workers losing hours, discouraged workers, workers no longer on the rolls, part time workers who want more hours but can't get them, etc.

[CARLHAYDEN]

The official unemployment rate is around 12%. That's the worst it has been since 1982, and it will get worse.

Ah, Chris, where do you get "the official unemployment rate is around 12%"?

Is that for a particular community, as it is far above the most recently reported official unemployment rate, cited in the article I posted.

There are some caveats with that statistic. The "unemployment" rate is only 12.5% when you add in workers losing hours, discouraged workers, workers no longer on the rolls, part time workers who want more hours but can't get them, etc.

So, its an unofficial estimate.

[Marokai]

The official unemployment rate is around 12%. That's the worst it has been since 1982, and it will get worse.

Ah, Chris, where do you get "the official unemployment rate is around 12%"?

Is that for a particular community, as it is far above the most recently reported official unemployment rate, cited in the article I posted.

There are some caveats with that statistic. The "unemployment" rate is only 12.5% when you add in workers losing hours, discouraged workers, workers no longer on the rolls, part time workers who want more hours but can't get them, etc.

So, its an unofficial estimate.

Yes, it's not official like he says. Still a startling number, however.

[InsaneTrollLogic]

Soon, we'll all be on the dole.

I have a totally off topic question; What's it like being a liberal in Wyoming?

Where did that come from? Albany county voted for Obama, but it's pretty fu cked up everywhere else. This is just an alpha-male-type dominated state. Most of them can't debate that well and will eventually just want to stop talking.

[Marokai]

Soon, we'll all be on the dole.

I have a totally off topic question; What's it like being a liberal in Wyoming?

Where did that come from? Albany county voted for Obama, but it's pretty fu cked up everywhere else. This is just an alpha-male-type dominated state. Most of them can't debate that well and will eventually just want to stop talking.

Just curious, I remember hearing that Democrats are outnumbered in that state something like 2-1 or 3-1?

[Swing low, sweet chariot. Comin' for to carry me home.]

Some of the best reporting on economic condidtions in the United States over the past few weeks has come from the British press.  The Financial Times has been the leader, but now even the Guardian outshines the American press.

Fears of a million layoffs a month in corporate AmericaHeather Stewart and Ruth Sunderland
The Observer, Sunday December 7 2008
Article history
As many as a million American jobs could be lost every month by next spring as businesses struggle to raise capital in financial markets consumed by fear, according to a new analysis.

that's what you call "some of the best reporting on economic conditions in the United States"?!

burn that euro rag!  there is extremely little chance we'll be seeing 1M job loses per month (which would be on a 1974 recession level).

even last month's "huge" 500k loss only ranked 41st on the all time worst list.

[opebo]

...there is extremely little chance we'll be seeing 1M job loses per month (which would be on a 1974 recession level).

What's made you suddenly turn so optimistic, jmfcst?  I see no reason for it.

[Swing low, sweet chariot. Comin' for to carry me home.]

...there is extremely little chance we'll be seeing 1M job loses per month (which would be on a 1974 recession level).

What's made you suddenly turn so optimistic, jmfcst?  I see no reason for it.

I'm not very optimistic.  I think the recession is going to be very bad, but I don't see us heading towards the 1974 level of layoffs.  There are still 135M people working in the US, for us to reach the 1974 levels, as a percentage of those working, we'd have to start seeing 1M jobs lost per month.

As a percentage of those working (135M), the November loss of 500k ranked 41st on the list of worst months.  So as bad as November was, it barely registered historically.

I think Obama's team understands they have to put the peddle to the metal and goose this economy.

This is why I am confident we're not headed towards 1M jobs lost per month:
1) Unlike during the Great Depression, the Feds have stopped the systemic risk by making sure on cornerstone of the economy fail (e.g. GM, Citi, etc, etc).  They've learned their lesson from the Lehman Brothers debacle.
2) Unlike during the Great Depression, they're printing money like crazy.
3) Gas prices have come crashing down, thus acting like a HUGE $500B/year tax break to Americans
4) We're all going to be able to refinance our homes for 4-4.5% APR within the next 6-12 months, thus saving the average home owner hundreds of dollars a month - again acting like a HUGE tax cut.
5) Obama team is going to lay out the ground rules to determine which banks will be allowed to stay in business and recapitalized with public money, and which banks will fail...which will bring the TRILLIONS of dollars of private cash off of the sidelines and back into the market, thus restoring liquidity.
6) Obama is going to spend at least a half trillion dollars to stimulate the economy and rebuild the country's infrastructure.
7) The “flight to quality” into U.S. treasury notes and bills:  No matter how bad things get in the U.S., the EU’s problems, especially the U.K., are going to be FAR worse.  Why?  Because the U.S. will be running trillion dollar deficits at very low barrowing costs, thus sucking up all available capital, while the EU countries will not being able to finance their deficits.

So, with the combination of historically low energy prices and interest rates, coupled with historically massive amounts of liquidity and stimulus…it’s very hard to see the U.S. slipping into a Depression.

Bottom line:  For the U.S. households that can retain their level of income during the next 12-24 months, the next 2 years offer historical opportunities to build a financial future.

IMO

[So the Heroes Fall]

jmf actually DOES bring up a great point about gas prices. If you read any articles about the recession back in the summer (find an old TIME or Newsweek some time), you'll notice gas prices are mentioned as one of the driving factors. Which they were, less disposable income, less traveling, plus transportation costs drove up the price of everything else, etc. Someone who spent $200 on gas a month back is now spending less than $100, and thus has extra cash to put into the economy.

[CARLHAYDEN]

...there is extremely little chance we'll be seeing 1M job loses per month (which would be on a 1974 recession level).

What's made you suddenly turn so optimistic, jmfcst?  I see no reason for it.

I'm not very optimistic.  I think the recession is going to be very bad, but I don't see us heading towards the 1974 level of layoffs.  There are still 135M people working in the US, for us to reach the 1974 levels, as a percentage of those working, we'd have to start seeing 1M jobs lost per month.

As a percentage of those working (135M), the November loss of 500k ranked 41st on the list of worst months.  So as bad as November was, it barely registered historically.

I think Obama's team understands they have to put the peddle to the metal and goose this economy.

This is why I am confident we're not headed towards 1M jobs lost per month:
1) Unlike during the Great Depression, the Feds have stopped the systemic risk by making sure on cornerstone of the economy fail (e.g. GM, Citi, etc, etc).  They've learned their lesson from the Lehman Brothers debacle.
2) Unlike during the Great Depression, they're printing money like crazy.
3) Gas prices have come crashing down, thus acting like a HUGE $500B/year tax break to Americans
4) We're all going to be able to refinance our homes for 4-4.5% APR within the next 6-12 months, thus saving the average home owner hundreds of dollars a month - again acting like a HUGE tax cut.
5) Obama team is going to lay out the ground rules to determine which banks will be allowed to stay in business and recapitalized with public money, and which banks will fail...which will bring the TRILLIONS of dollars of private cash off of the sidelines and back into the market, thus restoring liquidity.
6) Obama is going to spend at least a half trillion dollars to stimulate the economy and rebuild the country's infrastructure.
7) The “flight to quality” into U.S. treasury notes and bills:  No matter how bad things get in the U.S., the EU’s problems, especially the U.K., are going to be FAR worse.  Why?  Because the U.S. will be running trillion dollar deficits at very low barrowing costs, thus sucking up all available capital, while the EU countries will not being able to finance their deficits.

So, with the combination of historically low energy prices and interest rates, coupled with historically massive amounts of liquidity and stimulus…it’s very hard to see the U.S. slipping into a Depression.

Bottom line:  For the U.S. households that can retain their level of income during the next 12-24 months, the next 2 years offer historical opportunities to build a financial future.

IMO

If Citi is a "cornerstone" of the American economy, then we're in BIG trouble!

I remind you that you never answered my question about Citi's using the bailout money to buy Spanish toll roads.  Just how does that action help the American economy?

Also, what is it that makes you believe (apparently passionately) that Citi can do nothing wrong and must be endlessly bailed out? 

[Swing low, sweet chariot. Comin' for to carry me home.]

If Citi is a "cornerstone" of the American economy, then we're in BIG trouble!

I remind you that you never answered my question about Citi's using the bailout money to buy Spanish toll roads.  Just how does that action help the American economy?

Also, what is it that makes you believe (apparently passionately) that Citi can do nothing wrong and must be endlessly bailed out? 

Unlike a GM, Citi, in itself, doesn't mean much.  But the saving of Citi stops the feeding frenzy cold and halts the hedge funds from shorting relatively sound banks to death.  Most companies are not like Microsoft and don't have the cash reserves to defend themselves, rather they rely on their ability to enter into deals with their counterparts.  If their liquidity with their counterparts dries up, their business grinds to a halt and their cash flow stops and they die.

If Citi had been allowed to go under, then the shorts simply would have moved on to the next bank, then once they killed the next bank, they would have moved to the next, and then the next...until, within a matter of a few short weeks, you've lost your banking system.

So, by saving Citi, you've basically told the shorts that the game is over because Citi in now backed by the printing presses of the Federal Reserve, and that we’re not going to let another Lehman Brothers to happen, and therefore the shorts can’t win.

The shorts are allowed to do this because SEC chairman Cox is totally incompetent.  He has removed many of the safeguards that were put into place after the Great Depression and thus allowed the hedge funds to create their own reality and simply destroying companies by shorting their stocks and credit swaps during times of panic.

So it has little to do with whether Citi uses the money to buy Spanish toll roads, but it has everything to do with not allowing the shorts to destroy perfectly sound companies simply by manipulating a lawless (thanks to Cox) system that is in temporary crisis.

The reasons the safeguards were put into place after the Great Depression was to ensure that during times of inevitable panic, the markets couldn't be artificially driven into a death spiral by those looking to turn a quick buck.

[ChrisFromNJ]

The official unemployment rate is around 12%. That's the worst it has been since 1982, and it will get worse.

Ah, Chris, where do you get "the official unemployment rate is around 12%"?

Is that for a particular community, as it is far above the most recently reported official unemployment rate, cited in the article I posted.

There are some caveats with that statistic. The "unemployment" rate is only 12.5% when you add in workers losing hours, discouraged workers, workers no longer on the rolls, part time workers who want more hours but can't get them, etc.

So, its an unofficial estimate.

No, it's not. Check out the U-6 unemployment rate.

[CARLHAYDEN]

Please cite the url.

[Joe Republic]

Please cite the url.

How ironic.

[CARLHAYDEN]

If Citi is a "cornerstone" of the American economy, then we're in BIG trouble!

I remind you that you never answered my question about Citi's using the bailout money to buy Spanish toll roads.  Just how does that action help the American economy?

Also, what is it that makes you believe (apparently passionately) that Citi can do nothing wrong and must be endlessly bailed out? 

Unlike a GM, Citi, in itself, doesn't mean much.  But the saving of Citi stops the feeding frenzy cold and halts the hedge funds from shorting relatively sound banks to death.  Most companies are not like Microsoft and don't have the cash reserves to defend themselves, rather they rely on their ability to enter into deals with their counterparts.  If their liquidity with their counterparts dries up, their business grinds to a halt and their cash flow stops and they die.

If Citi had been allowed to go under, then the shorts simply would have moved on to the next bank, then once they killed the next bank, they would have moved to the next, and then the next...until, within a matter of a few short weeks, you've lost your banking system.

So, by saving Citi, you've basically told the shorts that the game is over because Citi in now backed by the printing presses of the Federal Reserve, and that we’re not going to let another Lehman Brothers to happen, and therefore the shorts can’t win.

The shorts are allowed to do this because SEC chairman Cox is totally incompetent.  He has removed many of the safeguards that were put into place after the Great Depression and thus allowed the hedge funds to create their own reality and simply destroying companies by shorting their stocks and credit swaps during times of panic.

So it has little to do with whether Citi uses the money to buy Spanish toll roads, but it has everything to do with not allowing the shorts to destroy perfectly sound companies simply by manipulating a lawless (thanks to Cox) system that is in temporary crisis.

The reasons the safeguards were put into place after the Great Depression was to ensure that during times of inevitable panic, the markets couldn't be artificially driven into a death spiral by those looking to turn a quick buck.

You keep getting stranger and stranger.

First, either Citi is a "cornerstone" of the economy (as you earlier asserted) or "in itself, doesn't mean much."  The two assertions are contradictory.

Second, do you understand the difference between sound and unsound companues?  Go ahead ans "short" a sound company, and find out how much money you will lose when people take you up on the offer.  You seem incapable of understanding that the deserved demise of an unsound bank does NOT, I repeat, NOT mean that sound ones will die.  You belief is irrational, insane and demented.  It amounts to a blank check for the idiots at Citi.

Third, have you ever heard of fiat money.  Well that's what you get run the printing presses to support incompetency.  Germany in the 20s debased the currency.  

Fourth, so, in your scenatio, if Citi burned the money it would be, ok because its not the money itself, but rather the willingness of the government to provide it in limitless quantities to Citi which is important.

[CARLHAYDEN]

Please cite the url.

How ironic.

Uh, Joe, my cites were clearly identified.

[Swing low, sweet chariot. Comin' for to carry me home.]

You keep getting stranger and stranger.

First, either Citi is a "cornerstone" of the economy (as you earlier asserted) or "in itself, doesn't mean much."  The two assertions are contradictory.

dude, stop being a child.  by me calling Citi a "counterstone" AND THEN stating that "it means nothing in itself" but is simply the next step the shorts will use to eat away at our banking system...I think it is OBVIOUS I was using Citi to represent our entire banking system...which is why it was rescued to begin with (because it was simply the latest target of the shorts).

---

Second, do you understand the difference between sound and unsound companues?  Go ahead ans "short" a sound company, and find out how much money you will lose when people take you up on the offer.  You seem incapable of understanding that the deserved demise of an unsound bank does NOT, I repeat, NOT mean that sound ones will die.  You belief is irrational, insane and demented.  It amounts to a blank check for the idiots at Citi.

Dude, I have spent the last 15 years of my highly lucrative career dealing with the trading of assets and derivatives among counterparties.  That’s what I do,  I help companies manage their trading risk.  I may work in the energy trading business, but the financial instruments are EXACTLY the same regardless if you’re trading oil or trading stocks or trading corn.

And my career experience has spanned periods of systemic risks where liquidity dies up between counterparties because of the death of a single counterparty (Enron).  And when that happens, every single trading company within that system is put at risk because business literally dies up.

Believe it or not, the vast majority of U.S. companies don’t have enough cash on hand to fund their day-to-day business. (Microsoft is one of the few exceptions) That’s why they have revolving lines of credit at BANKS and revolving lines of credit with other COUNTERPARTIES.  So when liquidity dies up within an industry, all the counterparties are at risk and the shorts go after the weakest link.  When the weakest link dies, liquidity is removed and the WHOLE industry then becomes weaker.  So the shorts pick the next weakest link (which was made weaker by the death of the previous weakest link) and so on and so on until the whole industry simply dies!

This very cycle was THE reason why the markets were concerned we were going to lose our entire banking industry and is why Congress passed the $700B TARP program.

---

BOTH Lehman Brothers and Citi WERE SOLVENT!  They may not have had the best management in the world, but they were solvent.  But in a market where liquidity has dried up, these solvent companies can NOT survive unregulated short selling.

Most of their losses were purely unrealized.  But in the current MTM rules put into place during the Bush administration and in the absence of the uptick rule and the unavailability of liquidity, they were neither afforded the time nor latitude to ride out the storm.  

THE EXACT SAME THING HAPPENED IN 1929...illiquidity coupled with panic leads to markets that are reckable by those seeking to turn a quick buck.  That’s why things like the uptick rule were put in place after the Great Depression.

And if the Feds had done nothing the last three months, we would have lost our entire banking system.

Obviously, not all the companies that went out of business during the Great Depression were poorly run.  Most were simply victims of the domino affect.

---

Third, have you ever heard of fiat money.  Well that's what you get run the printing presses to support incompetency.  Germany in the 20s debased the currency.  

I’m one of the biggest capitalists on this forum, and I hate the fact that we’ve come to the point of printing money.  But that is the result of the Bush administration being one the biggest destroyers of capital in the history of this nation simply because they forgot the lessons of the Great Depression.

---

Fourth, so, in your scenatio, if Citi burned the money it would be, ok because its not the money itself, but rather the willingness of the government to provide it in limitless quantities to Citi which is important.

What, exactly, is your problem with Citi buying up Spanish toll roads?  Are you saying the toll roads were a bad investment or are you saying that since Citi took Federal loans that they should be made to divest of their foreign holdings and not be allowed to invest in anything outside of the U.S.?

[CARLHAYDEN]

Let me see, according to jmfcst, if you short one company in a particular line of business, then all the other companies in the same line of business will also be shorted!  Give me a break.

Also, I must  be a little more than suspicious of your allegations to know all and see all.

I really like your repetitve use of "dude."  It really marks you as one who has enjoyed a "lucrative career."

I also find  your assertion that "if the feds had done nothing, we would have lost our entire banking industry..."

Now, I have found in my lifetime that there are so many exceptions to general rules that I try to avoid assertions like "all," "enitre," etc.  I guess your "lucrative career" has taught you otherwise.

Now, as to the Citi investment in the Spanish toll roads: (a) they have a history of being a bad investment, (b) due to the worldwide recession travel is decreasing, which makes them a particularly bad investment at this time, and (c) the bailout money was supposed to provide for liquidity in the American marketplace, via the taxpayers (and as such, was used for other purposes).

Now, its interesting to see you claim to being "one of the biggest capitalists on this forum," but really isn't saying much. 

Now, I do suggest that you take some time from your "lucrative career" and try reading some of works of Ludwig von Mises.  I was fortunate enough to meet him (and get his autograph om my copy of his book, Socialism). 

I also notice you evaded my point about inflation resulting from running the printing presses.

[opebo]

Very interesting post, jmfcst:

This is why I am confident we're not headed towards 1M jobs lost per month:
1) Unlike during the Great Depression, the Feds have stopped the systemic risk by making sure on cornerstone of the economy fail (e.g. GM, Citi, etc, etc).  They've learned their lesson from the Lehman Brothers debacle.
2) Unlike during the Great Depression, they're printing money like crazy.
3) Gas prices have come crashing down, thus acting like a HUGE $500B/year tax break to Americans

I would tend to agree with your first two points, but it appears the GOP ideologues in the Senate will not allow an auto bailout.. so we've got big, big problems there.  Personally I think the Fed should just do it on its own recognizance and ignore the legislative branch.

4) We're all going to be able to refinance our homes for 4-4.5% APR within the next 6-12 months, thus saving the average home owner hundreds of dollars a month - again acting like a HUGE tax cut.

There is one problem with this point, and it is a big one - most people are either upside down or have no equity in their homes now due to massive losses in house value (and these declines in housing values are just getting started).  I'm skeptical that there will be easy refinancing available to anyone in an insecure environment, and particularly people who have either lost their jobs or who owe 300,000 on a house worth 250,000.

5) Obama team is going to lay out the ground rules to determine which banks will be allowed to stay in business and recapitalized with public money, and which banks will fail...which will bring the TRILLIONS of dollars of private cash off of the sidelines and back into the market, thus restoring liquidity.
6) Obama is going to spend at least a half trillion dollars to stimulate the economy and rebuild the country's infrastructure.

Interesting.  I must admit I know nothing about point five, but I would tend to believe that 1/2 trillion is rather pathetically inadequate in the current environment.  We all know the level of spending it took in the 1940s, and it was multiples of the 'private' GDP, not fractions.
 

7) The “flight to quality” into U.S. treasury notes and bills:  No matter how bad things get in the U.S., the EU’s problems, especially the U.K., are going to be FAR worse.  Why?  Because the U.S. will be running trillion dollar deficits at very low barrowing costs, thus sucking up all available capital, while the EU countries will not being able to finance their deficits.

I could not agree more that financing is absolutely no problem for the US government in a depression, though I also doubt that it will be a problem for any government.  It seems to me that given a small rate differential, there will be plenty of savings available for all mainstream government bonds, US, European, or Japanese, simply because no one will want to invest in the 'private' economy.  (in other words I'm saying that trillion dollar deficits will not, in my opinion, come anywhere near 'soaking up' all the layabout capital.. then again I think it will take 2-3 trillion dollar deficits, in the long run, to get out of the depression, but it may be years before they realize this).

Bottom line:  For the U.S. households that can retain their level of income during the next 12-24 months, the next 2 years offer historical opportunities to build a financial future.

I hope you are right there.  I'm curious though what sort of investments you would advise?  I of course have no money, but my decrepit elders have loads, and it their income is very, very secure (being slumlords).  Lets say someone had a few hundred grand in the bank, plus 100-150K/year available for investment, plus of course sterling credit... what's a good thing to get into?

I'm not very optimistic.  I think the recession is going to be very bad, but I don't see us heading towards the 1974 level of layoffs.  There are still 135M people working in the US, for us to reach the 1974 levels, as a percentage of those working, we'd have to start seeing 1M jobs lost per month.

I still don't see why we won't lose 1974 levels of layoffs, jmfcst - this recession is far, far worse than that one and involves far more systemic and difficult to solve problems.

[Swing low, sweet chariot. Comin' for to carry me home.]

5) Obama team is going to lay out the ground rules to determine which banks will be allowed to stay in business and recapitalized with public money, and which banks will fail...which will bring the TRILLIONS of dollars of private cash off of the sidelines and back into the market, thus restoring liquidity.

Interesting.  I must admit I know nothing about point five,

I took a lot of liberty with number 5 given the fact I haven’t read Obama saying anything regarding formulating that kind of playing field.

 But we are a LONG LONG way from being through this mess. 

It started in home real-estate sub-prime market and spread to the investment firms and banks holding sub prime derivates (which are, by their very nature, leveraged).  Once some of those firms went under, it spread to those companies who sold unregulated credit swaps against those firms, which, in turn, froze the liquidity in the credit markets because counterparty A had no idea how much exposure to the credit swaps counterparty B held. 

With the lack of liquidity in the credit markets, the above crisis spilled over into the rest of the economy as companies were unable to gain access to lines of credit.  Which is where we are now.

But in the coming months, it will spill over into the commercial real-estate market as more and more businesses fail, which in turn, will bring down (force the closing of) another estimated 2000-3000 U.S. banks that are heavily leveraged in commercial real-estate.

That’s when things get REALLY dangerous, and thus the need for point number 5 which will put in place a set of rules to quickly weed out the winners and the losers.  This is needed because there has been no set of rules over the last couple of months as to which companies are allowed to fail and which companies are rescued.  Instead, it’s simply been “Let’s make a deal.”  This lack of level playing field undermines confidence and the result is that private equity is hoarding cash and sitting on the sidelines, which only adds to the liquidity problem and the result is a viscous cycle.

So, if Obama wants private equity to shoulder some of the burden and risks (which is the only way to halt the slide into the abyss), instead of the Feds going it alone, then he has to put in place a set of rules to determine which banks close and which banks are saved/recapitalized with public funds.