Last February, when the Asian markets collapsed overnight and led to a 500 point loss in the Dow Jones, we heard that there was a minor "subprime" problem, but it would not spread to housing in general, or to the broader economy.
Through the spring and summer months, we were told that the economy was doing fine and housing was going to recover in the back months of the year.There was no risk to the markets or the broader economy.
Bear Stearns disclosed punishing losses in two hedge funds, wiping out their investors assets in those funds. The market began a precipitous decline.
The Federal Reserve, facing a potential waterfall collapse in the stock market, launched a "surprise" cut in the discount rate on the morning of options expiration, trapping thousands of index option owners - and arresting what was destined to be a certain plunge.But they told us there was no risk to the markets or the broader economy.
Into the fall, we continued to hear that the housing market was getting worse - much worse - and dozens of lenders folded their tents, going out of business wholesale. Countrywide Financial's stock slid day after day, and the stock market underwent a sickening series of lurches higher and lower. Oil climbed higher as the dollar went lower.But they told us there was no risk to the markets or the broader economy.
As the holidays approached the markets rallied as is usual, but it was more tepid than we had seen in past years. Evidence of consumer slowdown was all around us, but the cheery-eyed commentators on national television continued to predict good times ahead. Oil continued its climb, while the dollar continued to tank.But they told us there was no risk to the markets or the broader economy.
On December 26th the markets began a precipitous slide, with daily news items of monoline insurers potentially going bust, lenders having billions of dollars of exposure to bad mortgage and other paper, and billions of dollars of losses related to complex instruments like CDOs were reported. The DOW lost nearly 2,000 points in the space of one month, or almost 200 points a trading day.But they told us there was no risk to the markets or the broader economy.
Then Bear Stearns blew up and The Fed "rescued" them, forcing the firm into the hands of Jamie Dimon and JP Morgan, all at our (the taxpayer's) expense.But they told us there was no risk to the markets or the broader economy.
Since then we have seen a ferocious rally in the markets. Is it over?
Let me point out a few things that you, as Americans, need to be aware of.
First is the general principle that desperate men will take desperate measures.
Look around you. You may know someone who was a "home flipper" or "speculator" in the real estate market, and if you don't, you certainly can find the stories in the media. As these people got closer and closer to imploding financially, they took more and more risk - levered up higher and higher in a desperate attempt to pull the one
ace remaining in the deck to avoid the certainty of bankruptcy and ruin.
We've all seen the stories of people who take their last $1,000 and go to Vegas, betting it all on "00". Or the lady who, facing foreclosure, buys $100 worth of Powerball tickets - with her last $100.Or how about John DeLorean
, who set up an "upstart" car factory and got into trouble? His version of "desperation" turned to putting up $1.8 million to bring 100 kilos of cocaine into the United States, a deal that promised (had he not been caught!) $24 million in profits - and the salvation of his company. He, of course, got caught, although he was later acquitted.
But it seems that wasn't the limit of his desperation. He was indicted and charged with income tax evasion, mail fraud and wire fraud and, while not convicted, was ordered to reimburse investors to the tune of $9 million.