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Financial Crisis - Dynamics and Causes

A financial crisis has happened with regular intervals throughout the last century, it happens again in the year 2008, and probably will happen in the future in much the same way. There is no fundamental differences between such crises in our time and former crises, except perhaps that they occur faster, occur more frequently, but fortunately also heal faster.

THE TYPICAL SITUATION BEFORE THE CRISIS

The crisis often occurs after a long period of economic growth, high employment and high activity. The situation for companies and individuals are typically as follows:

* The economic activity in the whole society is very high after a long period of growth, but is beginning to decline.

* Stocks are traded for historically high quotes after a long period of rise of 300% or more, they have reached an all time high level, but they are beginning to decline again.

* The prizes of real estate properties are also high after a long period of growth, 300% or more, but they also are beginning to decline after an all time high level.

* Companies are often over-established after aggressive investments for borrowed money. The investments have not yet shown profitable, but the companies estimate great profits from the investments because they think the general growth will continue uninterruptedly.

* Also the average individuals have high debts after having invested massively in their homes and in luxury objects. They have some beginning problems with payment on their debts, but think these problems soon will go away with an anticipated further rises of personal income.

THE INITIAL STAGES OF THE CRISIS

The crisis usually has a slowly developing initial face. During this face the situation can reverse and the economy recover without great damages. In this initial period one can observe the following process:

* Steadily more companies realize that their massive investments do not pay back with the expected revenues and they have problems paying on their loans. They abruptly reduce further investments and begin selling off assets.

* Steadily more individuals also realize they have a too great debt to handle with their private income. They reduce their consume and sell off properties and luxury objects.

* Companies are getting steadily less orders, are selling less and have less to do because of reduced consume and investments.

* Earnings of companies and individuals are declining and many are downright loosing money.

* The stock market values are sharply declining, often 20-30%.

* The property prizes are sharply declining, often 20-30%.

THE FURTHER STAGES LEADING TO A FULL-BLOWN CRISIS

At some time there can be a critical turning point leading into the development of a full blown crisis that it is impossible to recover from in an easy way. This turning point occurs when a certain percentage, for example 10%, of individuals and companies realize that they do not have enough income to handle their debt, and that sell-off of properties and stocks will not nullify the debt. The full-blown crisis has these properties:

* The activity and earnings of companies are abruptly declining.

* Many companies experience massive losses.

* The number of companies and individuals with debt trouble is abruptly rising.

* The number of bankruptcies is abruptly rising.

* The unemployment level rises abruptly.

* Banks get into serious squeeze due to customers unable to pay on their debts and due to the decline in the value of properties serving as security for the loans.

* The troubled banks have to rise the interest rates by many percent to counteract the losses. But this act only increases the problems for other banks, individuals and companies and accelerates the crisis.

* A high percentage of the banks get unfunctional and bankrupt

* Now there will be massive sell-offs of properties and stocks. The sell-offs are exerted by individuals trying to free themselves from some of their debts and by banks trying to stop losses on loans.

* The stock market cracks down by an new 50% or more driven by the massive sell-offs.

* The real estate market also cracks down a new 50% or more due to massive sell-offs, but usually somewhat slower than the stock market.

THE CHARACTERISTICS OF AN ULTIMATE CRISIS

The ultimate stage of the crisis is seldom reached, because the governments will at some point take control of the financial systems and secure a minimum functionality.

In the ultimate crisis the production of goods and services in the society has fallen 30% or more and continue to fall. Investments or building activities have totally halted. There is mass unemployment, 30% or more.

The financial system has nearly totally collapsed, and is only able to support the daily payment for food, energy and other necessities. The production facilities and organizations of the society have fallen apart 30% or more due to lack of maintenance, which means that the society is not able to recover in a short time.

THE END OF THE CRISIS

Before the crisis can end, all sell-offs to pay back on loans must be fulfilled. Then every actor in the society has to accept their losses. Debts that actors are not able to pay back must in some way be nullified. Then all the pieces remaining of the former companies must be fixed together again into new functional units. Then the society can slowly rebuild its strength.

THE CAUSES OF THE CRISIS

An important cause of the crisis are over-optimistic companies and individuals during the foregoing period of economic growth. They tend to believe that the general growth will continue forever without interrupting periods of economic decline. They also tend to overestimate themselves and think they will be a winner in the competition against other companies or persons, not a looser, not an average performer, but the winner.

This optimism, which is a general human property, make all actors borrow massive amounts of capital and invest them in homes, luxury objects and expansion of their business. This expansive behaviour tend to accelerate for quite a long time untill in meets the wall.

Another cause are executives in banking companies tempted to lend out as much money as possible to the borrowers, regardless of the consequences for the bank and the borrowers, because this behaviour gives the executives an enormous short term personal gain.

HOW TO AVOID FINANCIAL CRISES

Future crises can only be prevented by hindering financial institution lending out more money to anyone that the borrowers can pay back in a comfortable way. This can only be done by governmental regulations that set clear criteria that must be fulfilled when a certain amount of money is lent out.

Also banks must be forbidden to establish employment contracts for their executives that reward them directly for the amount of mortgages they establish.

Amazon's Best Investment Book Reviews: Have You Been Brainwashed?

Most popular investment books are published for the already rich and famous, by an industry that has become just too good at the business of selling books. Rarely will a publisher take a chance with the work of an unknown author. Certainly, it's a no brainer to sell a Jim Cramer, Peter Lynch, Robert Kiyosaki, or Maria Bartiromo effort while a uniquely new approach to solving the puzzles of Wall Street, presented by an unknown writer or commentator, requires some major financial risk.

Big publishers want to sell already big names; discovering new ones is not in their wheelhouse. Are they responsible for the problems in the financial markets? Of course not, but they do have a perverse, if indirect, impact. By constantly publishing the same Wall Street friendly message, they contribute to the brainwashing.

Without a wider distribution of new ideas based on old wisdom, Wall Street as usual remains Wall Street as usual and the average investor remains uninformed and ill advised about the dangers of the financial markets. The biggest investment mistake generators are cleverly ignored by most of the books I've read about investing--- even compounded.

The new generation focus on calendar year instead of market cycle performance; the worship of portfolio market value alone, for all securities, even those purchased solely for income production; the use of gimmicks and products instead of securities for portfolio development; the acceptance of speculations as acceptable, "alternative" investments.

Appreciating the differences between investing and speculating, and learning what to expect from your securities in cyclical markets are things that investors must learn about. Have you been brainwashed? These 15 Amazon members are learning to think outside the Wall Street box, without any help (or investment) from publishers:

1) Super Investing Book: I've read a bunch of books on investing and money management, and this is the best, BY FAR!!!!! It's so good, and refreshing, that I've read it twice. (R. Q. A., Bryan, Texas)

2) Back to Basics: This is an eye-opening and intelligent book, which at once offers an analysis of the investment industry and a practical guide for non-professional investors--- a clear set of economic principles mixed with clear commonsensical advice. The author--- describes how to benefit from the ups and downs. Great book. (Professor P. W., Jerusalem, Israel)

3) The Best Investment Book I Have Ever Read: For skittish investors such as me, [the] unique Working Capital Model reduces the emotional factor by taking the emphasis off market value and focusing on growth of working capital. I implemented and followed the trading strategy myself. You would do well to buy this book and read it two or three times. It will save you [from] a lifetime of mistakes that come from following conventional wisdom. (D. J. F., Peoria, IL)

4) Easy to Understand, Even for Non-Investors: This book seems to be much easier to understand than the stock market trading systems advertised on TV. (P. L., Manchester, CT)
5) Happy User: You can take this system to heart--- and to the bank. It works for me. (L. J., Phoenix, AZ)
6) Unique Advice that Stands Out From the Crowd: This is one of two [books] that stand out. Besides being written in an entertaining and irreverent style, it has immensely practical advice. Focus on making money on the market's inherent volatility vs. trying to guess what's next. Saves a lot of time and appears to work. (C. M. Rakes, Annandale, VA)
7) An Enlightened Self-Managed Investor: Not only did I identify many many mistakes that I had made thru the years, but the logical approach outlined [in the book] has to make sense to anybody who has tried to get meaningful portfolio guidelines for future investments tailored to individual needs. Great Book! (A. C., West Palm Beach, FL)
8) Right on the Money: I didn't want to put the book down until I was through. [The] trading strategy is refreshing information that should make a lot of people a lot of money with less risk. (D. M., SC)
9) Investing Made Successful: I heard [the Author] on a talk-radio program and was intrigued by the premise of the book. After reading it, I'm convinced. I'm migrating from mutual funds to individual, high quality equities. [The book] was a slap in the face to make me stop my destructive investing habits. (G. P., Colorado Springs, CO)
10) What a Great Read: This is really an incredible book--- [it] has incorporated very creative insight with some highly original thinking to produce one of the best "investing manuals" ever written. I wholeheartedly endorse this book! ("Jointhefreedom", NM)
11) Courage To Go Against the Pack: The [book] is written in an exciting, enthusiastic, fast moving, style that reads like a novel. Should I ever venture into the stock market, it will be with this book. (S. M., Virginia Beach, VA)
12) L-O-N-G Overdue Investment Strategy Advice: I've long been skeptical of the generic advice handed down to me by advisors over the past--- I don't know any wealthy people who do this. Well now I have a frame of reference for my doubts about the system and a simple plan to take control of my investments. (B. S., Vancouver, BC, Canada)
13) A Must Read To Save Your Money From the Sharks: Written in a conversational style with plenty of humor, this book gives you the questions and answers you need to keep and increase monies that are being put away for retirement. I have purchased three books already and am purchasing five more to give to friends and relatives--- (R. M., San Jose, CA)
14) Brainwashing of the American Investor: Finally the truth! What an eye-opener to see how the markets, and the people behind the markets, have manipulated the average investor over the years. I highly recommend [this] book for your next financial read. (A. J. L., Ft. Pierce, FL)
15) Profit Like a Trader; Sleep Like an Investor: The technique or strategy presented is almost a "why didn't I think of that?" The idea is to run your portfolio the same way you would run a business---not a get-rich-quick kind of plan. You just focus on the essential measures of quality. The key is to maintain your plan during the slow times and reign in your greed during the boom times. (P. G., Moon Township, PA)

Today's publishing industry has a no-risk attitude, and those that are brave enough to deal with new authors are intimidated by the full-return guarantee demands of the bookstores. Stuck in the middle with no choice, most new authors must turn to self-publishing.

The reviews above describe a book that Wall Street wants to keep in the closet, an educational and strategic breakthrough that would have allowed most investors to avoid the bubbles and derivatives that caused our current financial woes. There are probably others--- below the 200-level in all Amazon's best categories.

Last Bank Standing - The Wall Street Mega-Crash

Dateline Washington, October 19th (get it?) 2010: the Peoples Bank & Trust of America has now established itself as the only bank of any kind in the USA, totally owned and managed by the US House of Representatives. A 2/3 majority must now approve all investment banking transactions; your district representative's staff reviews individual mortgage applications; and all 401(k), IRA, and remaining employer pension assets have been rolled into the Social Security Slush Fund.Only federal and state elected officials are exempt from the 45% all purpose Income Tax. The estimated time to bring new companies public is 4.5 years; all individual account dividends and interest are paid directly into your IRS "grabber" account; CEO's salaries are limited to 50% of the amount paid to a first year congressman, and any government budget shortfalls are withdrawn from corporate earnings before any corporate obligations can be dealt with.All employees receive the federal mandated minimum wage, except senior executives who are limited as mentioned above. Scary? This is a scenario that could play out if Congress (or the SEC) does not come to the rescue of the credit markets. You missed your opportunity to help stop it, but chances are a fix is on its way.How many more businesses, jobs, and hopes will be killed by this irresponsible Congress? When will the average blogger realize that when a corporation fails, we all suffer? One would think that the informed and enlightened could take time out from their texting for a little research and education. Instead, they show their power by influencing public opinion numbers and the marshmallow politicians who worship them. As economist Irwin Kellner and I have pointed out, this is no bailout and we are not nearly approaching a recession.Kellner's September 28th Market Watch article points out ten major differences between now and then:

(1) In 1929, the DJIA plunged 40% in two months vs. around 30% in about a year.

(2) In 1933, the jobless rate was 33% vs. 6% today.

(3) The GDP shrank 25% then, but has increased 6% now.

(4) Consumer prices actually fell 30% then but haven't ever since.

(5) Home prices dropped 30% then, but only 16% from the recent bubbly highs.

(6) 40% of all mortgages were in default then vs. only 4% now.

(7) 9,000 banks failed in the 1930s compared with just 25 or so (bigger and broader based ones) recently.

(8) The Federal Reserve reduced the money supply,

(9) raised interest rates, and

(10) raised taxes on foreign imports.

Further, Kellner points out, we now have automatic stabilizers, deposit insurances, and market trading restrictions as protective elements. Today's Congress however, has never been good at connecting dots, has accomplished nothing under an unpopular president, and is ignoring its role as the primary creative force in today's problems. This transfusion is needed because: bad laws have obscured the values on financial institution balance sheets, and have created a clot in the credit arteries that keep the economy alive.Educate yourselves on the Accounting Rule's that require institutions to book paying assets at pennies on the dollar. Find out why institutions are afraid to loan money to one another--- over night, at any rate of interest--- strangling the credit markets. Doing nothing is killing jobs, killing companies, and deferring retirements for those who were counting on 401(k) and IRA dollars to provide them with income. Congress, of course has an old-fashioned pension plan, so it is unaffected by such financial realities.Investigate the relaxation of lending standards that Congress orchestrated over the past few administrations, before blaming the companies that then extended credit to many speculators and other buyers who falsified application papers. Learn how the SEC was prohibited from regulating the CDOs and other multiple-leveraged credit market speculations. There are as many culprits outside the corporate executive suite as in it.

Congress is bursting with pride over bringing some of the Rich and Famous to their knees, and capping some of their obscene compensation arrangements at still shareholder pillaging levels. I've spoken often about how these salaries need to be controlled. But the multi-level-mortgage-marketing schemes that Congress encouraged must be unbundled somehow, and a buy out is the proper vehicle.Congress has punished the entire world with its attack on Wall Street, and both parties are to blame. Representatives of the states listed below voted "no" to the credit transfusion, causing death and destruction that, in many instances, cannot be recouped. We have to replace them with better decision makers, representatives who can think in economic terms when they have to. The number and letter code after the state designation indicates the number of representatives and their party: AL-1R, AK-1R, AZ-4D4R, CA-15D9R, CO-2D2R, CT-1D, FL-1D13R, GA-4D7R, HI-2D, ID-1R, IL-4D5R, IN-3D3R, IA-1D2R, KS-1D2R, KY-2D2R, LA-2D3R, ME-1D, MD-2D1R, MA-3D, MI-3D6R, MN-2D2R, MS-3D, MO-2D3R, MT-1R, NE-3R, NV-1D1R, NH-2D, NJ-3D4R, NM-1D1R, NY-3D1R, NC-3D5R, OH-3D7R, OK-3R, OR-3D, PA-3D7R, SC-1R, SD-1D, TN-1D4R, TX-8D14R, UT-1D1R, VT-1D, VA-1D5R, WA-1D3R, WV-1R, WI-1D2R (Names withheld, but available from the author.)On Friday evening, candidates Obama and McCain gave their support to the Capital infusion, but neither bothered to explain why--- a huge audience was ready to soak up the information. Over the weekend, both attended meetings to support the plan and to generate support from their respective parties.

Is there enough time left to find a hero?