This American financial/economic crisis is the product of many years of excess built up in the global financial system. Partly because USD is the world reserve currency and partly because the Wall Street enjoys dominant position in world financial stage, the entire private financial system, including commercial banks, investment banks, hedge funds, private equity corps, investment structures such as CDO/CLO, and other SIVs and SPVs, has, during the past twenty-five years, helped to created a false sense of prosperity in America and other developed world by, like a ENRON corp, hiding the loss/debt but showing the profit/wealth.
The persistent demand for USD denominated assets by foreign central banks and domestic non-bank financial institutions such as Insurance companies, pension funds, mutual funds has contributed to the appreciation of USD assets. That trend prompted the creations of many loosely regulated domestic speculative institutions such as hedge funds, which, with the tremendous funding from the banks and investment banks, try to take advantage of pricing trend with highly leveraged bet. Such demand from speculative financial institutions and the greater willingness for the banks to lend have further boosted the assets prices and hence the sense of wealth and prosperity among most American consumers and American corporations (higher stock prices, higher housing price, higher commodity prices, higher wage and labor compensations etc.)
(To be continued)
Although the foreign demand helps to firm up the marginal transaction prices on these assets, it is, in my view, the highly leveraged positions taking on by the domestic hedge funds generated most of the demand. As I mentioned earlier, these leveraged positions were mostly financed by the banks and other investment vehicles, which are largely hidden from plain sight. Such ENRON like private financial system have been sanctioned by the government and by the organizations like FASB probably unwittingly, and have been promoted by all level of “grass-root” networks including educational institutions.
I think that it is almost impossible for US government to replicate the private shadowy banking system (i.e. hedge funds, SIVs, etc.) existed before 2007 since it is prohibitively expensive to take the tens of trillion of hidden debt/loss onto government balance sheet. With subdued future investment demand from traditionally current-account-surplus nations such as OPECs, China, Japan, etc., and from badly hurt hedge funds and SIVs, the USD assets could enter into a secular downtrend which would likely last a few more years.
We have now witnessed the first and second stage of this “One-hundred-year flood” — the financial crisis and the economic crisis. I think that the third stage would be the social crisis. The high unemployment and high number of family in financial distress over a long period of time would present a fresh test to the democratic political system.
Senator Portman seems to have made some practical proposal to start the debate on the long-term solution of the perpetual fiscal deficit and debt malaise. But so far, there is no taker.
If I knew in 2009 that Federal Reserve 's series QE would not work, then many smarter people should also have known. They knew all along that this is a PONZI game and will collapse sooner or later. They probably want to control how it collapses and who will be affected by it.
The farce on the Capitol Hill only serves a distraction from solving the real problem.
I guess that they now know that the debt problem could not be solved organically, only possible through a massive debt restructuring.
The bottom line: by 2013, the Federal Reserve has failed to elevate the gdp growth onto long-run sustainable growth path, despite trillions of printed money and historical low mortgage rates.
It is the check-mate time.