Why is There So Much Confusion in the Markets?

The experts are confused.   Bank presidents, University economics professors, CEO’s running multi-billion dollar International companies, large fund managers, execs of the federal reserve banks, and even our politicians are totally stumped by the chaos in the markets.   Exactly what is happening and why?   A brief chronological review of the fundamental facts actually helps to answer the why.

The mortgage market crumbled, the result of greed, lax standards for income verification, and sub-prime lending.   Partly because of that, but also being steered by it’s own forces, the real estate market hit the biggest speed bump in decades.   Foreclosures overwhelmed the capacity of institutions to handle the administrative nightmare.   FHA was tasked with the responsibility to handle foreclosure workouts but congress has refused to provide the $65 million FHA needs to hire staff.   Could it be congress is preoccupied with bigger problems at the moment?

In a parallel universe, but intimately connected to the mortgage market and the real estate industry, the banking industry started cracking under the pressure of massive miscalculations and mismanagement.   A small crack in the damn started to get wider–let’s call it the credit crunch.  

Inevitably the financial markets began to feel the crunch.   Support for 70% of the entire home mortgage business collapsed as the feds took over Fannie Mae and Freddie Mac, unprecedented government intervention.   Large banks began to fail, red flags of a pending disaster.   Major corporations unrelated to the banking industry, like Caterpillar, are unable to tap into their large commercial lines of credit.   In crisis mode, these companies seek direct financial help from the feds, which is rapidly buying up more and more of private industry as fast as money can be printed.   (In high finance, ownership is often clothed in the form of lending with tight security provisions and killer remedies.)

The credit crunch deepened in the U.S. as the average Joe began to panic, and collectively Americans withdrew over $81 billion dollars from their banks as of this writing.   Some are told they cannot get their funds.   These people tell 20 other people.   Some are saying, “I’m not worried.   This too shall pass.”   But at home, they don’t believe that.

It is no leap of logic to connect the dots from the U.S. to International financial markets.   The credit crunch deepened as banks’ cash reserves dwindled from withdrawals and as banks throughout the chain of electronic transactions began to put holds on their available cash reserves, fearing that if they let go of those precious funds, they would never see them again.   Strong borrowers cannot get loans, and the text book economics phrase “self-fulfilling prophesy” has meaning once again.

Fear spreads and the stock market tells the whole story as it mathematically maps technical charts clearly showing what everyone is thinking.

Why don’t the experts know what to do?   First, we have moved from a simple to an exceedingly complex economic system, comprised of thousands of interdependent variables, controlled by a multitude of individual, corporate, and government influences.   Since the great depression, we have created millions of laws, rules, regulations, and systems at the city, county, state, and federal levels.   On the bench judges have created millions of interpretations, each finely tuned to the specific facts of the case.   Politicians have added millions of nuances to economic controls of private industry, and have steadily replaced the power of the federal government over private market forces.   Between the “fine tuning” of the federal reserve system with it’s monetary policies and the power of fiscal policy (government spending and taxation), virtually no one has the ability to comprehend all of the interdependent forces at work.   It would take a super computer   to compile and assimilate all the variables, and then you would need a human to interpret, which we already know they cannot do.

Go beyond the borders of the U.S. and add to the mix the European Community.   You think there is chaos on the American financial scene?   You haven’t seen anything until you’ve tried to figure out how European countries function on a cooperative economic level. Yet, our economic system is no longer just national–it is International.   We do not function in a vacuum.   The entire world economic system is intimately interconnected.   If you understand statistics, you understand how increasing the variables dramatically increases the complexity of a given outcome.   In simpler times our economy could be explained.   Now the variables have exceeded our capacity to control and comprehend our current condition.

Of course, our executive and legislative branches of government claim to have the fix for $700 billion, and promise many new laws in 2009.   Congressman Brad Sherman warned us that this bill was nothing more than a sloppy guess full of pork barrel programs for special interests that would stick taxpayers with a huge bill.   The Congressman alerts us to a number of very dangerous events going on behind the scenes.   There is a common pattern we see in every major American crisis:   out of fear Americans turn over more of their rights and power to the Federal government.   In the past 60 days, the U.S. government has taken over more of private industry than in all of American history.

This answers the question of what is happening, at least superficially.   As to the question why is all this happening, know we know why no one knows the why.   Since causation cannot be mapped, the route to a quick recovery is not apparent.   How does a severe wound heal when you have no miraculous medicine?   Slowly.   Let’s just hope our brilliant politicians don’t make things worse.

[This article deals only with economic issues.   It does not delve into the subject of hidden agendas.   There can be no doubt that the players listed in the first paragraph all have hidden agendas driving what they do and how they justify their actions to the public.]

Last Updated on October 11, 2008 by Chuck Marunde