I.O.U.s: Assets must deflate to their proper values...

"That's as good as money sir. Those are I.O.U.s"_

From Dumb & Dumber

It has been a breathtaking week. Last Friday, world markets were down $7 trillion dollars:

World market losses
-$7 trillion dollars
http://www.theaustralian.news.com.au/story/0,25197,24479442-643,00.html

The American stock markets alone lost 2 trillion of this amount. Over this past weekend, European governments have formed a coalition to put together a package of $2.3 trillion on line to try and protect the banks world wide.

European tax payers
+$2.3 trillion dollars
http://ca.news.finance.yahoo.com/s/13102008/2/biz-finance-european-governments-2-3-trillion-line-banks-ease.html

Ultimately a giant bailout package was needed to keep the gears of the banks in motion to prevent a seizure of banks. This was required to prevent markets from going further into free fall. The dollar figure Europe has provided has dwarfed the Bush administration's $700 billion rescue, which only last week seemed huge:

USA tax payers
+$0.7 trillion dollars
http://news.bbc.co.uk/2/hi/americas/7651823.stm

So the total bill from tax payers worldwide was a grand total of 3 trillion dollars --that's $3 with 11 zeros after it and this demands a flashing number:

Thanks to everyone who pays taxes for these huge bailouts ; -) $3,000,000,000,000

As a result, markets have climbed significantly this Monday to recover about a quarter of the losses from last month. Nations act markets soar
The interesting thing here is that tax payer money is now propping up the bank system. Now the collapse happened when private money was used to prop up the markets using imaginary highly inflated ASSET (HOUSING BUBBLE) money, created through Sub-Prime mortgage lending and other forms of bad lending based on "stated income". Mortgage contracts were signed world wide (and not only in the US) to allow low income families to buy over priced houses in a feverishly exited speculative market they could not afford. These toxic mortgages become unfordable when the introductory artificial rate of monthly payment expired to follow current market rates which are unaffordable. These purchases of overpriced houses were essentially IOUs (certificates saying I owe you the money) and later became worthless pieces of paper floating around the stock markets. The certificates labeled Collateralized Debt Obligation were referred to as toxic dept by 2008 as soon as the markets realized they had been holding onto an empty asset.

I.O.U: You've gotta watch this short clip from Dumb and Dumber:

"Ahhh -- Where's all the money?"
"That's as good as money sir. Those are I.O.U.s"
"Go ahead and add it up. Every cent is accounted for.... you might want to hang onto that one"

Going back to reality, this fake money bubble (relying on people to pay for artificially inflating housing asset prices) came from people like this well known foreclosure guy, Casey Serin, the poster child for everything that went wrong in the real estate boom:



The trouble is, after the stock market TECH BUBBLE crash of 2000, we created a MORTGAGE BUBBLE. Now that the spectacular bubble has popped and has almost crippled the financial system worldwide, we have found there is no more bubble. Unfortunately, this has put the world economy into a dicey situation. I myself was hoping that the next BUBBLE will be green renewable energy. The trouble is, when demand for energy goes down during a world recession (in this case it is fossil fuels) the price of fuel goes down too. When the price of fossil fuel goes down, there is no incentive to invest in green markets as they will not offer a profitable alternative. At the moment I see we have got ourselves in a stale mate situation [a term used in a game of chess].

Intuition tells me people are paying for their madness and it will take a while to get out of this pickle. All I can say is I don't think there is going to be much growth going on (certainly not in assets) until we weather this financial storm. (Even Speilberg is affected by the money crisis). Assets will have to deflate to their proper values for the system to work properly which means house prices going down. Unfortunately I believe this could take quite some time.