The financial system is very much like a circulatory system that connects people together. Although the people are the financial institutions and the blood is the money. If blood does not flow from one person to the next, it shuts down. So we needed an EKG shock to bring it back to life. The fed and treasury have started deliver an enormous amount of liquidity to pump the blood through the system. We’ll see if this works.
There are several blockages throughout the system, in fact there is not much blood flowing in any direction. Small businesses are getting the crunch as lines of credit disappear and people tighten their wallets. The US Consumer Society has all but shifted in a few weeks, the more frugal we are the more we protect are severe sickness from getting worse. Yet, we need to get out and move on to get out of this sickness. Although, the circle comes around again as the US Debt is now $516,000 per US Citizen and the American population has no savings and no credit, foreclosing and filing for banruptcy as housing plummets and risk taking is gone. We are more a socialist country today than we have ever been, frozen from the invisible hand swooping away the excesses we have enjoyed.
Then there are the financial institutions that loaned to companies whom we can say are the cells in the blood. The companies created very leveraged balance sheets as they moved enormous amounts of debt off the balance sheet and into SIV/SPV companies. It would be like taking out some of the negative cells out of the blood system. It looks healthy, yet someday need to come back to the system. Then, rating agencies took these negative cells and made them feel healthy with good ratings. Some would go from CCC to AAA with some insurance. AIG was one of the providers of these credit enhancing insurance. Unfortunately, with prices plummeting on homeowners and liquidity and movement of cash stalled. The whole system is about to die. All at once, the negative cells are moved back into the blood and getting called on as people want liquidity from their hedge funds, banks and money markets. The blood is draining fast and the pulse is sharply lower. So the US prescription is to re-capitalize or loan money to the major banks who provide liquidity and stabilize the economy. Right now, we are still in critical condition, yet the more we learn the more the market has already considered.
The systems have been identified, which is important going into surgery. We have started and brought some stability as the market volatility is greater than ever before. We have not flatlined, it has felt like it and there is more to come. Now we know we need to do more.
We saved the major institutions and the other banks will start to consolidate to strength, yet consumers not get jolted with the pains of low blood flow and blockage. These pains can only be worked out by having surgery on them one by one. So look for mortgage reform and more policies to help middle America or we may just flatline.