Many more shoes to drop in 2010

Next year, 2010, should be pretty interesting. Let’s review the problems that our hard-working government has been industriously ignoring for the past year, waiting for them to explode.

1. Commercial Mortgage defaults: expected to be a multi-billion dollar tsunami that will start in a couple of months and last for about two years.

2. Alt A home loans: ultra-high risk loans which will start to have huge default rates in 2010.

3. Option ARM home loans: ditto.

4. Credit card and consumer credit defaults: The pace is alarming and expected to pick up in 2010.

5. Residential “hidden inventory”: as banks are forced to declare and try to sell all of the homes that have defaulted, which they are currently ignoring in order to make their books look better in the short term, the number of houses on the market will make prices plunge another 10-20%.
6. The federal government needs to refinance about $2 trillion in the next few months, but there are few buyers of their debt. The most recent debt auction didn’t go well at all.

7. The interest rates the government will have to pay will be rising towards more normal levels, causing the out-of-control debt to snowball.

8. If the dollar continues to fall in value, since oil is priced in dollars, there could be an oil price shock, which normally causes recessions.

9. The end of the fake “Viagra recovery” of the economy as the government is forced to end stimulus because of being broke (and inflation fears).

10. With the insanely loose monetary and fiscal policies of the last year, we have the perfect set-up for some of the highest inflation in history (if banks start lending).

11. We are starting to see asset bubbles, from Asian real estate to many types of commodities. The danger is that they will either burst, or continue for a while and cause general price inflation.
12. With our government offering essentially free money, it has spurred a global “carry trade” as investors take almost free money and buy investments. If the dollar suddenly goes up in value, the bubbles caused by cheap money will collapse, causing huge losses around the world. If the dollar drops too fast, the current walk on the dollar could become a run, where people are scrambling to get rid of their dollars while they’re still worth something, driving the dollar’s value through the floor.

13. Social Security is now expected to go broke in 2010. Fixing it will mean probably a large increase in taxes, which will hurt the economy.

14. There is no combination of taxes (which would have to rise by 68% to even stabilize the situation) or cuts (the federal budget would have to be cut by 97% to stabilize the situation) that will be able to pay off the debt mountain built up in the last year. Now what?

15. The stock market is overbought and weak. A large drop is expected, probably after the holidays. Among professional traders, they are selling 30 stocks for each one they buy – the professionals are taking their money and running. What will happen to confidence and economic activity in general if the Dow drops 4,000 points?


Let’s review the primary causes of the meltdown last year, and what has been done to improve the situation since then:

1. The nine hundred pound gorilla is the Community Reinvestment Act, under which Fannie Mae and Freddie Mac, then all other banks were forced to offer ultra-high risk mortgages, or they could be prosecuted or fined, and/or their branches shut down. Once serious enforcement started in 1999, an explosion of ridiculously bad loans resulted (obviously, it was government mandated). This year the CRA has been beefed up to be much riskier, with more money involved.

2. Looser finance rules allowed much more risk and leverage. A bill addressing this has just come out. It remains to be seen whether this will be an improvement.

3. The integration of global finance meant that a problem in one place affected everyone. There has been increased integration this year through the G20.

4. Rating agencies were asleep at the switch, and should be prosecuted. Nothing has been done about this that I know of.

5. Easy, cheap money encouraged people to spend more and take more risks. This, of course, is now far worse, since money is cheaper and the Fed is flooding us with it.


Hmmm. Almost everything has been made worse since the last collapse. So, There are fifteen huge problems about to converge in 2010, and our government has done nothing to prepare for or prevent them, plus they have worked hard to do nothing about the original causes of the problem. Interesting strategy.

I guess the take-aways are that anyone buying stocks now, or real estate, or new cars and such are crazy. We have seen no desire by our government to improve things. They are very keen to bail out their friends and spread money around to their supporters, but head off huge problems or make the economy more sound? Absolutely not.

Anyone who buys the government’s pap about “Gee whiz, the recession is over and that was a close one.” is going to make a lot of bad decisions based on that viewpoint. This is the time to get your money out of dollar-denominated assets, out of stocks, out of real estate, and hunker down. Doing otherwise will put you in a lose-lose situation later. There is a way to win in a collapsing economy, but doing the same things as you did in 2007 is not it.