Tuesday's Market Meltdown - Greenspan's Invisible Hand

[Ugnmoose]

http://www.informationclearinghouse.info/article17214.htm

Yesterday’s stock market freefall has Greenspan’s bloody fingerprints all over it. And, no, I’m not talking about Sir Alan’s crystal ball predictions about the impending recession; that’s just more of his same circuitous blather. The real issue is the Fed’s suicidal policies of low interest rates and currency deregulation which have paved the way for economic Armageddon. Whether the Chinese stock market contagion persists or not is immaterial; the American economy is headed for the dumpster and it’s all because of the wizened former fed-chief, Alan “Great Depression” Greenspan.


Greenspan pumped the housing bubble so full of helium; we’ll be feeling the back-draft for a decade or more. Still, the gnomish ex Fed-master had the audacity to stand in front of the cameras and say, “We have not had any major, significant spillover effects on the American economy from the contraction in housing.”

It’s not just the housing market that’s buckling from the expansion of debt, but the stock market as well. The Associated Press reported last week that, “Investors are borrowing at a record pace to sink into the stock market, and the trend is raising concerns on Wall Street about what might happen if a major correction occurs….The amount of margin debt, which is how brokers define this kind of borrowing, hit a record $285.6 billion in January on the New York Stock Exchange. Such a robust appetite, amid a backdrop of complacent market conditions, could leave investors badly exposed if major indexes are snagged by a market decline. Some could find themselves forced to sell stock or other assets to meet what’s known as a margin call, when a broker effectively calls in the loan".

That last time margin debt was this high was at the height of the dot.com bubble in March 2000. We all know how that turned out; the bubble burst taking with it $7 trillion in savings and retirement from working class Americans.

It all could have been avoided if there were prudent and enforceable regulations on margin debt. Of course, that would have been a violation of the central tenet of free market exploitation: “There shall be no law inhibiting the unscrupulous ripping-off of the American people”.

Margin debt is a red flag that the market is over-inflated by speculation. When the market hits a speed-bump like yesterday the fall is steeper than normal, because panicky, over-leveraged investors start scampering for the exits. This probably explains much of what happened on Wall Street after the sudden decline in the Chinese market.

The problems facing the stock market will soon play out whether or not we recover from this “dress rehearsal”for disaster. America’s huge account imbalances and the massive expansion of personal (mortgage) debt ensure that there’s more trouble ahead.

My take on this: As it relates to the stock market, the massive amount of carry trade (margin debt) that has been fueling and supporting asset prices will once again rear its ugly head when the shit hits the fan, just like it did in 2000, but only worse. Once the panic selling starts taking over the market will drop like a rock. It is only a matter of time. Once again the greedy bastards who run the financial markets will have screwed us again.