Proof that the system is unsustainable in its present form

Hurricane Katrina, an economic and national disaster, could have been prevented by spending a small fraction of the cost up front, compared to rebuilding post-disaster. That estimate is difficult to calculate precisely, but it is in the 1% range. At the time, the system was too cheap to spend the seemingly large hundreds of millions, to save a city from a potential natural disaster that had a high chance of occurring in 50 years, finally costing hundreds of billions. But the collateral damage to society is immeasurable: deaths of victims, lost opportunities of New Orleans residents, crime in Houston, and economic prowess that could have been spent on other projects instead of rebuilding a city that already existed. Imagine if the levy's had been built in 1965 and instead of rebuilding Katrina, we build a national maglev train system, such as exists in many other developed countries (China, Japan, Germany). There is even a proposal to build a maglev in Venezuela, certainly not a country most would consider superior to the United States in terms of Technology. Yet while the US is repairing a flooded and toxic New Orleans, Venezuela is building the train of the future. The question is not about politics, it's about an unsustainable school of thought: is it cheaper to build a dam, or to rebuild your entire city?

In another story, overleveraged hedge funds will collapse, losing billions, without any consideration of implementing risk management software, or advanced systems to mitigate market downturns.

There is not much argument to defend the kind of thinking (or lack thereof) that creates such situations. As the American mentality goes, you can just pay your way out, so no one pays much attention to efficiency. But what if you don't have the money? This is a major flaw in thinking of policy makers in government and corporations. They assume that in their lifetime, the government will have the power of the purse to bail them out of any disaster, as the fed is now bailing out defaulting borrowers of loans. We assume we can spend our way out of any bind, and if we run out of money, the fed will bail us out by 'injecting liquidity' into the economy.

Secondly, many countries operate as they do being supported by the US and the US Dollar. If they get into the mess, they can always call Uncle Sam. But who will bail out the fed if the fed collapses? (any collapse will be called "reorganization" or "restructuring" and will be spun and woven into a blanket of keywords and sound bites so it will seem that it is still in control but morphing into an institution of the 21^st century)

It is a difficult scenario for many to imagine, who have grown up in a world fueled by cheap oil, a relatively stable world political scene, and a negative output capacity. However a global meltdown is not only likely, based on all existing evidence, it is highly probable. Not just institutional crisis, not a bankruptcy, major system wide meltdown, to the level that basic infrastructure will collapse, such as we have seen in the mid-west, and people (of all classes) will lack basic services and necessities. The system is connected in ways that cannot be easily explained but can be easily understood. Bank of America has 650 billion in customer deposits, and is a known provider of banking services to small businesses. If BOFA experienced a 'liquidity crisis', and there was any delay in customer deposits, imagine the repercussions in the local economy. Most small businesses run on little or zero credit lines, and depend on weekly cash injections, payments, and invoicing to stay afloat. Moreover, most employees live from paycheck to paycheck, and are 2 paychecks away from major financial disaster. Every company claims they are safe from a crisis, and backup measures can be implemented in the event of such crisis, but none of them can understand how interdependent they are of each other. Moreover, they are taught to be salesmen and believers of their own company, not analysts or skeptics. This means if a crisis was on the horizon, no one inside these institutions would even notice. Any critique of their policies is labeled conspiracy or fanaticism, which is supported by the public view that everything should be happy and pretty, leave the negative dark discussion to crackpots living in the woods. Yet when the house burns, they are apparently surprised how this has happened. After a period of the egotistical denial phase "how could this happen in united states??" there is the blame game, then redemption. What we have not seen is the widespread understanding that the system itself is the problem, not corporate greed, global warming, or criminals, or foreign dictatorships, or drug use by teens, or any other likely societal scapegoat. Just keep shopping and everything will be fine, as bush said in his latest speech, we are a country of Does and Innovators, and we have created eBay; therefore our economy is resilient and capable of thinking and innovating our way out of an 8 trillion USD based debt bill.

Today (August 10^th,2007) on Bloomberg TV, several guests from the banking community assured viewers that the "credit crunch" would not affect Money Market funds. These are treated by many banking customers as savings accounts, many do not understand that a money market account is not a cash account but is a type of debt-security which is sold by the bank to 3^rd party buyers. These buyers could theoretically renege on their obligations, putting the holders of the money market funds out of the money. Under normal circumstances, the amount of defaulting loans is so rare that they can be covered by insurances and profits. But if there is a system-wide 'credit-crunch' (which is incorrectly titled, a better title would be 'money crunch' or 'cash crisis' as there is plenty of credit but not much cash), borrowers might feel they can get a better deal by not repaying, suffering through a bankruptcy or debt restructuring, and renege on their obligations.

In the example of Goldman's Alpha fund, a sophisticated asset diversification tool has been developed, with no clear risk management for losing trades. Of course in the hedge fund world you don't disclose what your quant strategy is, but the fact that the fund has consistently lost money is proof that there is no risk management which is working.

There is no clear conclusion to these thoughts, because we do not have a clear picture of the extent of the crisis, and reports are still being created, investigations still taking place. Many of which will be released on or before Monday, but it is a process that can take weeks or months. We can expect volatility – normally one would say "a flight to safety" but now that bonds and real estate and stocks are all scratched off as being 'safe' – and money market funds are also in question, many investors may not know where to feel safe. www.eliteeservices.net