CDOs, Subprime Mortgages, Rising Debt…Investors Are Looking for Trouble

Gloom and doom ain’t what it used to be.

Our old friend Dr. Gary North was – and still is – a master of the Armageddon genre. The turning of the millennium seemed to cry out for some kind of catastrophe. Gary came up with what seemed like a suitably disastrous scenario – Y2K. Remember that? It sounds like a joke now, but it was no joke then.

Computers are set up to do things at certain times. Gary guessed that when the world’s computers got to the year 2000 they would freeze up. They hadn’t been programmed to go beyond December 31, 1999. Even if most computers made the transition gingerly, there were so many computers, handling so much data, some of them were bound to go haywire. It wouldn’t take many errors, he figured, for the whole data system to collapse.
People wouldn’t be able to use their credit cards. The government wouldn’t be able to send out retirement checks. The railroad yards and truckers would lose control over their freight. Stores wouldn’t be able to restock their shelves. Municipal water systems would shut down. Deprived of food and water, city dwellers would go on a rampage and many thousands would die.

But then the big day came and nothing happened. As far as we know, not a single computer-controlled system in the entire world failed because of a date-related malfunction.

Poor Gary. He had moved his family to the backwoods of Arkansas in order to avoid the urban riots, starvation and lawlessness that he saw coming. He had staked his reputation on Y2K trouble; his fortune too. But the trouble never came. Those of us who knew him felt sorry for him. We were afraid he was depressed. So we called him up with sympathy and consolation.

“Too bad about that Y2K,” we would say. “No collapse…no panic in the streets…no mass starvation. Really, too bad.

“But don’t worry. There will be plenty of other crises. Maybe this global warming thing will catch on. Maybe the whole planet will fry. Or bird flu could turn out to be a mass killer.

“And we’ve heard that there is a meteor that might strike the earth and wipe out all human life.

“So, cheer up.”

You know, the life of a financial advisor is not easy. We’ve been in the business of publishing financial analysts and advisors for nearly 30 years. We’ve seen plenty of them come and go. And many have gone under very unpleasant circumstances. One whom we knew was shot dead on the beach. One went to jail. Another one went crazy.

From time to time, a young man will come to see us. He’ll say he wants to get in the business. So, we warn him. You don’t know what trouble is, we say, until you become a financial analyst. When your recommendations don’t work out, your readers will despise you. And when you do well, they’ll be disappointed you didn’t do better. Worse, you might begin to think you really know what you’re talking about. And then you’re completely useless – and a danger to everyone, especially yourself.

So take our advice, we tell them. Go into law or dentistry. But if you decide to go ahead…remember, you can always come to us for advice and help. And if things really go badly for you, we always keep a loaded pistol in our desk drawer; we hate to see a financial analyst suffer.

But the trouble with this modern world of ours is that there isn’t enough trouble in it. There used to be more. Which is what made the good old days so good. Back then, people had real trouble and they really appreciated it. Now, they just toss it off. They’re not worried about it because they don’t know what it really is.

When we were young, we fully expected that we would never be old. Nuclear war or runaway population growth would see to that. As to the former, the threat was very real. “We will bury you,” said the leader of the Soviet Union, in the august chamber of the United Nations one day. We thought he meant it. And during the Cuban Missile Crisis, the world was probably only an upset stomach away from annihilation. If either Kennedy or Khrushchev had been in a bad mood, we might never have lived long enough to enjoy this great economic boom.

There was also the danger of too many people; India could never feed herself, the experts said. Food production worldwide couldn’t keep up with population growth. Hundreds of millions would starve; it was only a matter of time.

As to financial matters, the average family was only a paycheque or two from total disaster. Losing a job could be catastrophic. No one had credit cards. There was no EZ mortgage finance available. Besides, adults back in the ’50s and ’60s were deeply suspicious of debt. It was the lesson they had learned during the Great Depression. That generation knew trouble…real trouble.

I often compare my own situation to that of my father. He was born in 1921. His father died in 1923. And there he was. The family was so poor that to eat, they had to dig up potatoes out of a field where the farmer had missed them. And to keep warm, he walked along the railroad and picked up coal that had fallen out of the rolling stock. Then, when he was 10 years old – along came the Great Depression.

In the 1930s, one out of every four American workers lost his job – with no unemployment insurance…and no welfare system…to fall back on. My father had a knack for being in the wrong place at the wrong time. He tried to escape the poverty of his family by joining the army – in 1939. Then, he thought he had gotten extremely lucky when he drew the best assignment in the army; they sent him to Hawaii. He said he was recovering from a hangover on the base when Japanese airplanes appeared overhead.
They tried to kill him for the next three years.

But Americans had it easy during the war, compared to others. Britain was bombed for months. France was occupied…Italy and France were both battlefields.

There were severe financial shocks, too. Britain went broke. France had to form two new governments…and replace its currency – again, twice. But, imagine the time of it your parents and grandparents would have had, had they lived in Russia, China, India, Germany, Argentina or Japan: War. Hyperinflation. Starvation. Police repression. Mass arrests. Occupation. Bolshevism. You name it; they lived it.

As long as the generation that had lived through the Depression and WWII were in charge of things, America was in pretty good shape. But in the 1980s, a new generation – our generation – took over. And there were three key events during that period that caused trouble – as we had known it – to take a holiday.

First, there was the Crash of ’87. Stocks fell hard. But then, they got right back up again, as though nothing ever happened. Then, people began to think that crashes were no trouble. Even if stocks fell, they’d soon be on an upswing again. Books began to appear such as “Stocks for the Long Run”. People began to believe you couldn’t go wrong in stocks, no matter how much you paid for them.

Second, in 1989, the Berlin Wall was dismantled. Suddenly, we no longer had any enemy worthy of the name. We weren’t going to be exterminated in a nuclear war after all. From here on, it would be clear sailing.

Third, Ronald Reagan and the neo-cons transformed the Republican Party. “Deficits don’t matter,” said Dick Cheney. They don’t matter to the Democrats. And now they don’t matter to Republicans either. After the ’80s there was no longer any organised political party in favour of fiscal and monetary conservativism.

With these changes in place, trouble could take a holiday. Since then, every warning has turned out to be a false alarm. The Tech Bubble burst and it didn’t really matter. The recession of 2001-2002 was so mild few people even noticed. Even terrorists disappeared from North America after the stunning attack in 2001.

But the trouble with trouble is that when you don’t have enough, you have to go looking for it. That is probably what drew Britain, America and Australia into Iraq. And it is the lack of financial trouble that is drawing people all over the world to do strange and troubling things. What homebuyer would sign a contract where his payments automatically went up to more than he could afford, except someone who wanted problems? And what is a subprime ARM but an invitation to rumble? And who would buy a package of these Collateralized Debt Obligations but a moron…or a man looking for trouble?

As mentioned above, despite the crack-up of two Bear Stearns funds, the Financial Times reports that investors continue to put record amounts into hedge funds. And from Miami comes word that 20,000 new condos are under construction – even as the American property market sinks. Savings are at a record low. Debt is at a record high.

People looking for trouble are bound to find it.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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2 Comments on "CDOs, Subprime Mortgages, Rising Debt…Investors Are Looking for Trouble"

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I often wonder about the doom and gloom thing? There is a lot of doom and gloom people sayin things are gettin bad or something nasty will happen. I agree that maybe they want it to happen, yet, that doesnt mean that everyone has to agree or share in their loathing.


Regarding Y2K:

Anyone working in the MIS profession could have told your friend that it was not an issue. I ran a small shop and we were dealing with the issue in the 80’s.

In looking for disaster, such as a potential credit contraction, one has to ask what could be done to realistically prevent or mitigate that “expected” disaster.

Looking at hypothetical solutions and short, mid, and long-term consequences would seem to be a safer way of picking an investment path, than taking a worst-case scenario and banking everything on that.


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