Diverging Paths

Great article in Yahoo! Finance on how we ended up in our current economic situation.

15 Things You Need to Know About the Panic of 2008

It's a good read.

Everyone seriously needs to check out this CNN article, written by Glenn beck in February 2008.

" • DEFCONOMY THREE

How you'll know we're here: Some banks begin to crack under the pressure of continuing write-downs and mounting defaults by consumers. A national or large regional bank finally collapses, triggering hedge fund failures and general chaos on Wall Street, potentially leading to a 1987-style market crash.

Odds we get here: Very good. Roubini says that we'll likely socialize the losses, 'effectively nationalizing the mortgages or the banks.' It would be, he told me, 'like Northern Rock (the large bank in England that was recently taken over by the British government) times three.' He thinks the stock market will head south throughout the year as fears about a severe recession are confirmed.

• DEFCONOMY TWO

How you'll know we're here: Most forms of credit (both to consumers and businesses) become virtually nonexistent. That results in a 'vicious circle' of additional write-downs, stock market losses, and bank collapses, which leads to even less credit being available.

Odds we get here: Good. Roubini says that credit conditions are becoming worse everyday across a variety of markets and won't be getting better anytime soon. Without extra credit available, people might have to actually (gasp!) live within their means."

The next time someone from the Fed or the guv'ment tells you about how we need to pass a huge bailout to save the economy, and that none of this could have been predicted, call bullshit on their claims. There were economists warning about our current situation over six months ago. The question is, did our government ignore them? Or did they start planning how they were going to save their Wall Street cronies?

Just found a great article from The Motley Fool on why AIG's Failure Is So Much Bigger Than Enron.

"Enron -- reviled, fraudulent Enron -- destroyed more than $60 billion of shareholder value.

AIG (NYSE: AIG), which the government just took over, has destroyed $180 billion already -- and it almost brought down our entire financial system."

-=snip=-

"Apparently, AIG didn't realize that almost 40 years of 15% growth multiplied by a big fat zero equals just that: zero. It didn't consider that its leverage left it exposed to a liquidity crisis, and it didn't consider that its non-insurance businesses could bring down the whole company.

In all fairness, management did not realize how much exposure it had to CDOs backed by subprime loans. This may or may not be true, but Buffett has famously stated that each one of these prospectuses has something like 15,000 pages, so it's unlikely they were gone through in any great detail.

But investing in things you don't know is a huge risk, right? And that risk was compounded by having so much leverage. The fact is, the more leverage you have, the more careful you must be with the investments you hold, because your own capital structure is that much riskier.

AIG did nothing of the sort. And so even though it has a rock-solid, wonderful insurance franchise, its greed and lack of care in its investing decisions took down one of the world's great companies.

What a shame. What a shame for all of the investors who lost billions thinking that this company was conservative. What a shame for taxpayers like you and me. What a shame for the United States' reputation as a beacon of financial stability and conservatism."

The Motley Fool is offering a very informative collection of articles analyzing our current economic situation here. Worth a close read.