This is What the Economic Crash Will Look Like
From WSJ.com:
Foreclosure on Las Vegas Casino to Begin
The developer of the Cosmopolitan Resort Casino, a $3.9 billion condo-hotel complex on the Las Vegas Strip, has been notified by its primary lender that it will begin foreclosure proceedings.
The move by Deutsche Bank AG, the lender on a $760 million senior loan, comes after the developer, Ian Bruce Eichner, wasn’t able to finalize a deal for new financing amid the credit crunch. Mr. Eichner in late February cut a tentative deal with two of his other lenders, Global Hyatt Corp. and New York hedge fund Marathon Asset Management, for a possible rescue of the twin-tower project.
I’m not one for doomsday scenarios. The coming crash will not be the end of the world as we know it. But it will be very unpleasant in the short term, and the aftereffects will linger if the Fed continues to inflate away the dollar to try to prop up Wall Street.
As I explained earlier, the subprime mess basically means that our economy has been growing for the past several years based on lending that was based on bank assets, which included a great many mortgages, and those mortgages were based on home valuations that were too high because the system fell into moral hazard. Nobody can wave a wand and restore the value of those lost assets. Not Bernanke, not Bush, not George Soros or Warren Buffet. Not even Congress giving us back tiny scraps of our own money and expecting gratitude for it. Nobody.
The banks must cut their lending to levels that are proportionate to the real value of their assets. And that means that a whole lot of businesses will be denied loans, and other businesses will pay much more for credit than they did before. Basically they’ll be unwinding the loans that they never would have made had they known what their assets were really worth. Without those loans, businesses will go under, and the liberal press will give us the usual “Women and Minorities Hit Hardest” stories.
But then it will recover. Unless the government gets too deeply involved and really makes a mess of things, the economy will shrink to the point at which it would have grown had the assets not been overvalued, and then it’ll start growing again. Until then, I wouldn’t invest much in stock. Heck, I’m even worried about investing in dollars, since they’re declining in value, too. But you gotta own something, so pick your assets wisely.