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December 01, 2008 at 07:00 PM
The last 60 days have changed the world forever. Banking, investing, and even saving now require different considerations. Where and how we work and who we work for were changed. How and when we retire, even if we can stay retired, changed instantly. Institutions, including the government that we relied upon, failed us entirely. Americans went from confident, trusting and optimistic to insecure, wary and pessimistic in just one month.
What happened? It started when IndyMac Bank failed. Then, to prevent the mortgage industry from imploding, Fannie Mae and Freddie Mac were “rescued.” The $360 billion Washington Mutual went bankrupt (previously, the largest failure ever was $40 billion). Lehman Brothers went bankrupt. Bank of America bought Merrill Lynch. Citigroup bought Wachovia. AIG, the world’s largest insurance company, received $120 billion in loans from the Treasury to stay solvent. With no surviving investment banks, the implications for our economy’s health are unknown.
Derivatives share a large percentage of blame for the financial tsunami we find ourselves in. Credit default swaps, one kind of these derivatives, undermined the financial strength of our largest banks, insurance companies, and government institutions. The global value of these CDSs is $55 trillion, more than the total debt of the planet. Here’s the scary part: Bank for International Settlements values all derivatives on earth at $596 trillion. That is more than all the assets of banks and all the resources of the central banks on our planet. How will other derivatives react in our current economic climate? No one knows!
Finally, because other forms of credit have dried up, credit card debt, the most expensive debt, has increased to $2.57 trillion. Many Americans only pay the minimum payment; many can’t even afford that.
