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Dow Ends 500+ Points Lower

By: Steve Johnson

9/15/2008 - 18 Comments

The worst point drop in more than seven years, as two large investment banks become part of history.

Hold on to your hat, the entire financial market could quickly become a level 5 financial meltdown.  The first sign of the problem started when giant investment firm Lehman Brothers failed to find a solution over the weekend and was forces into filing for bankruptcy protection early today.

The problem is that Lehman Brothers has about $600 billion in debt and $30 billion in assets.  Nobody wants to buy that.  Investment brokers have been playing with high risk derivatives with massive leveraged positions for decades. That game is coming to an end.  Last month the government saved Bear Stearns, today Lehman Brothers filed for bankruptcy and Merrill Lynch was purchased by Bank of America for $50 billion.  Each one of these large investment firms has enough positions to bring down the financial markets, but one way or another they have to go.  The days of easy money by repackaging mortgages is over.

The really bad news is that this could just be the beginning, as the Auto, Airline and Retail industries are still hoping for a miracle.

Hoping for the Best

The prevailing assumption in today's economy is that recessions and bear markets come and go, and that things will work out in the end. That's because there's a collective confidence that the market is strong enough to correct itself, and that experts in charge of the financial system will understand how to fix it.  The primary bases for this reasoning is the historic strength of the economy to overcome many recessions and return to create jobs and increase the standard of living.  Besides, the dooms-day crowd has been wrong so many times, that the financial markets are num to hear anything they have to say. 

The real strengths of any economy are in its factories and firms, widgets and workers.  Confidence is not enough. Sincerity is not enough.  We need to rebuild our manufacturing sector.

The government is running out of options.  The last remaining option is to print enough money to keep the system afloat.  But, last month the U.S. Labor Department reported that consumer prices rose by 0.8% last month, twice the 0.4% gain that economists had been expecting. The jump in inflation marked the third straight month of oversized inflation increases following jumps of 0.6% in May and 1.1% in June, leaving inflation rising by 5.6% over the past year, the biggest 12-month gain since January, 1991.

The Wall-Street cheerleaders and the Bush administration and many others that are not facing reality. They believe we are in a short recession that will only last a few months and then the economy will return to its bubble state.  The goldilocks economy is gone forever and we are at the dawn of a lengthy economic decline.

The Dawn of a Lengthy Economic Decline

A 500+ point drop is another reason to realize that we are on the dawn of a lengthy economy decline. The importance of whether or not America is in an official recession is not as important as understanding what's really happening. 

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A Demon of Our Own Design

Why do markets keep crashing and why are financial crises greater than ever before? As the risk manager to some of the leading firms on Wall Street–from Morgan Stanley to Salomon and Citigroup–and a member of some of the world’s largest hedge funds, Rick Bookstaber has seen the ghost inside the machine and vividly shows us a world that is even riskier than we think. The very things done to make markets safer, have, in fact, created a world that is far more dangerous. Bookstaber gives readers a front row seat to the management decisions made by some of the most powerful financial figures in the world that led to catastrophe.

The Speculation Economy

American businesses today are obsessed with the price of their stock, and no wonder. The consequences of even a modest decrease can be so dire that some executives would rather damage their corporation's long-term health than allow quarterly returns to fall below projections. But how did this situation come about? When did the stock market become the driver of the American economy? Lawrence E. Mitchell identifies the moment in American history when finance triumphed over industry.

The Hyperinflation Survival Guide: Strategies for American Businesses

The Hyperinflation Survival Guide offers strategies for business managers to keep their enterprise afloat in the midst of runaway inflation. Within this succinct little book are a plethora of sensible business strategies for American businesses. If businesses are to survive they must effectively counter and minimize the ill effects of rampant inflation and/or hyperinflation. The utmost prudence is required in managing accounts receivable, inventory, and production at such a time. A sudden inflationary economic downturn may very well bring a business to its knees leading to insolvency.

U.S. Manufacturing: The Engine for Growth in a Global Economy

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