When will we hit bottom? February '09

Things are bad but not that bad. 
Did you know that the Federal Government could buy every mortgage backed security in existence for $2 trillion? 
Did you know the Government could buy every foreclosed mortgage for $200 billion? (1 million homes in foreclosure * $200,000 average sale price=  $200 billion)
Lets keep the above numbers in mind as we gain a perspective on the current situation.

Fact 1
The Government, Fed and the FDIC are trying to cope with the virtual disolution of the financial intermediary markets.  These are the markets that package and sell securities, Treasuries, Certificates of Deposits, home mortgages and commercial paper.   The large banks, investment houses and Freddie Mac and Fannie Mae used to handle this.  They are all gone or stagnant.

Fact 2
Some banks have had equity injections that according to experts would allow them to resume lending.  The theory being that banks can lend a multiplier of their equity position.  I believe that is 10-12 times their equity.  Good theory but it's basis is "ceteras paribus", all else being equal.   There are underwriting problems and balance sheet problems banks still must overcome.   Basically their infrastructure required for them to get back to business are still in shambles.  The rating agencies are no longer trusted (for good reason).   They can't trust the balance sheets of businesses, cannot value their own collateral, much less, new borrowers.  They cannot even trust the balance sheets of other banks. 

The infrastructure, those entities (1 above) whom the banks used to lay off their loans are in bad trouble.  Banks do not invent cash for loans.  They make a loan, recirculate it into intermediary markets and relend the proceeds from the sale of their loan.  They don't have sufficient cash to make loans without the intermediaries.  Without laying off the loans, they must collect them and then lend out the proceeds of repayment.  This involves no leveraging of their equity.

Fact 3
The Feds have stepped in to replace the intermediary markets.  They do this by buying the assets such as commercial loans, bank to bank loans etc.  They guarantee other transactions.  There is little risk in this type of lending.  That's where the numbers reported by Bloomberg swell.

Fact 4
There is no benefit to Obama to down play this crisis.  He will look better when it is solved.  Nor do the very rich mind.  They are laying in wait for a bottom.  It won't happen in December or January. 
It will happen in February.  All of the losses for tax purposes will be taken.   There are billion dollar investment pools forming all over the country.

You want to save the auto industry?  Send every American family a $10,000 voucher to buy American cars.  This will clear out the inventories.  Give them a $2,000 voucher to use if they buy goods of American manufacture.   That will save Christmas. 

Allow 401k holders to take their tax losses without selling their stock and without penalties.

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