Financial Crisis Explained – The Asparagus Connection

By Lawrence G. McDonald

The asparagus, in my opinion, is closely connected to the world economy falling to its knees.

Outside San Francisco, running east, are miles of farms, with acres of these green spears. It’s a Mecca for them. The weather is perfect, sun everyday, never too hot, never too cold.

Bliss.

And the place to live is downtown ‘Frisco, close to the many world-class restaurants and funky bars that have sweeping views of the Pacific, where you can watch long rollers crashing onto the endless shore.

The year is 2003, and the economy is shaken by scandal on Wall Street. Tyco, Adelphia and Worldcom have recently imploded, Jeff Skilling is front page news, and the women of Enron are in Playboy magazine. Corporate America is in disgrace, and news of greed and swindle are rife.

But this is America, the richest nation on earth. Nothing can destroy it. Plus the fact, Greenspan in charge, and he’s a genius. Also, the Sarbanes-Oxley Act was recently introduced – a law that states the head of any corporation, along with the chief financial officer, both have to sign the quarterly financial statements from now on, stating they’re true. If they turn out to be fraudulent, they both go to jail. That should put a nice end to cooking the books.

Then Alan Greenspan decided to keep rates low… like 1% low to encourage growth. And it did. The economy was in better shape than the media thought. Yes, there’s fraud on Wall Street, but we’ll get over it. The reason for this is very simple.

One word. Two syllables. Credit. Lots of it.

Real estate suddenly became a popular commodity. People were sick of the stock market. After the dotcom bonanza, 9/11, and the crash of 2002/3, who could blame them? At least real estate is bricks and mortar, and it always goes up over ten years, and rates were low enough to get an affordable mortgage on very unaffordable homes.

So, American consumers started buying houses. People began refinancing their homes for much better rates, and before we knew it, the economy was recovering. In fact, life looked better than ever. Everyone had a BMW, and the banks were lending money so fast they looked like ticket scouts outside Fenway Park.

And then, one of the great evils was born. The shadow bank.

You’ve heard of them. Countrywide. Fremont General. New Century. Institutions specifically set-up to lend. They borrow a billion from a commercial bank, then lend it out to people who need mortgages. It’s that simple. And as a consumer, you no longer had to visit your bank for a loan, you visited a shadow bank. Because they aggressively marketed home loans. They offered rates you never imagined. They had all kinds of twists and flowery language to convince you to borrow, and buy a home. And you did. The American Dream is to own a home with a two-car garage and suddenly you had one, for a rate so low it was cheaper than renting a two-bed in the wrong part of town.

This had a positive impact on housing prices. Supply became scarce. Demand surged. Prices rocketed. Economics 101. “Mr. Jones. Will you buy this home for $500,000?” “I don’t have $500,000.” “How about zero down at 3%. That’s only $1250 a month. Do you have that?” “Yes.” “Good, then sign here.”

Housing boom. Everyone is doing it. And they are all making money. Demand drives prices. And was there ever demand!

Demand does something else. It begs for more inventory. Construction boom. 

The year now is 2005, and prices in San Francisco have exploded to the upside. Locations with vistas of the Golden Gate Bridge are out of reach for most people now.  But the feeding frenzy hasn’t even pretended to slow down. People are upgrading their homes across America, and California is particularly active.

Big construction outfits are building new communities in and around the San Francisco Delta, and it isn’t long before the asparagus fields are sold off to big outfits like Centex and Beazer, who erect entire communities surrounded by asparagus!

This whole bonanza pumped up the globe in a very simple loop. Rates were 1%. Banks had cheap money from the government. Lending rates for businesses were lowt, an opportunity the Shadow Banks exploited. Consumers could have lines of credit for low interest rates, especially mortgages from the Shadow Banks. New homeowners could borrow against their homes, called “home equity loans” for pennies on the dollar. With that money, they strolled off to Home Depot for DIY kits to jazz up their new homes. They bought cars, cellphones, TVs, furniture. American retail boomed.

American retail chains became cash rich. However, instead of spreading the wealth to American manufacturers, they turned to the cheapest, most efficient labor force on the planet to boost their profit margin. China, which suddenly had an unprecedented manufacturing boom. Shipping lanes come alive throughout the globe, shipping coal, oil, chemicals, steel into China, and carrying their exports to America. It’s a booming economy. The Chinese are rich, and fantasies about taking over the world start clouding their judgment. Which might be why they decided to build 20 Chicagos and exchange their bicycles for Cadillacs.

However, China couldn’t spend the money fast enough. They had trillions to spend, and there’s only one thing you can do with a trillion dollars. That’s 1000 billion, by the way. A million millions. The answer is United States Government bonds. And with this amount of money flowing into the US from China, the rates could stay low. We basically had a situation where we were borrowing wealth from China we’d created!

However, one little detail in this giant orgy of wealth had been overlooked. The whole thing was borrowed money. It was credit, created by 1% interest rates.

What if these people who couldn’t afford these homes suddenly defaulted? What about the credit card payments… those thousands of Americans balancing several cards at a time? Why wasn’t anyone afraid that this great nation was suddenly racking up debt like palettes in a shipping yard? What happens to a population, who’s levered to the hilt, living one paycheck from bankruptcy, if they catch a cold? 

Armageddon happens. The world freezes. But why were the shockwaves so devastating? How did Wall Street become so involved with this madness? Why did a homeloan in an asparagus field outside San Francisco bring down Lehman Brothers and put Bank of America on life support? How did Lehman’s bankruptcy obliterate hedge funds around the world? What was the connection? What really happened at Lehman?

Get the real answers. July 2009.
“A Colossal Failure Of Common Sense – The Inside Story Of The Collapse Of Lehman Brothers

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