The story of the past five years has been the establishment of booming global investment markets due to the engineering of cheap credit by key global central banks (primarily the United States, China, Japan, and the Euro Zone). With the monetary stimulus working in overdrive - justified in some spheres as insurance against an economic meltdown, in others as keeping the currency low in order to maintain exports, and in others still as ok due to low government reported inflation (i.e. CPI) - many worldwide markets boomed as the credit bubble was stoked. Markets that benefited significantly were seemingly everywhere, but nowhere were the effects more pronounced than in the housing and mortgage sphere.

We all remember housing booming like bonkers. In fact, most people still think that residential real estate is a great investment.

The problem is, the unnatural credit bubble, blown ever so large by numerous central banking initiatives and urged forward by massive global banking institutions and just about everyone you know - the pro-real-estate crowd bandwagon got so big it was pretty much comical to observe - has led to a situation where in no way do fundamentals support current asset values.

We are now seeing a rather rapid structural shift in the awareness of risk within markets worldwide. Mortgage lenders are going belly up left and right, the stock markets are shedding points faster than they have since the last cyclical bear market low in 2002, the market for mortgage-backed-securities and other synthetic derivatives and strange financial products has dried up significantly, and, in a very rapid change, 66% of the American public now foresees a recession in the next year.

To put it simply, there are a whole lot of folks who are saying “Oh shit…” at the same time.

As Ludwig von Mises and the other key Austrian Economists taught, the problems are not starting right now, the problems started when the rate of interest was taken below where free markets would have had them absent goofy government intervention (remember Greenspan’s 1% short term rate??).

So given that there will be a lot to sort out, and many pundits will call for further whacky government interventions into the market to try to clean up the problems created by previous government interventions into the market, I’m including some articles that may help you gain an understanding of what the underlying issues are.

The first is a Bloomberg article highlighting investment guru Jim Rogers’ sentiment that the housing bubble was one of the biggest credit-induced bubbles of all time - read it here.

The second is a great article by M.A. Nystrom illustrating what the term “liquidity is drying” means - in essence, it means that it is harder to sell assets - but don’t take my word for it, read Mr. Nystrom’s article here.

Be sure to check out the adjustable rate mortgage reset chart posted about two months ago - the thing is not pretty.

Next, is the Wall Street Journal (now owned by Fox News proprietor Rupert Murdoch - BOOOOOOO!!!!) article highlighting the general feelings among the American public that the economy is not headed in the best direction.

Further, a telling article on American Home Mortgage essentially going belly up and laying off 7,000 employees, roughly 90% of its workforce, due to the continuing rapid implosion in the mortgage sector. By the way, AHM was the 10th largest mortgage originator in 2006 - very rapid fall from grace.

And finally, just to add insult to injury to the already battered American common person, Bush and his team continue to flout the Constitution and generally act in shady ways, related to near everything that they do. I personally feel that the Bush administration is quite possibly the worst of all time, due in a large part to their creation of the precedence of pre-emptive war, their pushing of warrant-less wire taps, their ignorance of the Constitution and their growing suspension of Habeas Corpus. The following article highlights the administration’s backing of Alberto Gonzalez even though he has lost all support of the public and Congress in terms of doing his job - Time Magazine believes its a ploy to keep Congress at bay in any potential impeachment proceedings.

In this time of growing unease and general ugliness of the scene, it is up to each individual to stay diligent in pursuit of the truth, the defense of liberty, and the limit of the scope of unreasonable government. An increase in government powers is not the answer, no matter what the potentially shady powers-that-be will start to tell you.

Filed under: Politics, Social Mood, Economics