Let’s consider liquidity and there’s still plenty of it around. When the system is awash in cash, the financiers have to find a somewhere , anywhere to place it.
Now where do the private equity firms (LBOs) get all the money to play with?
Easy money from the Fed, and foreigners, made it easy for the LBOs to generate spectacular returns in the last few years.
Now pensions funds that are mostly underfunded are chasing returns and pumping the LBOs full of cash. In order to justify their existence the private equity firms have no choice to but take on more risk to produce the desired returns.
Problem is spectacular returns are becoming harder and harder to come by. My guess is that some LBOs will begin to fail. That combined with the losses in the MBS, as households walk away from their houses, will drag down the pension funds and companies will start dumping their pension obligations onto the government.
How will the bailouts occurs?
1. Even more liquidity.
2. Shifting of pension obligations to the government
3. Shifting of health care obligations to the government. Businesses are now beginning to embrace universal health care because they realize it will save them millions.
4. Outright takeover and receivership for some financial institutions.
5. The War and the national debt will prevent the Federal government from providing too much fiscal stimulus.
This will happen over time, under the radar of the public who will be too busy blaming the immigrants for crime and job losses. Maybe we’ll have 2-strikes and you’re out. Politicians will blame economic hardship on the mismanagement of the war. Life will go on and 15 years from now, we’ll be entering another business cycle.
Like Chris Johnson said, there’s nothing to be scared of if you take the emotion out of it. Watch the market like an ongoing soap. Life is fascinating… you just have to examine it.
