Overdose: The Next Financial Crisis

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With the US raising their debt ceiling, are we in a global bail-out bubble that will eventually burst? This doc offers a fresh insight into the greatest economic crisis of our age: the one still awaiting us.

The financial storm that has rocked the world began brewing in the US when congress pushed the idea of home ownership for all, propping up those who couldn't make the down payments. When it all went wrong the government promised the biggest financial stimulus packages in history and gargantuan bailouts. But what crazed logic is that: propping up debt with more debt? "They're giving alcohol to a drunk: it just sets him up for a bigger hangover."

July 2010

[The Federal Reserve has cut its key interest rate to the lowest level…]

[Crisis will happen…]

[The biggest fiscal stimulus we have ever seen…]

[We’re in the midst of a serious financial crisis

and the federal government is responding with decisive action…]

Have you taken a large home loan?

Or did you put your savings in stocks, mutual funds or bonds?

If not, than you can relax.

But all of us who did are living on borrowed time.

This is the story of the greatest financial crisis of our time.

The one that is on its way.

They spent hundreds of billions of dollars to show that they were doing something

but not properly designed and not as effective as it should’ve been.

When they start losing money, “Hey, we gotta get back in the game,

“we gotta get theirs dice rolling again, hey, let’s create another bubble.

“You think the dot-com bubble was too big? We’ve got a bigger one for you…”

Well, the problem is they never actually cured the crisis.

Right, they just give alcohol to a drunk.

It doesn’t sober him up, it just sets him up for, you know, a bigger hangover.

And that’s all we’ve done, and that’s all we’re trying to do.

And so I know at some point you kill the patient, right.

At some point you can’t drink any more.

It’s just, it’s just the end of it. You reach the end of the ability.

And that’s where we are…

Congress wanted to believe them.

Congress wanted an excuse to bail out the autoworkers

and the executives gave them just enough political cover to say:

“Aah, well, I’m not really doing this because I want autoworker votes

“and I’m gonna give them huge amount of money.

“I’m really doing this for the American economy.”

So, the solution is the problem.

That’s why we have the problem in the first place.

This is the danger in protecting investors and consumers

from the consequences of their own decisions.

Overdose: The Next Financial Crisis

We can do it. But we need to do it soon

because the clock is ticking and time is not working in our favor.

I know many Americans have questions tonight.

How did we reach this point in our economy

and what does this mean for your financial future?

These are good questions and they deserve clear answers.

They took down the symbols… the financial symbols of America.

The twin towers of the world trade.

[Today we’ve had a national tragedy.]

[Two airplanes have crashed into the World Trade Center.]

Uhm, my, my old company… my whole com… where I used to work

the whole company is missing.

The story of the great financial crisis

begins just like many of the stories of our era.

In the United States, on September 11th, 2001.

The terrorists knew exactly what they were doing.

Striking at the ultimate symbol of the global economy.

And they did it when the US was already slumping into a recession

after the dot-com bubble had burst.

[Chairman of the U.S. Federal Reserve] Despite the tragic events of September 11th,

the foundations of our free society remain sound

and I’m confident that we will recover and prosper as we have in the past.

In spring 2001 the Federal Reserve started lowering interest rates

and now it continued lowering rates

to save companies on the brink and to keep unemployment down.

During 2001 the interest rate was lowered from 6.5% to 1.75%.

In 2003 it was cut all the way to 1% and it remained there for a full year.

Predicting the panic of ’08, the economic 9/11

and the current economic crisis that we’re still in

was probably one of the easiest forecasts we’ve ever made

in our 30 years of trend forecasting.

It was very simple.

Gerald Celente lives in Kingston, a few miles north from New York.

He’s one of the top trend analysts in the US.

He’s been called a modern Nostradamus.

He didn’t just predicted current crisis,

he also predicted the dot-com bubble and the stock market collapse of 1987.

Immediately after 9/11 the president of the United States George W. Bush

told the people to be good Americans and go out and shop.

But how are they going to do it? You’re in a recession.

Federal Reserve comes to the rescue.

In his memoir, Federal Reserve chairman Alan Greenspan writes

that he knew that low interest rates might cause a bubble.

[It’s party time.]

Traditionally, central banks remove the punch bowl

once the party stops.

The interest rate can’t remain low for too long

or people will do things they’ll regret later.

[This is one party that just has to turn out right…]

[Well, the purpose of a party is to have fun together

and a successful party needs planning and skill…]

Greenspan argued that the Fed should never remove the punch bowl

but rather keep refilling it when the party started to peter out.

And if things went bad, the Fed would clean up the mess

and tend to the hangover.

Banks and speculators loved it.

Now they could take greater risks than ever before.

If they were successful, they could keep the profits.

And if they were unlucky, Greenspan would rescue them.

[Mama’s that way.

Let me come home crying over something and she’d get me candy every time.]

When you see the stock market come down and real estate bubble burst

all that phoney wealth is gonna evaporate

and all that’s gonna be left is all the debt we’ve accumulated to foreigners…

Peter Schiff is another analyst who was roundly mocked

when he predicted the crisis for the US economy in the midst of the boom.

We went on a unprecedented global spending binge.

American citizens borrowed and spent trillions of dollars to buy stuff

and that is why we’re in so much trouble.

It was because we got drunk on all that Fed alcohol.

FED ALCOHOL

In a world that was suddenly uncertain with the country under attack

nothing felt safer than investing in your own home.

In the American Dream.

I do believe in the American Dream. [17 June 2002]

I believe there’s such a thing as the American Dream.

Owning a home is a part of that dream.

It just is. Right here in America, if you own your own home,

you’re realising the American Dream.

Vernon Smith was awarded the Nobel prize in economics in 2002.

He received it for his research in experimental economics.

In his experiments he puts economic theories to the test.

Smith is an expert on bubbles.

If you can buy a home with almost nothing down

then you do well if the prices continue to go up.

If it goes down, well, then you have an incentive to walk away from it

and let the bank have it.

Low interest rates caused a housing bubble.

Cheap loans encouraged people to buy more and bigger homes.

Housing prices began to rise by 10% a year.

So many took out a second mortgage on their old house to fund consumption.

You wanna go on a vacation, buy some new clothes?

How about putting an addition on your house?

You don’t have the money?

How about a home equity loan? That’s for you.

Let’s use your house as a piggy bank.

The banks granted loans to almost anyone.

Why would you need a decent income to buy a home

if you can get rich just living in it?

The market even coined the term NINA loans.

No income?

No assets?

No problem!

You’ll get a loan, anyway.

The legislation was more aggressively pushing lenders

to lend to people of modest means, people with… whose incomes

were 80% of the median income or below.

Politicians encouraged this.

For a long time both the left and the right have been encouraging home ownership.

So they’ve created deductions, subsidies and insurances.

And they created two huge mortgage-financing companies.

Fannie Mae and Freddie Mac.

Their job was to use thousands of billions of dollars

to insure loans for people who couldn’t get them on the open market.

They were government-sponsored enterprises.

They had private owners but they had been created by Congress

and their transactions were guaranteed by the government.

[Former Chief Economist, Freddie Mac] So, there’re particularly Fannie Mae and Freddie Mac

government-sponsored enterprises

and what it means is, er, they’re private, not now maybe. But they’re private companies

that have special charters from the government.

And the thing about government-sponsored enterprises

which is the main thing people are talking about

is a sense that they’re guaranteed by the government.

[17 June 2002] First of all, government-sponsored corporations

that helped create our mortgage system,

I introduced two of the leaders here today,

they call those people Fannie Mae and Freddie Mac

as well as the Federal Home Loan Banks,

will increase their commitment to minority markets

by more than 440 billion dollars.

In the last decade, Fannie Mae and Freddie Mac have donated

more than 200 million dollars to politicians in Washington.

Enterprise-sponsored government.

I asked the former Freddie Mac chief economist

what they got for their money.

I don’t know.

I mean, I… that’s a tougher question, ehm,

they had a pretty good charter, ehm,

they, they have… they were regulate in a spotty way.

In many ways the regulatory structure wasn’t that bad

but it was the case that the regulatory structure was a compromise.

It wasn’t the Treasury, it wasn’t the Housing really,

it was some… somewhere in between.

There was a huge moral hazard

courtesy of the government in the mortgage market.

When the government, through Fannie and Freddie,

started to guarantee mortgages, then the lenders were no longer

worried about getting their money back because the government said:

“We guarantee it.”

And so that’s why I proposed and urge Congress

to fully fund the American Dream Down Payment Fund.

This will use money, er, taxpayer’s money to help

a qualified, low-income buyer make a down payment.

Well, greed has to be balanced with a certain amount of fear

and that’s what down payment rules were all about. And amortisation rules.

It is to keep people from carried away by, as you say, the greed

of expecting become rich by buying a home

and reselling at a higher price.

And that’s important. If one of the barriers to home ownership

is the inability to make a down payment

and if one of the goals is to increase home ownership,

it makes sense to help people pay that down payment.

This is the problem.

The moral hazard.

We gave a moral hazard to home buyers.

Once you say that you can by a home with no down payment,

all of a sudden there’s no risk to the borrower.

He doesn’t care if he overpays

because if the house keeps going up, he makes money.

If it stops going up, the bank loses the money.

You know, we have moral hazards in our banking system.

The US government guarantees all bank deposits.

Well, what does that mean?

That means that depositers don’t care what the banks do

with their money once they deposit it.

Because they know the government guarantees it.

And the federal government obviously has to play an important role.

And we will, we will, I mean… when I lay out a goal, I mean it.

Why are they doing that?

Why can’t we let mortgages be financed in the private sector?

The reason is because the private sector would not finance

these crazy mortgages and real estate prices would have to come down

to levels that people can actually afford.

How can you promote home ownership if people can’t afford a home?

The big banks dared to make riskier loans

because they had started repackaging loans

and selling them to others as securities.

They sold them to each other,

to Fannie Mae and Freddie Mac

and they sold them to Norway, to Germany and to China.

If the loans turned bad,

someone else would end up with a hot potato.

I guess we’re little early. What do you want to do?

Anything but inspect this temple of capitalism.

Oh, Nick.

Look at them, their eyes popping out of their heads.

Drooling over the very things that are taking away their jobs.

Now Nick, don’t get all excited.

My family think that America is a pretty swell place

and I don’t want you to disillusion them.

I know.

Everybody wanted to buy

because the rating agencies that rate securities

gave the mortgage-backed bonds their highest rating.

They promised huge payoffs at near zero risk.

The rating agencies thought that house prices would just keep rising.

And then there was that minor detail

that the rating agencies were being paid by the sellers of the securities.

So I think the process was corrupted. First of all,

the government licenses Moody’s and Standard & Poor’s

so there’s only a few companies who are authorised

to rate these bonds.

So it wasn’t really a free market, the government was in bed

with Moody’s and with Standard & Poor’s.

But also you had this perverse relationship

between Wall Street and the rating agencies

where they were paying the rating agencies

to rate the products that they were structuring.

And so there was, you know, this was an incestuous relationship where

they knew if they put bad ratings on them, they wouldn’t sell

and if they didn’t sell, they wouldn’t be making all this money

constantly rating them.

They were great days.

But it was all based on a market on steroids.

Loans were cheap enough to keep trying the housing prices up.

But when interest rates returned to normal levels in 2006,

the spell was broken.

But for one person the future was still bright.

Ben Bernanke,

Alan Greenspan’s successor as Federal Reserve chairman.

[29 July 2005] Tell me, what is the worst-case scenario

if in fact we were to see prices come down substantially

across the country?

Well, I guess I don’t buy your premise,

it’s a pretty unlikely possibility,

we’ve never had a decline in house prices on a nationwide basis.

People could no longer get new loans to pay off the old ones.

Those who had been given a mortgage despite a very low income

couldn’t afford to stay.

The prices started falling,

making the mortgage-backed securities increasingly worthless.

[28 February 2007] There’s not much indication at this point that

subprime mortgage issues have spread into the broader mortgage market

which still seems to be healthy.

The rating agencies removed the high ratings from the securities.

Investors, who never looked beyond the ratings,

suddenly didn’t know what they had bought.

They didn’t know how risky those loans were.

[Chairman of the U.S. Federal Reserve, 18 July 2007] Overall the US economy appears likely to expand at a moderate pace

over the second half of 2007

with growth and strengthening a bit in 2008

to a rate close to the economy’s underlining trend.

The dominoes started falling.

Investors stopped buying mortgage-backed securities

and refused to lend to those who depended on them.

Investment banks like Bear Stearns and Lehman Brothers

suddenly couldn’t get new loans to stay in business.

Fannie Mae and Freddie Mac could no longer hide the disaster.

The financial crisis started in a way

that is eerily similar to today’s situation.

It started with an economic crisis in the US

and a government that responded decisively.

After 9/11 and the dot-com collapse

the US government decided to save the economy

by inflating a new bubble.

Today, the world is trying to get out of the financial crisis

by inflating a new bubble.

The difference is that this bubble is much bigger.

After they did the dot-com bubble and that burst

and they re-inflated it with the real estate and credit crisis bubble

and then when that burst,

now they’ve created the bubble of all bubbles.

It’s not only the United States, this is a global bubble, they’re all in to it.

It’s called the bailout bubble.

“Hey, the economy is going down, recession’s setting in,

“sales don’t look good, exports soft, need more money?

“How about, we’ll call it, stimulus packages?”

And from Australia to the United States,

from the UK to China

they’re dumping funny money into the system to keep it going.

In September of 2008 the US economy is near collapse.

Fannie Mae and Freddie Mac have been taken over by the government.

On September 15th giant investment bank Lehman Brothers goes bankrupt

after monumental bets on real estate.

AIG, the largest insurance company in the world,

collapses the next day.

Fear sets in.

It seems like anyone can fail.

Suddenly, banks no longer dare make loans to companies or each other.

Experts warn that the economy is about to collapse.

[The CBS News Special Report]

[A presidential address to the nation.]

[From CBS News headquarters in New York here is Katie Couric.]

Good evening, everyone.

President Bush asked the networks for this television time

so he could talk directly to you about a national crisis.

Some of this country’s major financial institutions

are in danger of collapsing under the weight of bad mortgages

and that would be devastating for the entire economy.

We’re in the midst of a serious financial crisis

and the federal government is responding with decisive action.

$700 billion

In a televised speech Bush scares the market even more

while still claiming that they can trust him.

He has a solution.

Under our proposal the federal government

would put up to 700 billion taxpayer dollars on the line

to purchase trouble assets that are clogging the financial system.

The US government wants to spend huge amount on Wall Street banks

to cover their bad deals.

Even banks who don’t want the money

will be forced to take it

so that the public won’t know which banks

are on the brink of collapse.

[All those in favor say “I”.]

[I…]

[Opposed say “no”.]

[The I’s have it.]

I want to thank the Secretary of Treasury

for working hard with the members

and thank the members for working long hours

like they’ve been doing to come up with this solution

that’s bipartisan and that’ll solve the problem.

On October 3rd Congress approves the biggest financial bailout in history.

700 billion dollars.

Around the world,

in Germany, Italy, Canada, South Korea and Great Britain,

other politicians do the same to save their banks.

We’ve taken the right, the decisive and the tough decision

that was necessary to protect the stability of the financial system

and to protect the depositors.

David Walker was US Comptroller General from 1998 to 2008.

He quit because he was so worried about the US economy

that he wanted to have the freedom to warn about what may happen.

In my view,

the bailout was necessary in certain regards

but in many cases we wasted a lot of money.

Because we didn’t do three things.

First, have clearly defined objectives

about what we were trying to achieve.

Secondly, have criteria established up front

as to who would get the money and who wouldn’t get the money.

And number three, have conditions established up front

as to what they could and couldn’t do with the money.

And as a result of not having those three things,

some people got the money that didn’t deserve it,

other people got the money that didn’t make good use of it

and as a result we had a lot of waste with regard to taxpayer money.

[19 November 2008] What would it mean if the domestic industry were allowed to fail?

You heard Senator Stabenow…

As a result of the crisis

the situation for the US auto industry becomes critical.

On November 19th their CEOs fly to Washington to demand money.

[Business and economics editor] The executives came out and they said:

“If you don’t do this,

“we are going to see a jobs holocaust.”

They issued extremely high estimates of how many jobs would be lost

that included counting every single company

that supplies them with anything.

That’s why this is all about a lot more than just Detroit.

It’s about saving the US economy from a catastrophic collapse.

A month later president Bush gives billions of dollars

to General Motors and Chrysler.

The money comes from the bailout package

that was really only designed to save the financial industry.

[Now, some US auto executives say

that their companies are nearing collapse.]

[And that the only way they can buy time to restructure

is with help from the federal government.]

Megan McArdle is a financial analyst for the Atlantic

and has written extensively about the problems of the US auto industry.

Congress wanted an excuse to bail out the autoworkers

and the executives gave them just enough political cover to say:

“Aah, well, I’m not really doing this because I want autoworker votes

“and I’m gonna give them huge amount of money.

“I’m really doing this for the American economy.”

But if you look at how much money we gave them,

I mean, we’re talking about almost a hundred billion dollars,

it’s how much we’ll end up spending on this.

You know, even if you were saving millions of jobs,

it would’ve been cheaper to give every single one of those people

100,000 dollars to go out and find a new job.

The big guys on Wall Street,

they can’t take their losses.

They’re crybaby capitalists.

Oh, they preach capitalism for everybody but themselves.

[16 December 2008]

[The Federal Reserve has cut its key interest rate

to the lowest level on record.]

[Fed chairman Ben Bernanke and his colleagues also pledge

to use all available tools to contain the widening crisis

and the longest recession in a quarter century.]

December 16th, 2008.

It is time again to pour alcohol into the punch bowl.

The Federal Reserve reduces interest rates to practically zero

to restore investor confidence.

Other central banks do the same.

Hey, have no credit? Don’t worry about it.

Just sign on the dotted line.

INSERT COIN

The housing bubble that they inflated

blew up with all the carnage and all the bankruptcies

and now what is their solution?

“We’ll just do the same thing we did before.”

Instead of having interest rates at 1%, let’s have them at zero.

And let’s buy everything we can. Let’s print money and buy mortgages.

Let’s buy credit card debts, student loans.

Let’s buy bonds, let’s drop money from helicopters

to try to get the same risk taking, excessive gambling on Wall Street

Let’s try to convince Americans, who are already loaded up on debt,

to go out and buy more stuff, to go out and go deeper in the debt.

And if the banks don’t want to lend them money,

let’s make ’em lend them money.

I mean, this is economic, you know, suicide.

While the Fed lowers interest rates,

president elect Barack Obama prepares an enormous stimulus package,

meant to get the US economy going.

We are running out of the traditional ammunition

that’s used in a recession,

which is to lower interest rates,

they’re getting to be about as low as they can go.

$787 billion

[17 February 2009] The American Recovery and Reinvestment Act

that I will sign today,

a plan that meets the principles I laid out in January,

is the most sweeping economic recovery package

in our history.

On February 7th, 2009 Obama approves a stimulus package

worth 787 billion dollars.

With the Bush stimulus package from the year before

US politicians have now spent close to one trillion dollars

to stimulate the US economy.

The money is spent on roads, airports, education, unemployment

and other benefits.

There is bureaucracy in everywhere.

And in Italy they used to say, where I’m from.

When you have a jar of honey, you lick your fingers.

The town of Union is located a few hours from the Canadian border.

This is where the computer company IBM got its start

and grew to be the biggest in the world.

The factories are now empty

but the town has acquired a small town rhythm.

So they were surprised when 600,000 dollars

from the stimulus package arrived to combat homelessness.

[Mayor] Ah, you know, on occasion, you know,

our police officers may run across someone and they try to, you know,

take the person to an area where the individual can get some shelter

and get something to eat. But it’s not a problem here.

This is Rodeo Drive in Beverly Hills,

probably the world’s most famous upscale shopping district.

It was here, for example, that Julia Roberts went shopping

in Pretty Woman.

Stimulus money has made its way here as well.

These streets are to be repaved to the tune of 1 million dollars.

Sure, there’re potholes in the asphalt

but is this really the economy that needs to be stimulated?

We had a $787 billion stimulus bill

but only about one third of it was truly stimulus.

By that I mean timely, targeted and temporary.

The other two thirds were things that people wanted to do,

have been wanting to do for a long time

but they didn’t want to have to pay for it.

They wanted to do it as a part of emergency legislation

and charge it to the national credit card.

The Johnstown, Pennsylvania airport has three scheduled flights a day.

Other than that, it’s quite empty.

When we have the flights coming, that’s when the people are here.

Other than that, it’s empty.

But one face is everywhere.

Congressman John Murtha, the airport’s name sake.

He’s been called the King of Pork

and has gotten 200 million dollars for Murtha Airport from Washington.

Earlier this year, the airport got a new source of revenue,

800,000 dollars from the stimulus package

to repave this backup landing strip.

The head of the airport insists that the landing strip is safe.

So why does it need doing if its not a safety issue?

Because of the steps we take,

this plan is about to shift it to high gear.

One of the biggest stimulus programmes was aimed at the auto industry:

Cash for Clunkers.

Turn in your old car and get cash toward a new one

from the government.

It was so popular that its one billion dollar budget ran out in a week.

So more money was quickly injected.

Many countries offered similar programmes.

Germany had the biggest one and handed out almost 7 billion dollars

to those who scrapped any car more than 9 years old

while buying a new one.

Our government seem to think that German auto industry is so important

we have to support it in some ways

and therefore they created this bonus.

They didn’t call it a scrapping bonus,

because I think they knew just how ridiculous that was,

so they called it an environment bonus.

Karen Horn is a doctor of economics at a German Economics Institute.

And of course, people took advantage of that.

It worked as long as it was on, the programme worked.

But now it’s out, it’s over and of course, numbers are dropping,

people are feeling that they ran into additional debt due to that bonus

that they wanted to take advantage of

and they’re having problems they didn’t anticipate.

So Germany spent almost 7 billion dollars to scrap fully functioning cars

and to maintain excessive auto factory output.

Once the programme ended, the industry was right back in the doldrums.

I was just very surprised that people would accept the idea so readily,

that they would accept the money is something else.

Who wouldn’t.

But, ehm, that they would find this a solution

that they deemed viable.

It doesn’t give me a very good impression

of the rationality of the voter and taxpayer, I must say.

And that’s where we are.

I think at this point, the problem is now so big

that government stimulus is not going to, you know,

buy us another five or six years of phoney growth

like it did last time.

Because we have to accumulate so much more debt now.

’Cause the bigger the problem gets, the more we have to stimulate

to get that short-term boost,

but now, the bigger the bust, because now we have the bigger stimulus,

you know, to get out the economy.

About a year after the worst economic crisis in modern history,

Lehman Brothers is gone.

But apart from that, Wall Street looks much the same.

Many banks are reporting record profits.

The world’s stock markets have skyrocketed.

The market is finally breathing a sigh of relief.

But isn’t it somewhat uncomfortable?

Haven’t we been here before?

All the measures that we have taken to save the economy:

The low interest rates,

the massive debt,

the safety net for the financial industry.

These are the very things that led us into a crisis in the first place.

We’ve been saved from the consequences of one burst bubble

by inflating a hundred new ones, all over the world.

[27 January 2010] One year ago I took office amid two wars,

an economy rocked by a severe recession.

A financial system on a verge of collapse and a government deeply in debt.

Experts from across the political spectrum warned

that if we did not act, we might face a second depression.

So we acted.

Immediately and aggressively.

And one year later the worst of the storm has passed.

There are positive signs.

This is the Hampton’s outside New York,

a classic playground for Manhattan’s elite.

A house by the Atlantic like this one costs 30 million dollars.

And a hotdog bun with lobster salad costs 18 dollars.

Fast food Hampton style.

The crisis has made its mark here too,

there are fewer private jets at the airport.

Instead the Porsches jostle the Mercedes on the turn pike to New York.

New York City, Washington, D.C. and Los Angeles, California

don’t represent the real world.

They also don’t represent the real part of America,

the so-called main street of America.

My tax money go to Bevery Hill,

well, there is a lot of money in Beverly Hill.

I don’t think they needed my money down there.

That’s a different world.

It’s not a reality, you know, down there.

If you ever visit Union and need a hair cut,

you may well end up at Frank Petrilli’s barbershop.

But unfortunately a lot of people lost their homes,

because they lost their jobs.

And it’s a…

They now live under the line for that one time they were able to do it.

And lot of the young people, specially educated,

they try to move, go out of town,

but I believe that no matter where you go, the situtation is the same a lot.

Where are they gonna go? Detroit?

Now listen son,

I wasn’t going to tell you this

but you’re the reason we came here all the way from Indiana.

You’ve heard all the talkers.

Now, I’m going to show you the doers.

The US government has launched bailouts, stimulus packages and guarantees

to the tune of 10,000 billion dollars.

[Caught myself wondering for the hundredth time,

how the hell I got here, what the hell I’m doing here.]

That’s more than the total cost of the US government

for World War I, World War II, the Korean War,

the Vietnam War, the invasion of Iraq, the New Deal, the Marshall Plan

and the Moon landing.

[… one giant leap for mankind.]

Bush almost wrecked up more US debt

than all presidents before him combined,

from George Washington to Bill Clinton.

And Obama is almost creating greater debt

than all presidents before him,

including George W. Bush.

But it’s not just the US that’s increasingly looking like a house of cards.

During the crisis, many governments went deeply into debt.

Estimates say that the average debt in the richest nations

will exceed 100% by the year 2011.

These are loans taken at currently low interest rates.

Should the interest rate rise by 1%,

the US interest payments will rise by 100 billion dollars per year.

That’s more than the annual cost for the Vietnam War.

[Sometimes it’s just an engine failure,

other times it’s the deadly flak.]

[If the pilot’s lucky, the flak kills him,

but usually he isn’t and he burns to death as his plane spins in.]

It sounds absurd to even think that the United States,

the world’s economic superpower, might crash.

After all, they get the highest ratings from the credit rating agencies.

One of the lessons that we must learn

from the mortgage-related subprime

is you have to take credit ratings with a big grain of salt.

Because as we saw with the mortgage-related securities,

they went from AAA rating to junk bond pretty fast

once people understood the true situation.

Today, the United States is rated AAA

but if it doesn’t start taking steps to put its financial health in order,

that AAA rating will be lost.

It’s only a matter of when and how quickly.

In September 2008, the bankruptcy of one large investment bank

brought the world economy to its knees.

The fate of Lehman Brothers raised the question

who was next in line.

So everyone avoided doing business with banks.

How would the world react if the next entity to declare bankruptcy

is a nation?

Who is next in line if that were to happen?

Some houses of cards have already started falling.

This is Iceland.

Until recently one of the richest nations in the world.

When the crisis hit, the Icelandic banks collapsed,

the Icelandic stock market crashed,

leaving the debt with a small population.

For the first time in 50 years this peaceful country saw riots.

This is Greece.

Here, deficits have hit a record high,

the national debt is approaching 135% of GDP.

The market wants higher interest rates for Greek loans,

increasing the pressure on its strained economy.

It seems like the Greek government needs a bailout to avoid collapse.

Italy,

Spain, Portugal

and Great Britain

are other EU nations with similar problems.

What about my country, Sweden?

The country’s finances are fairly robust,

our national debt and deficit are lower than that of most nations.

But Sweden is highly dependent on the world economy.

More than half of our prosperity is based on exports.

When other countries crash, we get hit almost as hard.

And Swedish hosing prices have risen during the crisis

despite the recession and despite the rising unemployment

but because of low interest rates and a government mortgage company,

SBAB, making loans easier to get.

Swedes have never carried more debt in relation to their income.

Doesn’t all of this sound very familiar?

We have new bubbles everywhere

so I am pretty worried about what’s going to happen.

If we don’t want bubbles to burst, then don’t blow them up in the first place

because all bubbles burst.

If enough things can go wrong, some of them probably will.

The question is just which needle will burst this bubble.

Will it be new credit losses as banks take on greater risks

knowing that the government considers them too big to fail?

Or falling stock prices as interest rates rise and the steroids wear off?

Will it be the Chinese economy, overheating?

Or will it be a collapse of confidence in the US dollar?

If we lose the confidence of our foreign lenders,

and we must not allow that to happen,

but if that were to happen,

then there will be a dramatic decline of the dollar,

a dramatic increase in interest rates,

significant fuelling of inflation,

a very, very deep recession and possibly depression

that would be felt around the world.

We must not allow that to happen.

When the next bubble bursts,

you cannot use the same emergency measures.

You can’t lower interest rates that are already at rock bottom.

You can’t stimulate the economy with borrowed money

if an excessive national debt is the cause of the crisis.

The governments could save the banks,

but who can save the governments?

Ultimately, there’s gonna be a price all around the world

to be paid for this.

And the longer it continues, the bigger that price is gonna be.

You know, this really is a moral question.

I mean, I can give you plenty of big and bad numbers.

You know, when you talk about tens of trillions of dollars,

it’s just hard to imagine.

But you have to put a face on it.

And to me I put my children’s and my grandchildren’s face on it.

It’s their future that we’re mortgaging.

When we tell people that there’s going to be a bailout bubble

and they see the world equity markets up 50 or 60%,

they don’t want to believe it’s another bubble.

They want to step right up back to that table

and throw their dice and try to win their hand

at the wheel of fortune that Wall Street’s spinning.

So people still don’t want to believe that the worst is yet to come.

It’s easy to think of these predictions as much too gloomy

but that is exactly what people said the last time.

When these experts predicted the 2008 financial crisis.

They were laughed at in the media.

We can do it. But we need to do it soon

because the clock is ticking and time is not working in our favor.

[Based on the book “Financial Fiasco” by Johan Norberg]