Saturday, January 9, 2010

Financial Armageddon, Book Review

This is a review of another financial book, "Financial Armageddon, Protecting Your Future From Four Impending Catastrophes", by Michael Panzer.

This is good book if you believe that a 2nd depression is still coming. The book was written in 2007 and describes very much what was to happen in late 2007 and 2008, the financial crisis. The worst as described on the book, has not happened. The question is is this "yet'?

The 4 catastrophes are:

1. Debt

2. The retirement system

3. Government guarantees

4. Derivatives

The book is written from an American and for an American point of view. The author describes the devastating effects that each phase of the crisis will have on the lives of every American.

The book is divided into 4 parts.



This chapter begins by stating that sometime in 2008 the "national debt clock will almost certainly run out of room". "The ever increasing figure will not be able to fit the extra digit that will pop up when the federal government borrowing breaks $10T".

'Most likely is that the U.S. will soon suffer the fallout of the live-for-today
orgy of borrowing and extravagance that has already foisted an untenable
economic and financial burden on future generations".

There is nothing new on the above, but to his credit, it was written in 2007. The crisis happened, and the fallout as described in the book, did not happen, at least in my eyes. The immediate fallout has been averted, true by even more debt. Can it still happen? Sure, but it could be any time in the future. So this is the fundamental problem with this book. It describes what would happen, but we had the crisis and many of the consequences described did not occur - yet. Yet is the keyword.

Things discussed in this chapter are MBSs (Mortgage-backed securities), MBIA, Fannie Mae. He discusses how low interest rates encouraged Americans to borrow first, ask questions later.

CHAPTER 2: The Retirement System

"By the time all the numbers are tallied and reported, at least some people
will paraphrase Shakespeare, it's time to kill all the accountants".

Th chapter discusses how the trillions of dollars that the retirement system promises to Americas will be a little difficult to pay. He says that historically, pension and postemployment benefits have barely been acknowledged. The liabilities were "off balance sheet".

He says that according to one expert cited by the NY Times, the final tab for state and local governments will as much as $1T. Hey, what a trillion these days. See, back in 2007, a billion used to be a lot of money. Today, we colloquially talk about trillions.

CHAPTER 3: Government guarantees

Here Mr. Panzer discusses the FDIC. He says that because of a moral hazard, there is $100k insurance people have less incentive to be vigilant about their own interests, as they would without such a backstop.

It's funny that the same things happens today with the big banks. The losses are socialized and the gains are private.

Panzer says that this paradox is associated with any type of insurance protection. This did not exists in 1934, when people immediately withdrew funds to another banks if theirs showed signs of being in trouble. As a side note (mine) this is also interesting because the reason Canadian banks survived so well the crisis was not because they were well-capitalized, but because there was no run on the banks.

"Like drivers with free or very cheap insurance who are not penalized for
accidents, bankers seemingly have little choice but to operate ever more
recklessly, specially when their competitors are doing the same".

He also talks about the fractional reserve system (leverage). He discusses the too-big-to-fail issues, and systemic risks, all things that we came to hear a lot about in 2008.

Freddie and Fannie are discussed again, as their debts are (were) not explicitly guaranteed by the government, but they were assumed to be, as the government would have to step in "should disaster strike". Yeap.

Fannie and Freddie helped boost total mortgage debt to nearly $9T in 2007. Then both companies became two of the largest speculators, and with nothing to stop them from taking on more risk. Panzer explains that coupled with the use of MBSs both entities became exposed to enormous risk.

So the government would pick up the tab, that is a problem. The government did pick up the tab (meaning the tax payers of course).

CHAPTER 4: Derivatives

He begins the chapter by talking about Warren Buffets's warnings about derivatives, followed by Tim Geithner's warnings, although the said that derivatives appeared to "make the financial system able to absorb more easily a broader array of shocks".

He also talks about the IMFs' warnings about derivatives.

Why was nothing done, or nothing that worked?

Next the chapter discussed hedge funds, and how their need to seek out better returns also encouraged them to use derivatives.

Mr. Panzer explains about swaps and CDSs, and how CDs were causing growing concerns.

PART II: Risks

CHAPTER 5: Economic Malaise

He starts the chapter by quoting market historian James Stack:

"Not one recession in the last 50 years has been predicted in advance by a major
poll of economists"

The chapter goes on talking about general market deterioration.

"After a long period of seemingly limitless liquidity, the duo of costlier
borrowing and restricted access to credit will become an unexpected burden"

CHAPTER 6: Systemic Crisis

The author describes that the explosive use of derivatives and leveraged hedge fund trading means that few people will understand of where the dangers are. At the same time, there would be a lot of complacency from a long period of market calm and growth. People will find it difficult to react, even the Fed.

He says that the Fed will then adopt a substantial measure of restraint, at just the wrong time. Maybe the fed was reading this, because that certainly is not what happened.

He says the Fed will not have a clear strategy. The extent of the crisis, too many firms, countries, "will trigger numerous panics, bank runs, and market crashes", "there will be "technical glitches and breakdowns".

We saw a little of that, but the world did not end.

CHAPTER 7: Depression

If you want to read about depression is like, this is it.

"The squeeze will be so severe that many municipalities will have a hard time
even staying afloat".
"Persistent asset liquidations and crashing stock, bond,and commodity markets
- with the exception perhaps of oil - will only add to the misery".
"For those who don't have much money, bartering for food, shelter, in
exchange for heirlooms, furnishings, and labor, maybe the only option..."

He says that a shortage of cash, and a willingness to wait, will depress all collectible, commodity and asset markets, and that real estate turnover will fall to almost zero. There will be a race to the bottom by investors, speculators, and owners. As things gets worse, wrongdoers will be hunted, etc.

CHAPTER 8: Hyperinflation

After the depression and money printing, comes hyperinflation, which is the focus of this chapter. He describes it quite well, shall we ever get there. I have lived in a country with hyperinflation, where when you got your salary you literally had to run to the bank to invest it, or buy whatever you have to buy, because you'd lose 1-2% a day otherwise.

But he describes worse scenarios where double or triple digit percentages will occur daily or monthly. He talks about fiat currency.

"Adding to the precariousness of the situation was the fact that the world
was awash in dollars [...] The once unrivaled superpower had become dangerously
reliant on foreigners who inexplicably where willing to finance years of
compulsive spending and borrowing".

He says that first the Fed will copy Japan's policies, zero rates, quantitative easing, but then it will resort to unconventional methods: they will 'monetize' anything that moves. The fed will buy stocks, gold, real estate, banks, businesses, even used automobiles.

Well, we saw many similar things, some the Fed directly, others through government programs such as cash for clunkers.

They may even follow Bernanke's suggestion and "drop money out of helicopters".

PART III: Fallout

CHAPTER 9: Economic

The author states that During the 1st phase of the fallout, those who owe money and don;t have savings will bear the full weight of suffering and impoverishment (that's 34M people0, followed by 54M vulnerable individuals, those living between the poverty line and double the poverty line. They will be submerged by the economic tsunami.

Nobody will hire, not even for the worst jobs. Those aged 65 and older lucky to have jobs will have to remain working. Spouses, teenage children will join.

"Others will have to make the most difficult choices: Should they go food
shopping or pay the electric bill?"

Americans will be transformed from indulgent squanderers into consumer zombies.

And so on.

CHAPTER 10: Financial

He starts with an analogy. When cars started being equipped wit ABS, accident rates were expected to drop, but they increased. Drivers felt safer, so started driving more aggressively. Modern finance has provoked a similar responses.

"Allegedly savvy operators will turn to less-than-beneficial activities,
rampant speculation, lending money to the least credit-worthy borrowers they can

Diminishing credit ratings will push down the prices of securities that Freddie and Fannie have. A series of shock-waves will emanate. Conditions will be chaotic. Fraud and corruption will be exposed.

Washington will begin to take steps to reduce or abolish FDIC guarantee. Banks, money markets, mutual funds will be frozen.

CHAPTER 11: Social

This chapter discusses the social consequences, frustration, resentment, anger. Nice law-abiding citizens will engage in criminal or deviant behavior. The social fabric will be torn apart. Divorce rates will rise.

The political arena will become uterly intolerant, polarized and radicalized. Separatism and exclusionism will amost certainly take hold. Bigotry and racism will rise.

CHAPTER 12: Geopolitical

This chapters discusses the geopolitical issues that will arise. Trade restrictions will be imposed.

This will mark a dramatic turnaround in the multi decade march toward

China will almost certainly endure a hard landing. The American public will raise a growing clamor for barbwire and pouted concrete as well as legal barriers.

"Made in America clauses"?

PART IV Defenses

Chapter 13 Planning

Americans will have to hunker down for a protracted period of hardship and suffering. It will be the time to think small, to simplify, consolidate, and downsize, and weed out anything that might be unnecessary.

Planning should involved taking into account spending and saving, and also health care concerns, insurance, longer term security. Americans will also have to develop a nose for danger. People will have to be informed.

He the suggests a number of we sites to read, from newspapers to blogs.

CHAPTER 14: Investments

"Rather than buying the dip, Americans will have to focus on selling the blip"

He says that bear markets often have rallies, so take the opportunity to sell. Well, the current "rally" has lasted over 9 months!

More blogs and sites are listed, suggestions to get a "well-rounded" picture.

CHAPTER 15: Relationships

The authors states that corruption will be endemic, scammers and con artists and identity thieves will be everywhere. Law enforcement will be cut as there is no money to pay them.

"The American sensibility, long characterized by trust and faith in
others, will need to be more discriminating".

CHAPTER 16: Lifestyle

He starts the chapter by explaining blogs and how to get blog feeds and other such issues, so stay o top of important developments.

"many seemingly alien concepts of the past, such as living frugally, conserving and recycling, and cutting back on non essentials will have to be recast from a 21-st century perspective

People will eliminate TV channels, Starbucks, etc.

Cutting expenses and boosting income will be the primary means of escape.


I hope that gives a good idea of what the book is all about. Here is the book cover and link to buy:


As I said, the worst as described on the book, has not yet happened. The question is: is this 'yet'?

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