What would you do?
Analysis of the last (and next) financial crisis
Chairman, Swiss America
Sept. 18, 2009

If you had been able to foresee the sub-prime mortgage crisis and what it would do to the economy, what would you have done differently? Would you have sold your real estate? Invested in different companies? Saved more? Spent less? Took a stronger position in cash? What steps would you have taken to protect your family and your savings?

With Commercial Mortgage-Backed Securities coming due at the end of 2009, our tumultuous economy won't likely be calming down anytime soon. Now is the time to plan for the next round of possible meltdowns in the financial sector. Despite the positive outlook coming from Fed Chairman Bernanke and the politicians in DC, most Americans feel the recession is far from over. It seems like little more than the same spin designed to shore up what remaining confidence Americans have before the other shoe drops.

2009 marks the eight year anniversary of the tragic events of September 11th. At the end of the day on September, 11, 2001, many thought America had been brought to her financial knees. Were they correct? Consider the chart below.

The Dow which topped out at 14,000 in July 2007 is today struggling to maintain the same level it was at eight years ago. Our dollar's buying power has shrunk by 37%, our debt has doubled and our budget deficit is exponentially out of control; from a projected $153 billion surplus in 2001 to a jaw-dropping $1.7 trillion deficit today. Commodities are about the only bright spot with oil prices more than doubling and gold prices more than tripling.

The best way to protect your assets in the last crisis would have been to build a hedge of protection around your home and retirement funds using gold. Will this strategy work during the next financial disaster? Time will tell, but history says yes.

What's on the horizon?

Aside from 10% unemployment, the growing possibility of a double-dip recession, higher taxes, trillions more in government bailouts and a potential healthcare takeover; experts are calling the potential commercial mortgage crisis a, "$ 1 Trillion Time Bomb".

"So far, banks in general have been reluctant to take losses on their commercial books. This ‘delay and pray’ strategy is preventing most banks from issuing new loans as they prepare their balance sheets for potential future losses." -The Wall Street Journal

The sub-prime mortgage crisis and subsequent financial crisis have already triggered a dramatic rise in residential mortgage delinquencies and foreclosures. Foreclosure filings in the US exceeded 300,000 for the sixth straight month in September, up 18% from a year ago.

An estimated $1 trillion in toxic assets were produced in the sub-prime lending crisis and it is far from over as millions of ARMs and other loans are not able to be refinanced today.

What will happen when the $1-2 trillion in commercial mortgages taken out between 2005-2008 come due? What if the banks cannot or will not lend or refinance property at current market values? Here’s a few thoughtful warnings in the headlines:

* Defaults on Banks’ Commercial Mortgages Seen Rising Above 5%Bloomberg “Defaults and late payments on loans bundled into CMBS could surpass 7% by the end of this year as banks anticipate more losses amid falling rents, according to Real Estate Econometrics LLC.”

* “Too-big-to-fail banks have become even bigger. The problems are worse than they were in 2007 before the crisis,” said Joseph Stiglitz, a Nobel Prize- winning economist to Bloomberg. The Fed faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing.

* "I think the worst is yet to come,” warns Peter Cohen, former Lehman CEO on CNBC. “I think we've got a tough year, year and a half to get through. Things aren't getting any better in the financial system. They're getting worse.”

* Economist warns of double-dip recessionLondon Financial Times “The world has not tackled the problems at the heart of the economic downturn and is likely to slip back into recession. Government actions to help the economy in the short run may be sowing the seeds for future crises.”

No wonder the Federal Reserve is terrified about the prospect of being independently audited. If the world knew where all the toxic assets were buried, it would panic investors globally.

What will this mean for our families?

"The destiny of a currency determines the destiny of a nation," according to Dr. Franz Pick, a noted free market economist.

Take Argentina, for example, once known as “The Paris of South America” with its enviable healthcare system, fine education system and a thriving economy. But, due to amassing billions in debt that could not be paid back, Argentina quickly went from being a 1st world nation to a 3rd world nation. As the U.S. government today follows in Argentina's footsteps, could the same fate befall America?

Our government has decided to sacrifice the buying power of the US dollar to pay for their trillions in spending. The only way to come back from the brink is inflation. It is the only alternative that is politically expedient.

Inflation translates into a shrinking of the value of our time, labor and lifestyle. Bottom line: Americans must work harder and longer just to maintain a fraction of their buying power. Our cost of living could skyrocket.

According to Nobel Prize winning economists as well as banking and real estate experts, the next shoe to drop will be a new wave of commercial-mortgage-backed securities foreclosures, leading to further home foreclosures, bank failures, government bailouts and a sharply weaker dollar. History teaches us debtors become slaves. Reversing the dollar's decline seems remote, given our addiction to debt.

If only we had allowed the free markets to work instead of propping up the economy with false hope and false money, we might have had a true recovery by 2010.

It is important, now more than ever, for all Americans to convert a portion of their wealth into the best asset of the last decade, physically-held precious metals. They offer a safe haven from a very uncertain financial future. You may not get rich quick, but history demonstrates that at least you’ll never be poor holding the world’s ultimate forms of money; gold and silver.


* 9.22.09 "Commercial real estate prices in the U.S. resumed a steep decline in July, Moody’s Investors Service said, as credit restrictions curtail lending and push landlords toward default. The portion of sales classified as 'troubled' -- those properties in or close to default -- almost doubled to 23 percent in July from March," reports Bloomberg.

* 9.18.09 Facing the next real-estate collapse: "THE next wave of the credit crisis is about to hit -- a collapse in commercial real estate and potential explosion of bank failures. With its resources tapped out by the first wave, what should Washington do? Already, commercial-real-estate prices nationwide are 39% off their peak of two years ago, reports the MIT Center for Real Estate. The 18% price decline in this year's second quarter was the largest quarterly drop in 25 years," reports NYPost.

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