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To: AllansAlias who wrote (30291)	10/20/2000 9:42:06 PM
From: patron_anejo_por_favor	Read Replies (1) \| Respond to of 436258

Nice discussion of why re-liquefication won't work this time in The Credit Bubble Bulletin by Doug Noland in PruBear tonight. Ends with my favorite passage from Charles Kindleberger's Manias, Panics and Crashes prudentbear.com Well, in conclusion, this week the leveraged players definitely found themselves in “hot water” once again. Typically, that means it’s time for, Here We Go Again – “reliquefication.” Yet, we don’t see it working this time, especially after the last episode was allowed to run so out of control as to create unprecedented liquidity for a final wild speculative blow-off encompassing the Internet/telecom/technology bubbles. Today, the consequences of previous excess are a great and escalating burden. We actually do agree with the Barron’s columnist in one area; the global economy is not today heading for recession, while economies throughout Asia and Latin America are booming, for now. But, let us not for one second forget that the underlying financial systems are extremely fragile at best, and likely hopelessly impaired. While economies boom, the financial foundation could not be more precarious. In a critical difference from 1998, our domestic financial system is in the midst of an unfolding credit debacle. Importantly, the crisis here at home in 1998 was mainly due to forced liquidations in the leveraged speculating community and resulting systemic illiquidity. Such a crisis could (and was) resolved through aggressive reliquification (particularly from the GSEs) and lower interest rates from the Federal Reserve – shift the leverage away from the troubled speculators, and then make the environment conducive for the leveraged community to continue to play. The environment was made “right” for leveraged speculation, and the game was set in motion for a final wild fiasco. There is another key aspect that made the 1998 environment conducive to a system-wide “reliquefication.” Importantly, to achieve credit excess takes both willing borrowers and lenders. For liquidity to “stick,” it must get in the hands of aggressive spenders. Don’t underestimate the role played in the 1998 “reliquefication” process by having hundreds and even thousands of individuals and companies with pie-in-the-sky ideas to create businesses from the Internet and telecom “revolution.” They were mountains of tinder waiting to catch fire – more than willing to borrow and spend in historic proportions. On the other side, liquidity found a similar tinderbox with manic behavior overwhelming a bloated banking, investing, and speculating community who absolutely fell over themselves to provide capital and speculate like there was no tomorrow. It was an extraordinary confluence of unprecedented liquidity, exciting new technologies, and raw unadulterated emotion. It was a once in a lifetime mania. Those days are over. Investors’ confidence has been irreparably broken in the Internet and telecommunications sectors, and I have no doubt that herein lies the catalyst for the piercing of the Great U.S. Bubble. Quoting from Charles Kindleberger’s masterpiece “Manias, Panics, and Crashes:” “Causa remota of the crisis is speculation and extended credit; causa proxima is some incident that snaps the confidence of the system, makes people think of the dangers of failure, and leads them to move from commodities, stocks, real estate, bills of exchange, promissory notes, foreign exchange – whatever it may be – back into cash…To the extent that speculators are leveraged with borrowed money, the decline in prices leads to further calls on them for margin or cash and to further liquidation. As prices fall further, bank loans turn sour, and one or more mercantile houses, banks, discount houses, or brokerages fail. The credit system itself appears shaky, and the race for liquidity is on.” The race for liquidity is on indeed!