Possibility of terrorism adds to financial worries

Possibility of terrorism adds to financial worries
Worldwide market contraction would be aggravated by attack

A balloon of no-money-down home loans and easy credit for corporate buyouts, followed by the perfect storm of inflation and declining home values, has set the stage for what economic experts believe could end up a literal "meltdown" in the global economy.

It's the result of a combination of factors, but some warn that as bad as it is – Wall Street has lost about 10 percent of its value in the past few weeks – it would undoubtedly be aggravated by a major terrorist attack, which would create tremors felt by millions.

"We've never had a crisis like this while we're at war," said Craig R. Smith, president of Swiss America Trading, and an expert on financial issues including tangible assets.

"Homeland Security is warning [about the potential] over the next two to three weeks of another terrorist attack," he said. "If we are hit with terrorism, it would send these markets into a tailspin. Consumers already are nervous and fearful that they're going to lose their homes, that their 401k [retirement fund] will be chopped in half."

"Osama bin Laden knows how delicate the system is," he added. "If there was a small dirty bomb attack, or a homegrown cell attack, we would have a meltdown on Wall Street," he said.

A new warning from the Stratfor terrorism intelligence report echoes Smith's concerns about an impending attack.

"One of the reasons for the heightened concern," the report said, "is that most everyone … is surprised that no major jihadist attack has occurred on U.S. soil since 9/11. Many plots have been disrupted, and it is only a matter of time before one of them succeeds. Simply put, attacks are not difficult to conduct and the government cannot stop them all."

The organization said it believes al-Qaida retains its ability to conduct "tactical strikes" but probably cannot pose a "strategic threat."

"While this may be reassuring on one level, people can and will be killed in a tactical strike. The fact that an attack is not strategically significant will provide no immediate solace to those near the carnage and confusion of a tactical attack," the service said.

Such an incident could prompt a 2,000-point drop, Smith suggested.

"For the first time in the last 25 years, I'm trying to figure out what to do," he said. Important, he said, is an absence of panic on the part of consumers, and he suggested one shouldn't make major investments or divestments with that attitude.

Jerome Corsi, a Harvard political science PhD who has written several best-selling books, collaborated with Smith on "Black Gold Stranglehold: The Myth of Scarcity and the Politics of Oil." He agreed that the meltdown could be severe.

The two documented in the book that Americans consume more than 25 percent of the world's oil but have control over less than 3 percent of its proven supply. This unbalanced pattern of consumption, they assert, makes it possible for foreign governments, corrupt political leaders, terrorist organizations and oil conglomerates to place the citizens and the economy of the United States in a stranglehold of supply and demand.

"The bursting of the mortgage bubble and the bursting of the worldwide credit bubble have caused a major worldwide meltdown in credit markets, which has slipped over into the stock market," Corsi told WND regarding the current situation.

He said the expansion in recent years of the available of credit literally abandoned a more "disciplined" approach that would have held down borrowing.

"You've had subprime loans wildly out of hand and commercial paper which … should have been rated junk bond status but has gotten rated much higher than that. There have been leveraged buyouts that never would have happened but there was available credit," he said.

"Hedge funds have had wild access to credit. A pool may have a billion dollars worth of assets … but may borrow 10 or 20 times that," he said. "When the stock market goes up, everybody wins, they can pay the investors, make a nice profit. But when the market adjusts downward … the underlying assets drop in value."

Some of those fund investments will end up being literally worthless, he said, with its resulting impact on the market.

"The losers are going to be anybody who has these funds: banks, pension funds, institutional investors. They're going to have to take trillions of dollars in losses," he said. "It's hard to see where the bottom is going to be."

At the consumer level, such conditions can produce tragedies, Corsi said. Perhaps a consumer purchased a house for $167,000, but wasn't really qualified so borrowed 100 percent of the value of the home at that time – on a variable interest rate loan.

Now with inflation, the interest rate and payment will rise. At the same time neither the consumer's income is likely to rise, because of tight economic conditions, nor is the value of the home likely to rise, because of a depressed market.

And now the home is worth only $157,000, so the consumer cannot even sell out to pay off what is owed.

Corsi warned that the "unconscionable credit party" held in recent years will result in "hundreds of thousands" at risk of losing their homes.

Smith, whose company has grown from a $50 startup to accumulate sales of half a billion dollars, said the current situation has taken years to develop, and could take much time to solve. He said the beginning was when consumers switched from the old-fashioned save-up-$200-and-buy-a-TV attitude to picking it up now and paying $19 a month.

As the use of credit expanded, people who did not pay their bills on time were targeted by those who accepted a higher risk, and the subprime market was born. In recent years, as the Federal Reserve has allowed conditions that generated huge amounts of credit, those loans were made to consumers on homes – often at 100 percent or more of the value of the collateral home – as well as corporate buyouts.

Hedge funds and other investment entities then bought up bundles of those loans.

But when the combination of inflation and declining property values started hitting individual consumers, the crunch became intense for the investors.

A French bank, BNP Parabas, recently said it was shutting down redemption of some of its funds because there was no way to determine the value of the underlying collateral, so it couldn't set a value for the investments.

"What you have happening, with all of these market factors converging, is that investor confidence is totally shattered," Smith told WND. "People thought you could put money in the stock market and it would stay. We've blurred the line between savings and investments. If you put $1,000 in the stock market, that's not savings, that's an investment."

Then hedge funds, he said, "used Wall Street as a casino."

He said it's the first time he's seen the influences converging as they have at this point. And it's worldwide, affecting markets in Europe, China and other areas, in addition to the U.S.

"There's a huge contraction going on," he said.

Robert Chapman, author of the International Forecaster, an economic newsletter with an international audience estimated to number over 100,000, warned in his July 25 newsletter, "We face a collapse in real estate and then in the stock market, which are parts of a larger banking crisis."

Chapman has warned for months that just as the dot.com bubble burst, followed by a burst in the real estate bubble, now the global debt bubble is an issue.

Specifically, for over a year Chapman has predicted a collapse in the heavily leveraged $1.4 trillion dollar unregulated hedge fund market and the little-understood derivative market where leveraged exposure may be as high as $500 trillion.

As WND has previously reported, John Williams, an econometrician who publishes the website Shadow Government Statistics, has been predicting an economic downturn.

"The dollar could lose as much as 30 percent of its value in 2007," Williams told WND in January. "In 2007, we are likely to see the economic downturn of 2006 develop into a structural recession and yet we have international trade and federal budged deficits careening out of control."

"Against the backdrop of intensifying inflationary recession, the dollar has started taking some early and heavy blows," Williams writes in his current subscriber newsletter. "The sub-prime mortgage difficulties have gained media prominence, but they are just the beginning of difficulties for mortgage and other asset-backed securities."

Williams summed up his concerns about the likely bursting of the liquidity bubble this way: "Debt upon debt, leverage upon leverage – the sub-prime real estate loan problems are symptoms of bigger issues."