B. Preface

The year is 2008 and I am living in Miami Florida. Miami is one of several places where it seems like a nuclear bomb has ravaged the economy. Never before in my life has the foundations of society in the United States been so questionable.  A real estate bubble has been bursting since the beginning of 2006. The magnitude of the damage is impossible to measure at this point in time. The largest banks in the country are failing, needing federal bailouts. The trust level between banks and other financial institutions is so bad that the credit markets have frozen. The stock market has gone down more than 45% and 2 month Treasuries are paying less that .1%. Basically, institutions and individuals are more concerned about preserving principle that earning interest. Unemployment is rising by the month and is over 9.3% in Michigan and 6.5% nationally. The big three auto makers – General Motors, Ford and Chrysler are also begging for a bailout like the Banks (November 20, 2008).

A downward economic spiral is feeding on itself. Housing prices are collapsing; putting home owners upside down on their mortgages; mortgages that were taken out as subprime and with adjustable rates are exceeding the average person’s ability to service them; banks and lending institutions are writing down these bad loans beyond their available reserves and sending them into default. What started in the residential markets is quickly spilling over into the commercial area and putting commercial paper at risk and sending rates ever higher. The next shoe to drop is consumer confidence is dropping as they see their 401K, IRA’s, pensions and pay checks shrink. Now companies across the entire spectrum are panicking (cutting salaries and staff) – sending unemployment rates ever higher. Finally, right behind that the governments that were drunk on the revenues from real estate appreciating are having the rug pulled out from under them.

This would be bad enough. However, the packaging of real estate securities and globalization of financial markets has caused our financial problems to spread around the world, devastating banks around the world. There is an additional phenomenon that has compounded these problems – the rapid rise in commodity prices, causing a significant transfer of wealth to oil rich countries; the emergence of third world economies such as China, India and Brazil; and the concept of “Free Trade”. The net result is the largest transfer of wealth in the shortest period of time in the world’s history.

We are nearing the end of the George Bush years which has been a disaster – economically, politically for the Republican Party, internationally to be an American, just to name a few.  As much as it would be easy to blame one person for the mess we are now in, in would be inaccurate to say that it happened over a mere eight years. The reality is, the economic mess Americans now face is global in scope with roots that go back to the Nixon years. It really doesn’t matter who did what when. What does matter is, what caused this mess and how to best get out of it.

Many Americans, like myself (and I suspect many people around the world) that have enjoyed the prosperity of education, hard work, advances in technologies and savings will not enjoy the fruits of their labors as they enter retirement. This book will be of little comfort to those people. Watching the politicians squander their tax dollars on useless bailouts does nothing but infuriate them even more but worse yet they offer little comfort as to what the future will look like.

This was the motivation for this book. I come from an engineering background and I am self taught on finance and economic matters as it related to my professional career. It is relatively standard exercise for an engineer to analyze a problem, explore various options as possible solutions and choose the best option to recommend. There will be plenty to criticize about the analysis and the options presented but the problem is of such a magnitude I only hope that this treatment of the subject matter will help move the discussion forward towards a more positive, long lasting solution that will benefit the maximum number of people.

We share a common problem that begs for a solution. The real challenge is to find a substantive enough solution that will provide more than just a mere Band-Aid on a huge hemorrhage.