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3/9/09

TheStar.com : Fundamentals at root of economic mess

For the complete report from TheStar.com click on this link

Fundamentals at root of economic mess

Never have we seen such a calamity in banking caused by financial instruments that took on a life of their own. Derivatives have become contagions, so unpredictable that financial markets are frozen, continually waiting for the next shoe to drop. Because of this there has been a lack of liquidity due to a lack of trust and confidence between financial institutions. And banks became over-leveraged to a point that became unsustainable. This was eventually exposed by the real estate bubble those financial institutions happily enabled. Never have we seen large corporations like GM, Citigroup and GE, the backbone of the U.S. economy, in such dire straights. This alone is creating a "self-fulfilling prophecy." At the root of the problem is excess – from over production to over capacity. There were too many stores, too many buildings, too many car producers. Eventually the economy became saturated; people could only buy and absorb so much.

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