America is turning into "a giant hedge fund." ... as financial services take 40% of all profits

Credit Crisis Only Begins With Mortgages | A Look at the Consumer End of a Stumbling Economy | By Charles R. Morris | The Washington Independent
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The hard reality is that the economy is facing a one-two knockout blow from a collapse in consumer spending, plus a shock-and-awe wave of asset write-downs that is wreaking havoc in the financial sector. The more Bernanke floods the economy with easy money, the worse the final reckoning is likely to be.

First the consumer. For decades, personal consumption’s share of GDP averaged in the 66 percent-67 percent range. In 2000, however, it moved up sharply, hitting 72 percent in early 2007, the highest rate of consumption in any modern country ever.

How did consumers pay for it? Well, not with their wage packet—median household incomes were roughly flat in the 2000s. Instead, households doubled their debt load, and personal savings rates dropped to zero.
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... The same problems infect almost every important asset class. Commercial mortgages had a drunken spree of their own in 2006 and 2007. A sign of the times: the big New York developer, Harry Macklowe, is unable to pay $7 billion in debt on seven prime Manhattan office buildings he bought less than a year ago. The takeover loans that fueled the 2006-2007 stock market boom are also faltering badly. Trading markets are now pricing prime takeover loans and commercial mortgages as if they were junk bonds.

On quite reasonable assumptions, total market losses from defaults and writedowns on mortgages of all kinds, and from junk bonds, leveraged takeover loans, credit cards, and auto loans, will be in the range of $1 trillion. ...
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Imploding Credit Bubble to Hit $1 Trillion | Money Was Free For Banks Under Greenspan, Creating a Debt-Driven Economy | By Charles R. Morris 02/12/2008 | 4 Comments

The current credit and financial crisis, unusually, is almost entirely the creation of the financial services industry.

Financial services now dominates American business to an astonishing degree. Though the industry accounted for only about 16 percent of corporate output in 2007, it racked up more than 40 percent of corporate profits. From 2000 through mid-2007, total American stock market value grew about 6 percent, while the value of financial services stocks grew by 78 percent. And though total corporate profits roughly doubled, business investment was almost flat.

Where did the profits go? Mostly to dividends and stock buybacks, much of which, in turn, poured into the hedge funds and private equity funds driving the company buyout boom. Martin Wolf, an economist and columnist for the London Financial Times, laments that America is turning into "a giant hedge fund." ...
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The scale of the required writedowns is scary. Bank capital will be decimated, necessitating perhaps $150-$200 billion in new capital raising. The tens of billions in new capital raised by banks last year almost all came from sovereign wealth funds – murky investment vehicles mostly under the control of Asian and Arab governments. It is not xenophobic to worry about the sale of yet another huge block of ownership to such entities. ...