During the past 10 days I have been glued to TV and web news sites. The events unfolding between Wall Street and Washington D.C. was scary and exciting drama. I was concerned for my investments, which I am using to fund StockWiki and other startups. I comment on a few items that stood out.

The first shocking event was that Lehman Brothers filed for bankruptcy. Going into Friday evening (9/12/08), I thought chances were higher than 50% that there will be a rescue. I thought the Fed will come through and provide some sort of an indirect credit assistance without a direct loan guarantee that will allow Lehman to be bought by either Bank of America or Barclays. But, I was wrong before about the likelihood of a bankruptcy during Orange County and Russian government bond defaults. So, I didn't feel as sure about Lehman's outcome. It was still a shock when the announcement came at 2 a.m. Monday morning.

My next shock was the pure panic and absolute pandemonium in the trading markets. Swap spreads reaching 8% above Treasury yield, US Dollar LIBOR trading several percentage points above Treasury Bills, even though they are virtually the same thing, Short-term Treasury Bills actually trading at negative yield for a brief period and closing at 0% yield, a massive run on Money Market Funds, and Brazil & Mexico stock indexes showing huge declines, even though Latin American markets had been faring better than the rest of the world until May. Wednesday evening and Thursday morning was the worst period. I was beginning to think we were moving from a 1987 type of stock market crash to a much more serious 1929 type of crash where the real economy experiences 25% unemployment and sever economic pain that lasts for a decade. I am glad Henry Paulson was able to convince our Congressmen of the severity of this crisis. I don't think he could have been exaggerating.

I am very glad and relieved that we have probably averted a severe panic, but I think we will still have a slow economy for 2 more years or so. Main Street conditions would have been adversely affected along with Wall Street this year. And the cost of the bailout will prevent Congress from passing another stimulus bill. Most experts are expecting another 10% decline in housing price average on top of the 25% decline from 2006 peak. But when I look at the S&P/Case-Shiller home price index, I think it may need to fall another 18-20%. The index was 115 in April 2001, right after the internet stock bubble. I think investors just switched to housing at that time. The index reached 206 before falling to 168 in June 2008. (The FHA also measures median home price which shows different peak time and amount of drop in home price since then.)
View home price index spreadsheet>

Read - Housing Downturn: Is the End in Sight?>

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