The Great Depression of 2009

The world is sliding into the second Great Depression.

How did the United States and much of the world reach this point? Three investment manias which ended disastrously.

The seeds of this pending economic disaster were established during the tech stock implosion during March 2000. The Nasdaq composite reached 5132.52 in what became a classic blow-off phase. Cisco Systems had passed General Electric to become the most valuable corporation. Venture capitalists began pouring money into Internet start-up companies in 1995. Companies such as Broderbund Software and Netscape became overnight stars. Ultimately, many companies lacked real earnings. It was all potential.

The mania began to show its excesses when an analyst raised his price target on retail giant Amazon.com, virtually doubling its price overnight. Other tech stalwarts, such as Intel and Microsoft, also soared. Shares were reaching astronomical price-to-earnings multiples, as money continued to flood the market. Financial network CNBC on air-talent became stars, personified by Maria Bartiromo, dubbed by the New York Post as The Money Honey. Stock options replaced salaries as the compensation of choice.

In an attempt to circumvent potential disastrous problems with computer inability to decipher the year 2000, dubbed Y2K, the Federal Reserve Board lowered interest rates, fueling the blow-off phase of the mania. As the Fed reversed itself early in 2000, raising rates to slow the stock market rise and guard against inflation, tech stock prices and the Nasdaq average plunged. Shares which once traded for more $100 plunged to single digits. The climax of the era was the merger of America Online and the much larger Time Warner. Hailed as the symbol of the future, both company's shares soared. AOL chairman Steve Case was hailed as a genius. The new company, AOL Time Warner, was the symbol of the boom and the bust.

Following the stock market crash, exacerbated by the September 11, 2001 attack on New York City, investors learned certain companies had been dishonest when reporting their earnings and true value. Enron and WorldCom ultimately filed for bankruptcy. Executives were tried and imprisoned. Trust in corporate integrity vanished. The era had been declared a lie. Companies and investor wealth vanished forever.

Yet, the events of September 11, 2001 caused the Federal Reserve Board to lower interest rates in an attempt to circumvent fear and keep the economy from sinking into a recession. Rates ultimately reached one percent, sparking the second mania of the decade. Home sales boomed. Money was loaned freely due to a Clinton era change in policy, allowing mortgage government sponsored enteprises Fannie Mae and Freddie Mac to give banks money geared to borrowers with poor credit. Subprime loans fueled the mania, as lenders distributed large of sums of cash, fueling an inflated market, to borrowers with no proof of income or repayment ability. To assist these borrowers, lenders devised creative loans in which the first years of ownership interest only would be paid. Reasoning borrowers then would have the opportunity to save for the inevitable readjustment, home prices soared as sales remained brisk. Many new homeowners, though, never realized there were not building equity.

The mania also sparked an improbable speculation binge, in which homes and condominiums were being bought and resold before construction was completed. Owners used soaring values to gain home equity loans, providing the economy with a solid cash base for stellar growth. That is, until the first set of loans were readjusted.

Owners were shocked by substantial leaps in their monthly mortgages. Foreclosures began permeating the market. Families abandoned homes, flooding previously thriving cities with inventory. Las Vegas, one of the biggest beneficiaries of the boom, became one of the first to experience a bust. The local gaming industry began suffering as free cash among locals disappeared. Homes became worth less than their cost. As the bust reached other major cities, suddenly growth had ceased. The United States was headed for recession.

Equity market capital was leaving the country, fueling the third mania of the decade: soaring commodity prices. As the housing boom roared, prices of copper, used for wiring, skyrocketed. Oil consumption spiked, fueled by sales of popular small trucks and sport utility vehicles. New car owners in China and India now consumed oil like their first world brethren. Prices jumped to $135 per barrel, with analyst promises that $200 oil was a guaranteed part of the globe's future.

The commodities boom fueled emerging market investment. Suddenly BRIC (Brazil, Russia, India and China) was the engine of growth. As the housing bust hit consumers, oil consumption plunged. But emerging market Infrastructure continued growing. Foreign companies such as mobile phone providers VimpelCom and Mobile Telesystems in Russia; America Movil in Latin America and China Mobile attracted American investors.

Then the end began. Airlines, stung by the high cost of jet fuel, removed planes from service. Consumption gradually declined among financially hobbled consumers. Oil prices retreated. The housing bust curtailed demand for copper. Metals and mining stocks plunged. The global economy, stung by the revelation of global hedge fund derivative schemes to hold U.S. mortgages cracked. Former Federal Reserve Board Alan Greenspan declared subprime mortgages worthless, sending the global financial infrastructure reeling.

Deeming the potential failure of troubled banks and brokerages too threatening, the Bush Administration initiated rescue attempts. Bear Stearns, absorbed in a government brokered deal with JP Morgan Chase, was first to be saved. Failure of Lehman Bros. was permitted, sparking panic. Titan lender Washington Mutual plunged, some of its assets assumed by Wells Fargo, which also is absorbing troubled Wachovia Bank. Longtime shareholders were destroyed financially.

In a comical panic, administration officials maintained a determination to support an entity with a phantom foundation by brokering deals with the strongest financial institutions to absorb the remnants. But as the scheme was executed, the economy continued deteriorating. Consumers, stung by the plunge in home values, stopped spending and began defaulting. Suddenly, General Motors' share price plunged to a level last seen in 1946. Burdened by inventory of models no longer in demand, Ford Motor Co. traded for less than $2. General Motors and Chrysler considered a merger. All asked the government for financial assistance. Suddenly, the Bush Administration and congress were scrambling to formulate plans to aid struggling companies. Stock prices plunged as investors watched key components of the American economy slip into abyss, while an ever mounting horde of taxpayer dollars is used to save the infrastructure. Analysts began fearing the dire potential.

Next in this saga: Soaring unemployment, especially within the financial community; constricting credit; government attempts to rescue homeowners to prevent a new wave of foreclosures; declining stocks, as more companies seek government assistance; a huge stimulus package; a ballooning deficit; an expanding safety net of social programs; declining tax revenues due to job losses and dwindling capital gains; attempts to raise taxes to pay for rampant spending; and ultimately, price deflation.

Plunging real estate and stock prices. Collapsing multinational corporations. Inevitable price deflation. The next Great Depression soon will begin.