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Bernanke Calls a Bottom

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Hey, Federal Reserve Chairman Benjamin Bernanke's kinda sorta calling a bottom to our economic malaise -- it's time to get happy, right? Today, he revealed the results of his peek into his economic crystal ball, declaring that our economy could be on the road to recovery in 2010. Laissez les bons temps rouler!

Or not.

There are caveats behind the optimistic headlines, including Bernanke's contention that our policy makers must make all the right moves to even begin a recovery in 2010. Given their track record so far, forgive me for being just a tad cynical about his prediction.

Hooray for "reasonable prospects?"
Bernanke admitted our economy is in a "severe" contraction, and that if the financial system isn't stabilized, the hard times could last into 2010. However, he said that "if actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."

The turn of phrase "reasonable prospect" leaves a lot to be desired. And the actions taken by the administration(s), the Congress, and the Federal Reserve have seemed pretty darn ineffective thus far, succeeding only in expanding the threat of the zombie apocalypse devouring our economy.

This week cemented the idea that Citigroup (NYSE: C  ) is dying a long, slow death; there are serious questions about Bank of America (NYSE: BAC  ) , too. AIG (NYSE: AIG  ) may have been bailed out and basically nationalized last year, but it's once again in need of capital. That financial support the government gave to General Motors (NYSE: GM  ) also looks pointless at the moment, since the automaker's flat broke again.

I recently called out the new administration for resorting to shock tactics similar to those of its predecessor, all to pass a stimulus package that includes pork and moral hazard galore -- not to mention an ill-conceived Buy American provision. (Even companies like General Electric (NYSE: GE  ) and Caterpillar (NYSE: CAT  ) opposed this point, although it probably would have helped them in the near term.) Then again, I shouldn't be shocked. A good mugging requires that element of surprise and fear.

Behind the magic 8-ball
Important folks like Ben Bernanke are supposed to inspire our confidence, whether it's warranted or not. So far, they've failed. (At least Bernanke's speeches make more sense than the mind-numbing orations of his predecessor Alan Greenspan, whose own prognosticative powers aren't looking too hot these days.)

Last fall, I theorized that these pep talks were more like a con game, since all the upbeat statements weren't exactly accompanied by anything to be confident about. At the time, Bernanke argued that if the TARP bailout in the fall wasn't passed, we would have a recession. As it turned out, we'd already been in a recession since late 2007.

Some people suspected economic growth was already starting to run out of steam. Alas, our leaders apparently weren't among them. Earlier last year, the powers that be insisted up and down that the economic problems were controllable and contained.

Don't forget that "considerable uncertainty"
Granted, Bernanke admits there are caveats to his predictions, with admissions about "considerable uncertainty" in the Fed's own forecast. I'll give him some props for honesty, but it's shrewd of Bernanke to hedge in these unprecedented times. Even so, many of us may suspect his prediction will still prove too rosy.

Bernanke seems to say that the economy won't recover without the government's (and the Fed's) bright ideas -- he's advocating "strong" action. But what if those people just keep making the situation worse? The TARP was supposed to be "strong" action, too, and it doesn't seem to have made a dent in the crisis.

Meanwhile, the Fed's been contributing to our current disaster by continuing its years of debt-happy monetary policy. We're in this mess because the Fed and the government allowed the last few years to become a bubble of excessive indebtedness. Forgive me if I don't think enabling overspent individuals and entities to borrow even more, removing the incentive to save, and propping up bloated asset prices will do anything to fix matters.

Reality bites, doesn't it?
It's Bernanke's job -- and his livelihood -- to assure us all that the Fed and the government have everything under control. But the paradise of debt-driven spending in which we all spent the past few years was never realistic. Sooner or later, the bill had to come due. I hope our leaders realize that, but their attempts to "fix" the crisis leave me doubting their grasp of reality. Ugly as it may be, I think the economy simply needs to correct itself, without further interference.

Thanks for the predictions, Mr. Bernanke, but I'd rather wait and see myself how it all turns out.

Alyce Lomax does not own shares of any of the companies mentioned. She knows she shouldn't talk about bottoms; it isn't very nice. The Fool has a disclosure policy.

Read/Post Comments (28) | Recommend This Article (72)

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  • Report this Comment On February 24, 2009, at 4:02 PM, trubludevil wrote:

    I completely agree, brilliant article. We need to let the economy correct itself and painful as it may be, we need to let companies fail that need to fail. Otherwise they will just keep coming back like an irresponsible teenager who has spent all their allowance, and then spent all their allowance advances, and then "need" more. If we do not let the economy correct itself, the dollar will be so devalued that it won't matter that we bailed out these entities.

    Please, Mr. Obama, you have already injected all we the taxpayers can afford and then some. Let market forces do the rest for the sake of avoiding hyperinflation. People will be OK in time.

  • Report this Comment On February 24, 2009, at 4:07 PM, ww4cash wrote:

    We will never learn that intervention (at least and entirely by the Government) only postpones the inevitable (and costs more). If you were out of a job, would you want the Government to extend that time by 6 months, or get the pain overwith quickly? Could you stand it for a year. Could the Government pay for that extra 6 months, while you loose your house and car. Let the Market work it out, but close the loopholes that got us into this (CRA, Wall Street, Banks).

  • Report this Comment On February 24, 2009, at 4:08 PM, ww4cash wrote:

    Also, sounds like another Tea Party is in the wings, will it be outside Pelosi's house?

  • Report this Comment On February 24, 2009, at 4:09 PM, kws12 wrote:

    This is the first time I have ever responded to an article but I have to now. I'm so tired of the media, the president, and congress talking the market and economy down. THEY HAVE NO IDEA WHAT THEY ARE TALKING ABOUT...

    The stimulus plan will have little to no relevant effect on the economy. Most importantly, If we don't start speaking, acting, and thinking positively about this problem we will think ourselves right into a depression.

    There should be a gag order on the media and politicians.

    I listened to Bernanke's speech and it wasn't as negative as it is being painted by the media...

    Go sell your magazines, services or news feeds but ultimately, you will suffer the most because we are tired of listening to your negative BS...

  • Report this Comment On February 24, 2009, at 4:12 PM, ww4cash wrote:

    When are they going to make the Stock Market an even playing field? With Technology what it is today, why do the peons have to wait 15 minutes for an accurate quote, Wall Street doesn't? Why can't we trade after hours on all stocks, like they do? Why do so called Market Makers get to shut us out of entering buys or sells after hous at limit prices? Shouldn't the market risk be the same for all investors?

    Why let them buy or dump stock ahead of us? Why can't we have the same info at the same time?

  • Report this Comment On February 24, 2009, at 4:12 PM, STORMSTOCKER wrote:

    The question everyone has to ask is...

    What Side of the Government Cheese Are You On?

    Are you more the "eater of the cheese"-(government employer,school, municipality,subcontractor,employee or welfare recipiant" Or are you the "producer of the cheese" (taxpayer). Right now, thruout the world we have more "cheese eaters" in world governments, then the "cheese makers"-(the non-government employed taxpayers). We are extremely Out of Balance! The World Economy has becomeway too dependent on "The Government Cheese". The Producers of the cheese, -the taxpayers, are now broke or broken.. Lost Pensions,Benefits,Home Equity,Payrolls, and now Jobs....While Governments "require more and more cheese to feed all the programs, the taxpayer has no "ingrediants"-taxes, to "make it" any more.

    The Cheese Producing Taxpayers have had it! They can't and won't do it any more.!

  • Report this Comment On February 24, 2009, at 5:20 PM, bernbern0 wrote:

    Congratulations kws12,

    I agree with you 100%!

  • Report this Comment On February 24, 2009, at 5:22 PM, AlyceFan wrote:

    Not gonna go into depth with this one as it is really just a "greatest hits" of your previous articles...

    I have to say though, you do stick to your apparently 'libertarian' leanings come hell or high admirable trait...

    It will be interesting to see what your articles will look like when the administrations efforts have had the desired effect.

    Can we count on you to become a born again Keynesian...?

  • Report this Comment On February 24, 2009, at 5:33 PM, chari401k wrote:

    Agree or disagree - is NOT the question. We need our leaders to begin speaking some positive news. The glass has been half empty for too long and the markets are just too emotional because of it!

    So hurray for Bernanke's positive words - let the glass be half full for a change and see how the media and markets respond. Yes, the American worker will too - a Godly principal for this unique and blessed Nation!

  • Report this Comment On February 24, 2009, at 5:49 PM, millerinfoserv wrote:

    3 quick points:

    1. Your commentary ignores the complexity of the modern US economy. The government represents 1/3 of GDP. The stimulus package is primarily aimed at preventing that segment of the economy shrinking at the very time as the rest of the economy. Whether you like or don't like government programs, only a Fool (surely not of your stripe) would argue the government sector should shrink right now.

    2. There is an elephant in the room in the form of the "toxic assets"--no one yet has a handle on the size and scope of their residual value. A little moderation in searching for shock absorber mechanisms to avoid trully catastrophic market overreactions seems warranted to me. Once the toxic assets can be priced, then government policy will have to allow the markets to adjust to those values. But right now--do the markets have ANY information that allows reasonable valuations?

    3. The government infusions of capital into the banks and into the auto industry are best viewed as informal bankruptcy workouts. If GM went into formal bankruptcy, it would be "nationalized" under the total and sole control of a federal employee (a bankruptcy judge). It would be seeking interim financing to give management a reasonable opportunity to develop a work out plan. If the preferred creditors agree to the workout plan, the assets could be consolidated into a viable entity. Isn't this what is going on, but without the words "bankruptcy" wrapped around the process?

  • Report this Comment On February 24, 2009, at 5:59 PM, TMFLomax wrote:

    AlyceFan, there's one thing for sure, I will never become a born-again Keynesian.

    As for thinking positively, yes it is an important and admirable trait, but not at the price of facing things head on and being honest and using common sense. The market and economy was artificially propped up by a long, long period of largely artificial optimism, as far as I'm concerned. The irrational exuberance of the Internet bubble was nothing compared to the irrational exuberance of the housing bubble. I'd say an emphasis on honesty and personal responsibility is something we could all use now. The glass has been half empty for too long...? I don't know about that, the glass was not only half full but supposedly overflowing for an awfully long time, too many people bought into it and nobody wanted to hear that it couldn't go on forever, even if that was the commonsense truth. Just my extra two cents on some of the thoughts here. Thanks for the discussion, everyone.

  • Report this Comment On February 24, 2009, at 6:02 PM, eldetorre wrote:

    "Agree or disagree - is NOT the question. We need our leaders to begin speaking some positive news. The glass has been half empty for too long and the markets are just too emotional because of it!"

    This is a laughable comment! The problem of economy is precisely because of this attitude. Everyone was spinning things positively and leveraging up based on lies. An economy based upon delusional positivity is worthless. We don't need positive spin we need transparency, fairness and unvarnished truth!

  • Report this Comment On February 24, 2009, at 6:43 PM, chari401k wrote:

    Dear eldetorre, et al:

    Thank you for pointing out that positive spin and positive truth are not the same. Excellence and integrity of management seem to no longer exist.

    Of course I was talking about positive truth - guess we need to go back to the original Webster's dictionary to find out what that word means these days! But no, we can't do that either can we now - the original Webster's dictionary was based on Biblical definition of words - Selah!

  • Report this Comment On February 24, 2009, at 8:06 PM, billdick6 wrote:

    Have FHA buy (for price of unpaid mortgage balance) ALL homes going to foreclosure that do not sell for that amount (and then usually rent back to occupant) instead of trying to sell the "toxic assets" to investors. This makes these assets non-toxic as ALL mortgages in the tranches will be paid in full. These now valuable* assets can be sold by Banks etc. to raise funds for new loans, etc. (A perfect and cheaper antidote)

    “Cheaper” as most mortgages in the tranches are being paid. – No need to buy ALL the mortgages in the tranches. It also avoids needing to set any value on the toxic assets. Also keeps these houses off the "for sale" market for a few years. (Stems the slide down of home prices.) Tax payers get real, rentable assets for their dollars with probable capital gains in a few years, not “toxic trash.”

    Even the cost of foreclosures (typically more than $10,000) can be avoided: Underwater owner simply sends deed and mortgage to FHA, which pays off mortgage and takes title to house. If he just walks away he remains in debt. Also a few years later, when FHA sells house back to private owner with capital gain, 50% of “excess profits” after recovery of ALL costs, including interest on the investment plus (rent – repairs, etc.) are returned to the original owner to encourage him to avoid foreclosure losses.

    More details and other social benefits at:

    Which is a post that explained why TARP would fail PRIOR to Congress voting even the first time on Paulson's plan.

    Geithner’s just announced plan for selling toxic assets will fail too because

    (1) Private investors are not investing. Not even the banks know what toxic assets are worth; yet need to set some value on the toxic assets.

    (2) Deep discounts needed to attract investors the banks cannot accept and tax payers should not as they will then need to give the banks more funds. The toxic assets need to be, and can be, made non-toxic as explained above.

    (3) Does not address the fundamental cause of the crisis. – Too many bought, via “creative mortgages” homes they cannot afford. They need to become renters of their houses or downsize to house (or even a trailer, if need be) that they can afford.


    *Actually more valuable than the owners had hoped as the toxic tranches had an assumed default rate which is now ZERO.

  • Report this Comment On February 24, 2009, at 8:39 PM, xetn wrote:

    To amplify STORMSTALKER's comments the following link should be of interest to all: .

    I think all of this just underscores the Socialization of the US and in fact all of the so-called G20 countries. The only country that is reducing (although they have a long way to go) their grip on the economy is China. They are converting their banks and other organizations to private ownership.

  • Report this Comment On February 24, 2009, at 9:03 PM, jesse2159 wrote:

    Although Ben's comments were welcomed,...he's just guessing just like everyone else. The markets all over the world will decide the end of the downward spiral and no predictions by anyone can say when it will bottom out or what the weather will be nine months from now.

  • Report this Comment On February 25, 2009, at 12:11 AM, PoundMutt wrote:

    What MOST in authority (GOV'T LEADERS, BUSINESS LEADERS, etc.) have ignored is that "...the truth, the whole truth, and nothing but the truth..." ARE NOT three different things!!!

  • Report this Comment On February 25, 2009, at 9:23 AM, scotchbarn wrote:

    Those of you who saw the film "Amadeus" may remember the remark made by Mozart's patron to the great man himself - "Too many notes." These days we have the phenomenon of "too many words" and use them when and where they are not needed.

    So to TMFLomax I would ask about the use of the word "prognosticative" which I cannot find in either of my well-thumbed dictionaries, although I did find it in Roget's Thesaurus. However, the word "prognostic" is an adjective and sits nicely in front of the word "powers". Why complicate English grammar - it is difficult enough as it is!

    And of course you may talk about bottoms! Some are exquisite and well worth talking about. Though making a prognosis about the next one is infinitely more challenging!

  • Report this Comment On February 25, 2009, at 11:53 AM, dgmennie wrote:

    The US economic model works fine so long as the trend remains basically inflationary and most assets (as well as most salaries, stock values, home prices, etc.) keep going up year after year. A small, occasional downward nudge in one or more sectors is fine so long as the general upward trend remains unbroken.

    But now everything of consequence has taken a negative hit at the same time. This has induced panic where once there was unbridled confidence. If you are retired, or thinking about retiring soon, what do you invest in that will pay you a decent return for the next 20-30 years? A year ago you could call your local financial planner and he/she would decorate your coffee table with stacks of investment options that promised financial bliss and security. Now, nobody has even the hint of a workable answer.

    If you are a student making critical decisions about career and college options, do you use family assets (or go into debt) at the rate of $20-50K/year to "prepare" for a job that may well not exist when you graduate? Or if the job does exist, will Corporate America soon ship it to India or Taiwan?

    Unfortunately, the familiar steadily-growing economy greased by a polite amount of inflation has disappeared. In its place is a black hole that swallows huge segmernts of "presumed" value and spits out pennies. It is unlikely that any type of bail-out or stimulus can come close to "making up" for the "presumed wealth" that has already been decimated.

    Yet the basic assets of the US are no different now than they ever were in decades past. No physical infrastructure has been destroyed or stolen and our native, well educated, able, and intelligent work force remains available for hire. Business opportunities still becon the ingenious among us (if they could only get financing).

    While it has become tempting to target a few scoundrels for blame, it would be far more productive to re-invent the US economy in such a way that a handful of players can no longer wreck havoc on everyone. This would mean FAR LESS consolidation and bigness in key industries than is presently permissable. Why not five or ten domestic auto makers instead of three? Why are our banks allowed to merge themselves into hugeness beyond comprehension? Do we really need 90+ percent of our computers and software tied to just ONE vendor?

    In the future, a diversity of such vendors would be key to righting things once again. An ongoing, intelligent analysis could prtobably spot most potential problems involving size. And no key product or service would be allowed to consolidate around just one or two sources. Individual business failures would once again become tolerable since NO ONE BUSINESS in any key sector would ever again be perrmitted a "too big to fail" free pass.

    Likewise, consumers should not have the option of racking up debt beyond any reasonable expectation of payback. The go-go days of making loans, collecting up-front commissions, and dumping the result as an "investment" must end. And credit card companies (of which there would now be very many) would simply have to swallow the results of overly-aggressive or predatory lending among those least able to pay.

    We can never eradicate charitans, theives, ignorance, or stupidity. But we can remake the economic infrastructure such that even when the worst screw-ups occur, the consequences are of managable size.

  • Report this Comment On February 25, 2009, at 1:58 PM, max12345 wrote:

    The author says: "Ugly as it may be, I think the economy simply needs to correct itself, without further interference"

    How about if "ugly as it may be" meant super-ugly and for a super-long time? That is, a much greater worldwide depression than the Great Depression and lasting twice as long ?

    Would it still "simply need to correct itself without further interference"? And can the author guarantee that this won't happen?

    Personally, I think the first who would say that we should have done something are the very same folks who are now saying we should do nothing.

    The problem with "free market" solutions (and BTW markets have never been free anywhere, anytime) is that those who advocate them have never had to live in crushing poverty.

    So I suggest a "no expenses paid one way educational trip to coastal Bangladesh" for some of the most ardent advocates.

  • Report this Comment On February 26, 2009, at 5:12 AM, JSinvestmentguru wrote:

    Allow a full tax credit for the purchase of a new Yukon, Navigator or other large gas guzzler, also allow the credit to include the insurance, and the financing. The credit could be taken in the years that payments are made. This depletes the inventory of GM and Ford, "bails them out", helps the bank that finances, helps the insurance. Bails everybody out, the "taxpayer" gets something for his bailout. Driving around the guzzlers helps restore the price of gas, helps Chevron, XOM, etc, creates incentives to make smaller cars which helps Toyota (Prius), BMW (electric Mini), etc. Ford and GM wouldn't be prohibited from making sensible cars but if this didn't save them, they probably need to go out of business. This plan might go for 4 years. Please refer to this as the Sloan Economic Stimulus Plan.

  • Report this Comment On February 26, 2009, at 11:12 AM, decbutt wrote:

    This is hilarious.

    We were facing - as an end result - full scale banking collapse; loss of wealth; loss of liquidity; loss of jobs; protests; hunger; riots and eventually starvation for some.

    No banks mean no job (since you won't get paid). How do you envision that the banks could collapse and yet vast swathes of unpaid people remain employed, or even eat?

    Difficulty buying food: It would be fine at first, if you had a stack of cash, but even then very little new food would get through since the drivers and warehouse workers didn't get paid.

    Eventually there would be

    No garbage collection (since they won't get paid).

    No electricity (ditto)

    "How ugly" it would have become is both stark and obvious. The whole world is much more dependent on US banks now than they were in 1930.

    Exactly how long did it take things to go apocalyptic in the New Orleans Super dome?

    Think that wouldn't happen in your neighborhood without money continuing to flow? It would only be a matter of time ....

  • Report this Comment On February 26, 2009, at 12:47 PM, AlyceFan wrote:

    Alyce, didn't really expect you would :-)

    You are certainly right folks should practice personal responsibility...but your premise seems to be that everyone in trouble vis a vis their mortgage are not responsible.

    There is a well worn story told by Franklin Roosevelt designed to get acceptance in this country for the lend lease program. Boiled down, if your neighbors house is on fire you don't haggle over the price of your fire hose, you lend it to him so your house doesn't burn down with it. Applying it to the current crisis, it doesn't really matter if the neighbors house caught on fire by accident or because he was playing with is still gonna burn down your house if you don't take action.

    There is no doubt this crisis started when speculators, investors and homeowners dove headfirst into the subprime waters. When those rates went beyond their means foreclosures hit, credit dried up and housing prices plummeted.

    Aided and abetted by a President more intent on wasting hundreds of billions on a useless war, by a Congress more intent on making sure the wealthy got theirs, that healthcare remained profitable for big insurance by refusing to enact even a single measure to drive down costs or god forbid, make sure everyone actually had healthcare, that sure big oil wouldn't be forced to help solve the energy crisis while racking up record profits, and by regulators not doing their job while those in Congress and the White House responsible for their oversight looked the other way, the economy spiraled down even further.

    We are way beyond the point where the only ones being hurt are those that deserve to be. We are at the point now where millions of homeowners who did not use sub prime loans, who did not finance their homes beyond what they reasonably expected to be able to afford, who are not in it for investment reasons are being severely impacted. And thanks to the inaction over the last eight years, healthcare costs continue to spiral upwards, energy prices have spiked up, home prices are plummeting, all precisely when people were beginning to lose their jobs at an ever accelerating rate.

    Your prescription, last tried I believe in the Gilded Age, is simply to let the recession resolve itself. Allow those who did not precipitate the crisis to sink along with those who did, even though there is a historically proven method for resolving it more quickly, and with less harm to folks caught up in it. Fortunately we seem to have leadership now that is willing to pursue that option.

  • Report this Comment On February 27, 2009, at 9:32 PM, MRBillsnutjob wrote:

    So Bernanke has all this wisdom when he is the one that could have changed this before it blew up. With regulation and such like you need more than a heart beat to buy a house and you should be able to make payments with you actual income. Now the democrats have to pick up where the bush crew failed and suffer the slings and arrows from arm chair politicians. Even the folks that are suppose to know what is going on say its going to take a lot of spending to jump start this old jalopy. As distasteful as that is it will take a lot of elbow grease and thinking outside the box just to slip through the restricting hoop of a full blown depression yes I said it Depression 15-20 % unemployed that's right 0ne 0f 5 so throw your mud but you better hope there is a rabbit in that hat of Obama's or our collective bacon will be scorched Good Luck to U.S. all we will need it in the up coming years. If the republicans think they can sit on their thumbs for the next fore years and not get involved when election time comes around again they may be on the outside looking in.

  • Report this Comment On February 27, 2009, at 9:35 PM, StarWitchDoctor wrote:

    bottom callers get sticky fingers. investors may get raisins, but they will keep thier fingers clean.

  • Report this Comment On February 27, 2009, at 9:44 PM, StarWitchDoctor wrote:

    bottom pickers

    hey fellas, this is the time to maintain our cool.

    we are entering a technical wasteland. the stops are gone and the bottom is gone. there never was a bottom to credit. lets just hope our bonds pay off.

    a little humor goes a long way

  • Report this Comment On February 27, 2009, at 9:48 PM, MRBillsnutjob wrote:

    Ps think of it if the collective hordes are willing to resort to violence and thievery in good time think how bad it could be if it hits the fan in a major way. So the question is are you feeling lucky(****). Or would you rather stop things from deteriorating to the point of no return. I say do what it takes after all at a train wreck you help the living bury the dead and pick up the peices

    and repair the damage in that order.

  • Report this Comment On February 28, 2009, at 2:17 AM, nicko168 wrote:

    Based on the past weeks, the stock market has been a place for the guys to rally & show their frustration towards "Robin Hood".So, no matter what stocks u thinking of..forget it....

    Ultimately, do you know who's the real fools? Ha..Ha..

    Real fools are the one who plunge their own economy to zero together with the $787 billion stimulus plan. Why?

    They'll be slapping their own face caused it opens up the opportunities & competition to the "third" world to buy all the "CHEAP" US Companies..Arabi, China, Kuwait & maybe Iran, Iraq etc...

    Based on the recent news, US companies are selling off thier valuable assets (technologies, bank etc) in order to pull through the crisis & who are they selling to? Make a guess....AIG went to China, Singapore etc selling off their stakes..Another is selling their US technologies or commodities caused they're ridden by billions of dollars debt....At the end of the crisis, what will the US companies who once holds the supremacy in technologies, banking etc become? "Zero" is my answer...

    Who the losers? The real losers are the next generation facing the real US....

    There's a old chinese teaching:

    "To break one chopstick is easy..

    To break a bunch of chopstick, is difficult"

    To the real fools, WATCH OUT!!! Ha..Ha...

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