George Soros:investors are facing the "worst financial crisis of our lifetime"

For many Americans this feels like the worst economic crisis in their lifetimes, and some leading investors are starting to say they may be right.

After IndyMac's failure, which bank could be next?

The bursting of the dot-com bubble in 2000 and 2001 seems tame by comparison, and the savings and loan crisis of the late 1980s and early 1990s almost forgettable. Similarly, the global impact looks to be greater than that of the Asian financial crisis of 1994.

Most comparisons turn to the low growth, high inflation, weak dollar and soaring energy prices of the 1970s, but this time with a housing crisis and spiking commodities prices thrown in, all threatening a prolonged recession.

“It is the most serious financial crisis of our lifetime,” said billionaire investor George Soros, noting a growing effect on the U.S. economy as a whole, rather than just financial markets. ”It is an idle dream to think that you could have this kind of crisis without the real economy being affected.

“We are facing a recession and it is slow in coming but the slower it comes, the more powerful it is,” Soros told Reuters.

The rapid erosion in confidence in Freddie Mac and Fannie Mae underscores the toxic nature of the problems facing the U.S. financial system. The publicly traded, government-sponsored enterprises (GSE) own or guarantee $5 trillion of debt, close to half the value of all U.S. mortgages.

With 8,000 to 9,000 American homes entering foreclosure every day, stock in Fannie and Freddie lost nearly half their value last week, leading the U.S. Treasury to open its discount window to the two firms to ease fears over their capitalization.

This comes as U.S. stock indexes have fallen by more than 20 percent from their peaks in October, while the pan-European FTSEurofirst 300 is down 30 percent, the Shanghai Composite has dropped 45 percent since the year began and Japan's Nikkei 225 is also significantly lower.
Experts who lived through the stagflation of the 1970s – a mixture of stagnated growth with inflation – say it may be worse this time because there are no safe havens in global markets.

Foreign central banks, mostly in Asia, hold almost $1 trillion of the bonds and mortgage-backed bonds sold by Fannie Mae and Freddie Mac.

One investor who lived through the early 1970s noted that in those days an equities investor could take refuge in the money markets.

“Now you're a stone loser in the money market fund whether it's before tax, after tax, or after inflation,” said Cummins Catherwood, managing director of the broker-dealer Boenning & Scattergood.

Dan Fuss, 74, vice chairman of Boston-based Loomis Sayles, which oversees more than $100 billion in fixed-income securities, said the current situation is “eerily reminiscent” of the markets in 1974.

Economist Jeffrey Sachs, who advised Eastern European governments after the fall of communism, also compared it to the early 1970s, which he said noted led to years of slow growth and economic difficulty.

“The '70s were pretty bad,” Sachs said. “There were serious dislocations in the world economy. It was very tough and I hope we don't go through that again.”

But one person's crisis is another's buying opportunity.

While financials and companies sensitive to fuel prices are getting hammered, many industries are attractive long-term holdings, said investment manager Don Hodges of Hodges Capital Management, who has been active in the market since 1960.

“I think ultimately the consumer comes to the rescue,” he said. “A lot of them that say they are hurting have a TV in every room and a couple of SUVs. It's not like they're on poverty street.”

Inevitably, comparisons will be made with the Great Depression, a worldwide economic downturn that lasted for most of the 1930s, until World War II.

For George Schwartz of investment adviser Schwartz Investment Counsel, the current situation is the worst he's seen in 40 years of managing investments.

“I can't tell you first-hand how it was during the Depression but people have been saying to me for months now, 'Gee, it has to get better, it can't get any worse than this.' And I keep saying I don't see why it can't.”