George Bush said we need to address the root cause of the financial crisis by pumping money into the mortgage market. Home loans, irresponsible lending, and irresponsible borrowing were to blame for today’s economic woes according to the administration.
What does that mean?
What it means to me is that the financial markets have run a natural course of lending money until the ability to collect on those loans became a problem. You’ll remember we changed the bankruptcy laws to make it harder to get rid of debt. We made the FICO scores the corner stone of the insurance industry. There have been many fixes in the works in the past year with each one promising more tax payer dollars.
What should happen is that these huge multinational corporations should go back to the consumers they made loans to and restructure those loans. They made bad loans on over priced assets and now want tax dollars to subsidize those bad business decisions. If it were in fact only Real Estate that was over priced that might be OK.
I paid $30K for a Prius this year that has a retail value, at the time of purchase, of $23K. I was told they were hard to come by, supply and demand. In fact there is a glut of 2008 Priuses in the United States, most people refused to pay the excessive fees.
Food is extremely expensive, oil ridiculous, and products from China were supposed to be cheap, in fact we pay the same for those as Made in America. The list of items requiring more money is long. Plasma TVs were $800 last year and $700 this year. That’s the sign of the times, fewer consumers lower prices. If we have to pay cash for things the prices will really drop.
Everything became expensive by consumers buying on credit with easy credit terms. The question I have kept asking is what lower interest had to do with increased cost. Just because you pay a lower interest rate, your payment should be less. Paying more for the product using lower interest rates for lower payments seems to me to be a wash. The value, core value, remains the same, we are simply paying more with lower payments due to lower interest rates.
As the lenders began taking back assets the problems began. Housing is the most notable. Houses being foreclosed on were being sold for a twenty per cent discount. That wiped out the twenty per cent second that comprised the 0 down financing options. That began the run. As more housing units went into the system fewer buyers were willing to pay the 80% of value. In California and Florida some builders were selling for fifty cents on the dollar. The flood gates opened.
As builders went out of the building business people lost jobs. Construction, building materials, washers, dryers, refrigerators, home decorating items, and furniture all lost jobs. As people lost their homes they lost hope and stopped paying credit card bills. As lender debt became consolidated the securities that were backed by this consumer income became questionable. It snow balled into the financial markets losing jobs, losing income, losing the ability to tap into the consumer credit cash cow.
Now we have consumer confidence declining which in turn causes a panic. If the consumer stops buying the entire economy stops expanding. As a matter of fact consumers may just turn in what they have and stop paying. That would mean huge losses.
There is a bright side from my perspective. I think if the government does nothing lenders will be forced to reorganize debt. If the government interferes lenders will become more bold and hold out for stronger payments on already bad loans. Either way the result is the same. Lenders will have to focus on what is done rather than what the future may bring. Core values will settle in, prices will go down, and the commodities market will stabilize. As a result inflation will be held at bay for a while.
Whether you are in a cash or debt situation I think the opportunities are the same as long as you focus on the basics. If you have cash invest cash for an immediate return. Invest profits into long term, of course I like real estate. If you are in debt, you may have the opportunity in the next three to five years to pay it off. Work more for whatever you can get and pay debt.
Either way I think this is good news. The madness needed to end.
