Historic Financial Collapse Underway?
I tend to be in hotel rooms when bubbles burst.
On January 6, 2000, I was on the 30th-something floor of the Marriott hotel across the street from the convention center in San Francisco. I was jet lagged and up working even though it was still dark outside, around 5:30 a.m. local time. Just then, Lucent Technologies announced earnings before the market opened. After beating expectations for 15 quarters in a row, Lucent missed its earnings forecast by 18¢. Much worse, it reported a $1 billion drop in revenue. You can't miss on revenues by $1 billion unless something is horribly wrong.
And something was horribly wrong. It wasn't clear until months later, but that was the morning the bull market in tech, telecom, and the Internet died. I vividly remember that morning. Believe it or not, I didn't have to look up the date or the details on the earnings miss. That morning is seared on my brain. It was the end.
I don't believe it was a coincidence I was in San Francisco that day. We financial scribblers follow the market. We cover what's hot. I visited tech capitals San Francisco, Boston, or Seattle nearly every month during the big bubble of 1998-2001. It was an incredible, exciting time. I'm glad I got to see it up close and personal.
This month, I got the same feeling I did back on January 6, 2000. It's over. And I was watching it all collapse, at the epicenter.
Recently, I was at the Four Seasons Hotel, looking down over the Las Vegas strip. Fannie Mae (FNM) and Freddie Mac (FRE) have finally cracked. While the stocks haven't gone to zero yet, it's clear the market woke up to the obvious fact equity holders of these companies are holding worthless pieces of paper. From my hotel room, I could see many of the reasons why...
Las Vegas may end up being the single-largest source of mortgage defaults. Upscale home prices here have fallen nearly 40%. The $2 billion Cosmopolitan hotel development is in default. The $6 billion Las Vegas Plaza is being delayed. Even Donald Trump has put his second tower on hold. It's a bloody mess.
Meanwhile, City Center, a $9.2 billion condominium/hotel development on the strip, is still going up.
Pre-construction sales began in February of last year – just before the financial markets shut out condo developers completely. I can see six huge cranes and the enormous steel infrastructure, half wrapped in glass. I cannot embellish on how big City Center is.
Each of its six main buildings seems bigger than any existing building in Las Vegas. This is the largest privately financed development in the history of the United States. It sits in the middle of a desert, in a city whose economy is dominated by gambling. Those two facts alone would give most reasonable investors pause.
The entire complex is five-star. One-bedroom condos here sold for $700,000. And the complex includes literally thousands of them. What will they be worth in foreclosure? I'd bet less than $200,000. And who will absorb those losses? I can't help but think in another two years we will look at those buildings and wonder, "What were they thinking?"
On a smaller scale, the same problems and the same questions are being asked of real estate buyers all over the United States. And the answers are not pleasant. By a huge margin, the largest owners of residential mortgages in the world are Fannie Mae and Freddie Mac.
Whether we like to admit it or not, the entire market for housing in the United States has been corrupted by government involvement. By subsidizing the availability of credit and by granting huge tax incentives to home speculators, the government helped finance the biggest bubble of all – the biggest bubble in history. It won't be unwound without serious disruptions to our economy and, unfortunately, a tremendous amount of pain.
I was listening carefully this week to the congressional testimony of Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. Both insisted Fannie and Freddie have enough capital to continue their operations. Paulson sounded just like a Latin American finance minister on the eve of devaluation.
Incredibly, they both insisted all that was needed was more regulation! I felt like I was watching a kind of financial Nuremberg trial, where the main perpetrators of the crime were utterly oblivious to the evil they'd created. I was aghast.
Consider: Only 20 years ago, the U.S.'s total outstanding mortgage debt made up roughly 30% of our GDP. Homeowners held large stakes in their houses – close to 70% of the equity on average. Today, mortgage debt equals nearly 80% of GDP. The average homeowner owns less than half the equity in his home. This seismic change in the nature of home ownership and debt financing occurred nearly overnight – in less than one generation.
Fannie Mae and Freddie Mac made it all possible. Released from capital-ratio requirements and backed with a line of credit at the Treasury, they were able to buy a nearly unlimited amount of mortgages. Today, Freddie or Fannie finance more than 80% of all new mortgages in the United States. Over the last several decades, their presence in the market greatly lowered interest rates, created an endless supply of credit, and pushed housing prices higher. Meanwhile, the cost of the government guarantee, which lay behind Fannie and Freddie's power, was invisible.
Now what?
The size of the bailout of Fannie Mae and Freddie Mac could easily surpass $1 trillion. But Congress has no understanding, at all, of what's about to happen.
In 2003, chairman of the Senate Banking Committee Chris Dodd refinanced his home mortgages with Countrywide Financial (CFC), receiving a below-market interest rate that allegedly saved him $75,000 a year. He never disclosed the benefit to the Senate and claimed he was in Countrywide's VIP program because he was "a good customer of Countrywide's" – which is as bald-faced a lie as has ever been told in Washington, D.C.
In any case, the bill Dodd is getting through Congress (which was written by Bank of America (BAC), by the way) will create a new tax on Freddie and Fannie – 4.2 basis points on all mortgages they buy. That would generate about $600 million annually.
And, the money won't go into the general fund. Most of the money (65%) will go directly to the secretary of Housing and Urban Development, who will pass out the loot in the form of block grants to states. The Treasury secretary will get the rest of the money. He's allowed to give it to any nonprofit entity he chooses. And that means, whoever wins the presidency will get another $600 million (or more) each year to kick back to political backers. All for "affordable" housing, of course...
If Congress had any idea how serious the problems with Freddie and Fannie were going to become, they wouldn't mess around with a new tax or allowing a rival to Fannie and Freddie (Bank of America) to draft the bailout. Clearly, Congress has no idea how much trouble Fannie and Freddie face. Here's my estimate:
Freddie and Fannie own or guarantee $5 trillion (yes, trillion) in U.S. residential mortgages. I'm convinced mortgage losses after recoveries will exceed 10% of the total outstanding and could exceed 20%. Thus, over the next 12 to 24 months, Fannie and Freddie will likely face losses of between $500 billion and $1 trillion. That's a huge amount of money, even for Congress.
There's simply no doubt Fannie Mae's and Freddie Mac's shareholders will be wiped out. Last month, I wrote the market value of the mortgages on their balance sheets has fallen by at least 5%, wiping out all of their equity. And when you factor in the off-balance-sheet guarantees these firms have sold, it was impossible to imagine they remained economically viable...
I'm embarrassed to admit my estimate of Fannie and Freddie's viability was hugely optimistic. Both firms seem unlikely to last through the end of July. Readers who followed my advice in June are up over 70% on their short positions in Fannie and Freddie.
I'm certain the government will do whatever it takes to ensure Fannie and Freddie continue to operate – but that doesn't mean bailing out the shareholders. All the government will do is guarantee Fannie and Freddie's debts. That means a huge amount of taxpayer money is about to go into troubled mortgages. A huge amount of money the government doesn't have and won't be able to increase taxes enough to afford. And that means inflation is going to get a lot worse. The government is going to pay for guns, butter, and housing. Look out.
The value of the dollar is going to go down, and the price of everything else is going to go up. I think this sets the stage for a true inflationary crisis – as the economy can't adjust to soaring commodity prices. I also find it hard to believe our foreign creditors will continue to hold U.S. Treasury bonds if the U.S. Treasury takes on all of the mortgage losses of Fannie Mae and Freddie Mac. I think they'll dump our bonds and that will literally be the end. No more world reserve currency. No more pegs to the dollar around the world. We'll be on our way to banana republic status, in terms of credit quality.
What's the best way to protect yourself and to make money on this looming crisis?
You must buy gold and silver as a hedge against a further collapse in the value of the U.S. dollar.
Most people don't spend any amount of time thinking about the value of the dollar. It has never occurred to nine out of 10 Americans that the last 35 years mark the first time in recorded history that every major financial power in the world operated with fiat (paper) money in the absence of a World War. No monetary backstop exists anywhere – no limit in any country to the amount of paper the government can create on a whim. Meanwhile, the track record of every experiment with fiat money is 100% perfect: In every case, the currency regime was eventually destroyed by an inflationary crisis.
I believe we have begun the monetary crisis that will end the dollar standard that has governed world trade since World War II.
I can promise you, the same way I promised readers that GM (GM), Freddie Mac, and Fannie Mae were "zeros" – the U.S. dollar's strength will continue to fade.
Slowly, bit by bit, Americans will realize this. Our foreign creditors will realize it, too. The result will be a flight from the U.S. dollar into other assets – at any price. Please set up your affairs now, so you can profit from the coming panic, not be a victim of it.
Writing the most recent issue of my investment advisory – my third strong endorsement of precious metals in as many years – I can't help but feel like Chicken Little. Are things really this bad? Well, let me ask you which do you think is more likely?
Scenario one: The U.S. government recognizes its severe financial mismanagement. It allows Fannie and Freddie to collapse completely and does not assume their liabilities. Mortgage investors take huge losses. Mortgage rates soar to more than 10%. Housing prices fall 75% – which makes housing affordable for millions of Americans previously priced out of the market.
In the meantime, the government cuts spending by 30% and reduces taxes radically to encourage economic growth (which, ironically, increases tax receipts, leading to a balanced budget). It restructures Social Security, moving the age of retirement to 75. And most importantly, the government gets out of health care completely, renouncing all of its Medicare obligations. Hospitals and doctors immediately drop their fees to meet the affordability requirements of a free market.
Scenario two: The U.S. government refuses to take responsibility for causing a bubble in mortgage finance. Rather than allow the bubble to deflate quickly, it bails out Fannie and Freddie. Mortgage losses build for five years, reaching more than $1 trillion. Housing prices stabilize in good neighborhoods, but risk-averse lending practices result in widespread vacancy across broad swaths of America.
Refusing to substantially raise taxes, annual deficits surpass $1 trillion in 2010. Total government debt begins to spiral out of control as our interest costs mount. Our foreign creditors lose confidence in the dollar and begin dumping it on the world market. Inflation surpasses 20% annually and prices for energy soar. Oil reaches $250 per barrel. The president alleges an international conspiracy to destroy America and threatens to attack China if it continues to sell the dollar. Price controls are instituted.
No paper currency regime has ever lasted. No government in history has ever repaid debts as large as those already assumed by our government (in terms of GDP). A default is not likely – it is inevitable.
The answer seems obvious and urgent. Make sure you own a substantial amount of gold and silver. I prefer to own plain bullion. Buy gold and silver bullion and bury it somewhere safe. The gold won't rust. Silver is more difficult to manage, but the best way to own it is to take physical possession.
That's what I strongly recommend you do. Right now. Seriously. I wouldn't be surprised to see prices of these metals soar if Fannie and Freddie are taken over by the Feds, which is what I expect will happen.
Is there a chance I'm wrong about all of this? Is there a chance the death of Fannie and Freddie will mark the end of the crisis? That financial stocks will rise from here and gold and silver will fall?
Yes, absolutely. At some point all of the bad news will be in the market, and prices will turn before the fundamentals improve. So, yes, I might be Chicken Little. I might be dead wrong. But I don't think we are anywhere near the end of the real estate bubble collapse, and I know we haven't even begun to deal with the fiscal imbalances of our profligate politicians.
One more thing... I wish I were wrong about all of this. But I don't believe the debts of our government and many of our neighbors will ever be repaid. As a nation, we've essentially bankrupted ourselves over the last 20 years. And the consequences of those actions will be felt by several generations of Americans, at least.
I worry about the middle class, people who generally lack the financial knowledge and resources to protect their savings. They will probably believe the lies they're told by the mainstream press about "greedy" speculators and evil oil companies. They will almost surely support the policies and the politicians who are actually responsible for their increasing poverty.
I also worry about people who are retired and depending on the government to support them. They will surely see their standard of living decline substantially.
And finally, I worry most of all about my infant son. Will he grow up in a vastly different kind of America than I did? He could. And that makes me saddest of all.
Disclosure: None
This article has 104 comments:
As to which scenarios play out - I truly hope it's the first, but given the cowardice of politicians and the constituencies, we'll wind up with 2.
Korean
The only bankruptcy that buying puts outright is good for is the personal kind. If you want to gamble, go to Vegas. It's a hell of a lot more fun.
Clifford
Sad but so true. Politicians have finally wrecked the economy. It will take a generation to recover.
gold
U.S. hegemony, economic and military, is in reverse. Like the author said, every fiat currency regime has ultimately ended in the crapper. And if a 'strategic base in the middle East' were enough to secure cheaper oil, we wouldn't be paying $130+ a barrel for it like everyone else.
Boy, you need to log off your computer and hit those GED books a bit harder.
ivaw.org/wintersoldier
Like the economy, even our "mighty military" has a breaking point.
Canada
Gold is WAY UP from where it was 5 years ago. If a US / China recession ocurrs, expect it to decrease.
Why not invest in Euros instead? They are gonna do a lot better job controlling the inflation.
"Howl ye rich man...for your abundant wealth has rotted and is ruined and your many garments have become moth-eaten. Your gold and your silver are completely rusted through and their rust will be a testimony against you and it will devour your flesh as if it were fire. You have heaped together treasure for the last days." James 5:1-3
The eventual destruction of all world economies is not a result of stupidity but rather it is intentional, its purpose being to bring about a single one world fiat currency which can be controlled by a privileged few. Mayer Rothchild said,"If I control the currency of a government, I control the government." And since gold and silver are ever the enemy of fiat currency, quick work will be made of them and since it is usually the rich who can afford to hedge into them, they will be the ones doing the howling.
_me_Al
I'd like to see a little more on this. How did you arrive at these estimates?
So, if you were an American, having only US$ to live on, your purchasing power will increase. If you are on Social Security even a near destroyed US$ will be worth more that the R$ and other emerging countries currencies.
The answer is get out of the states and move to another country where the currency will be destroyed by that countries stupity. Just be careful which country you choose. You may end up in a not so nice revolution.
As for gold, I would agree to some extent that it "may" help one survive. If you do own it own it physically. I would guess that the gold issued coins, although expensive, may be the best to have for living on a day to day basis. For investment bullion will be best.
Fannie and Freddie should quitely and quickly be burried. The faster we rid ourselves of these monsters the better. NO bailout. The Secretary of the Treasury is not interested in the country but only one street...Wall Street.
At long last it should be openly said by everyone that Greenspan may be the second worst government employee ever. The first is the morally corrupt Congress who allowed him to continue in office.
Does any one remember the "New Paradigm"? The idea that emerged in the late 90's to explain that you do not need earnings to justify a stock price?
The "New-New Paradigm" of this decade is that the global economies have decoupled and that what happens in the US no longer matters to the global economic cycle. Rubbish.
If half of what you describe takes place we are headed into a great deflation. Not inflation. It it will happen globally.
Euro land has a lot of weak economies in it. That currency is no safe have in the storm you describe. The Japanese economy has been in the tank for 20 years. The aging population limits domestic demand. In the future economy you describe there is no safety in the Yen.
China is in trouble today. It's weakness is masked by the Olympics run up. That currency will be a bust too.
So what currency do we buy? No gold. Not silver. That is like getting long oil at $150. A losing strategy.
I am not sure where the safe place to hide is. I am convinced that the logical choices, precious metals, will not prove to be a safe haven in a massively deflationary global economy.
It will be interesting to watch this unfold though. Good luck to all.
ultimately behind it and why?
The author , impressed me that salvaging Fannie / Freddie , the two government sponsored entities ( GSEs ) is like a " crime " .
I heard one said that the recent foreclosures stem from two sources :
1 ) the subprimes alleged to be fraud related ; someone organized to inflat property values by fraudulent appraisals and then mortgaged same to banks under the names of individuals with poor credit ratings ; the walking away would reap good profits for the organized criminals while leaving the banks with huge expenses and over valued properties .
2 ) the severe drop in price of the financials since October , 2007 have left traditional investors broke and unable to make mortgage payments . Foreclosures thus extended to the real people .
The " naked " short sellers intensified the damages on the economy .
Judging from the history of loss incurred by Citigroup ( C ) , the subprime issue can be speculated as over or almost over ; loss from over 10B in the 4th Q , 2007 to the 2.5B in the 2nd Q , 2008 .
The main hurdle now is the foreclures inflicted with the traditional investors or the good guys who lost all by confronting the unreasonably sharp drops in bank prices since October , 2007 .
Say , Regional Finance ( RF ) , a profitable regional banking network which has little or no exposure to the subprime , went down from $ 23 to $ 7 from April to July or in just three months .
Oh , RF has about 1.5% non performing assets ( NFA ) which are lands good for home construction purposes .
The real estate maxim tells us that land by nature , appreciates in value . Such NFA is in fact valuable asset to the bank and the same leaps when the real estate market becomes normal .
Investing into the future and thereby invest in financials .
When financials go back up to a reasonable level , the good guys would have their savings back to update their mortgage payments .
As a result , foreclosures would be reduced and the real estate market would be back to its normal functioning .
Some article indicated that Fennie / Freddie were told by the US government to loosen up their policy in accepting mortgages at the time when the subprime problem had surfaced while banks then generally raised their standards .
Such " startegy " was an attempt by the US government to boost up the real estate market at the time .
That attempt failed for the loose rules would naturally , invite more fraudulent subprimes .
Fannie / Freddie ended up with mortgages that they would not accept under their own policy .
On viewing the year 2001 / 2002 downturn , Fannie / Freddie flared better than or comparable to strong pretigeous banks like Bank of America .
Fannie / Freddie have proven themselves to be effective and profitable when being allowed to use their own standards in assessing mortgage applications .
Even being handicapped , the combined loss to date for the two GSEs is about 10B which is about the same as what Citigroup has lost in its 4th Q , 2007 .
Such quantity of loss is obviously manageable under today's standard .
Freddie's CEO has repeatedly told the media that their retained earnings are sufficient to finance the GSE through this crisis .
The shoring up by the US government is more for gaining back public confidence since half of the US mortgages are guarenteed or owned by the two GSEs .
Yes , substandard policy attracts frauds and eventual mortgage failures .
Published articles indicated that the substandards were used by subsidaries of investment banks and not regional banks .
The two GSEs straddled into these substandards reluctantly on a demand by the government to salvage the real estate market .
One would trust that the two GSEs would be more than happy when being allowed to go back to their own lending practice proven to be effective and profitable .
The " learned " author accepts that the economy would completely collapsed should the two GSEs fail .
The shoring up of the two GSEs would avoid such collapse .
The author however , suggested that a complete collapse in economy would best serve the US people as oppose to the backers' claim that the US people would benefit when the two GSEs or economy being uplifted .
People do have difference in opinions .
- In 1999 the Nasdaq was 5000 its 2200 or so now. In 1989 as the Japanese real estate bubble burst the Nikeii Average was 40,000 its 18,000 now 20 years later. Their real estate market retraced 20 years of gains as well. I feel it is not totally out of the realm of possibility that a much longer recovery trend like that in Japan can happen here.
-Regardless of the economy there are other factors -HUGE outflow of investment funds to baby boomers retiring. These people were able to save more than the next generations AND had the benefit of company pensions (also invested) that will now be coming out of the market just as new money in gets tougher as people cant save.
-Additional Risk - State and Local revenue -People are not driving on toll roads as much and they need to raise tolls. Property taxes are going to be a nightmare to collect, and sales taxes are down. There are some serious risks in that environment to state and local Govt spending (and related bonds etc)
-Not sure if I agree on the gold thing. The last year has shown you might have been better off buying food that you can store , things like rice , flour etc LOL But there is a valid argument in the currency collapse market.
THOSE THINGS SAID...
As a CPA in the northeast part of the country I have seen this mess coming for over 2 years. Just like the signs were clear to me 2 years ago I am seeing some limited signs of the seeds of recovery taking place. It could very well be far off but let me tell you about the few positive things I have seen..
1- The small business credit crunch seemed to ease when the Fed lowered rates. I dont know why but between Oct 07-March 08, it seemed like noone had money, now people seem to be hanging in there .
2- Some clients are reporting better sales (surprising even themselves). In the last 2 years I have not had a handful of people telling me anything good the same day but I am starting to get those reports.
3- Some new business formation is going on.
4- Looked into details of some financial stocks reports. IT appears to me that places like Citibank and Merrill Lynch are 6 months away from a turnaround. For example, Merrill has reported 40 billion in some odd losses already. They only have 4 billion or so left in CDOS in total.
5- Private people (like Boone Pickens for example with the Energy plan) are starting to step up to the plate with ideas.
There is an all bets off death scenario though. That is if we get involved in another war. Then I think its over.
Id like to state one more thing..
from a year ago to about 6 months ago the Govt essentially lied about inflation, unemployment and the jobs market.
Now the facts are out there. At least people are playing cards with the reality deck now. The risks are out there. Just articles like this one might show a bottoming process.
I have been very negative on things but call it as I see it. I do see some things moving in the right direction. It might be a dead cat bounce as they say but I am hopeful that we are wrong and things will turn, everyone makes out better that way and ill eat crow anyday over not having anything to eat!
Marty
alternative
It's still voodoo economics, almost three decades later.
ragmatist
The market place that encourages egregious greed is now, and always will be, the source of economic unrest and destabilization. Until we ascertain how to control this without damaging capitalism, we will, always, be in danger of the debilitating effects of outrageous avarice.
All other opinions are just an excuse to make a living from, apparent, wisdom and insight. Simplicity resulting in real insight will never be in vogue. Otherwise, all those who blather about things they obfuscate with excessive verbiage would have to get real jobs.
The market place that encourages egregious greed is now, and always will be, the source of economic unrest and destabilazation. Until we ascertain how to control this without damaging capitalism, we will, alwasy, be in danger to the debiliating effects of outrageous greed.
All other opinions are just an excuse to make a living from, apparrent, wisdom and insight. Simpiicity resulting in real insight will never be in vogue.
That said, I think the number of perps...err... goldman sachs...err.. governemtn officials they are trotting out to tell us that we worry too much is another 'tell' that things are worse than normal.
It all hinges on housing. What breaks the downward spiral ? Its a degenerative feedback loop, and what breaks it -- especially as the government offshores our jobs and devalues our dollar so there will be fewer and fewer solvent families and individuals to sop up the excess inventory and stabilize prices ?
What breaks the cycle ?
spenser
i've remarked on other articles on seeking alpha that the stuff going on in re to fannie and freddie, and selective enforcement of existing naked shorting rules reminds, not exactly, but in tone, etc, reminds me of pre-wwii germany - not good
but a probable very negative future for your son, or my granddaughters, is not necessary -
fuels alternatives are already available and, in ten yrs, could replace dependence on oil;
the tax structure could be overhauled (i personally like the flat tax, despite it's con's, 'cause of its psychologically promoting quality of a sense of fairness and incentive equal for all);
and a way to provide at least the level of health care available to the rest of the industrialized world currently not available to us, could be found
a lot of could's - i know
but then, who would've thought, in the late 1700's, the world would even see a country such as ours even existing to possibly squander such an improbable "could" ?
optomistic
pessimist
I have read the article, and many of the comments. For the most part I agree with everything in the article. Despite this, there have been many times in the past where one would have thought that the american ecomony surely cannot simply rise from the ashes of its economic stupidity. We are heavily indebted, some assets have become extremely overvalued, and so on and so forth. This has yet to be the case. Every market decline EVER has been a buying oppertunity. And while I was short seller of many differant assets over the last two years, I am now a buyer. do I feel comfortable about it? no. do i even agree (aside from a rather large yeild in financial stocks, no i think there are many more shoes to drop), and yet I am a buyer. We can argue and banter numbers and statistics all day. and there are reasons on both sides to be both extremely bearish, and yet very bullish. All i would remind others of, is by some measures, the american economy is not as indebt as our EU allies, or Japan, and so if we had to take on another trillion dollars to bail out freddy and fanny, theoreically we could.
I have a hole in the back yard where I keep a few hundred cans of food, lots of water, toothpaste, soap and several hand guns, with lots of amunition. I also am long the XLF, and the USD.
I hope I never have to fire a gun.
Walmart is complaining demand is down (don't make us mad we are going to sell the bonds if you don't shop at our stores) CNN is telling you to plant a garden. Cities are going to raise the price of public utilities to balance the city budget because so many houses are in foreclosure. Medical costs are out of the roof because doctors want patients to pay for their student loans and privledged lifestyles. No one wants to vote for Obama because they say he has no experience, but look at the mess BUSH got us into. So experience has little to do with anything except if you want to use it against someone. I am being sucker punched every time I go fill up 4.50 a gallon for 12 gallons of gas in a plymouth neon 1998 at that 58.00. To keep gas in the car cost more than the car is worth. No SUV's for me, and I"ve got no credit cards.
So why am I worried about my future because it's people who short the stocks, buy the stocks, scream for more dividends. The World Bank is trying to hoard the money for the few rich people who think "let them eat cake", I keep asking the money was there once, how can you loose what you never had so where is it now and I who have done nothing why am I paying for the sins of others. I bought my house with a 20/80. I never went for one of those crazy loans, I didn't buy a house before selling the one I am in, and I didn't refinance every time I wanted to go on a cruise or buy Prada or Rolex.
Who cares about what the government is gonna do because I am paying now and I am getting resigned to more pain later for something I did not do. Buying gold, arguing about Fannie Mae and Freddie Mac and future bank closings will not help me fill my tank, buy food, keep my lights on all I know is I am screwed regardless and I hope my job doesn't fold.
I just need to know where the food banks are, homeless shelters, and can I qualify for food stamps if necessary. Should my whole family move into my house so we can make sure we can cover the light bill. My brother can mow the lawn so I don't have to give money to a illegal mexican immigrant who bought a 500,000 house with "Landscaper" on his loan application. We can clean up our own messes and not hire a mexican housekeeper because we are to busy to clean our own house who by the way bought a 350,000 house with "Domestic" on her application. We can have a garden in the back yard and my sister can spend her weekends canning food so that we can have some food to eat when gas gets so high the truck drivers can't afford to bring the food to the grocery store. How do you dry out meat so when beef goes to 10.00 a pound for hamburger we can buy in bulk and have it ready for the winter when it goes up to 15.00 per pound.
Buying gold and shorting stocks will not help the average person with day to day needs. That's the article I would be more impressed with. Oh by the way I want that electric car next week when the price of gas is going up, not in ten years when people may not be driving at all. Oil is 250 a barrel and all commerce has stopped. Greed has caused this mess and a slice of humble pie will end it. Although it will take a while, people have a way of not taking ruin easily read the stories about investors in Karachi distroying their stock exchange because they were loosing too much money. (hence the stocks must have been purchased 25 years ago to weather any storms now)
Tell me what to do in a survivalist sort of way not a pump more money into this economy to help stablize it. They don't care about me and I've pumped enough money in to pay for sins of bank who loaned 850,000 for a house to a couple who said they made 1.5 million a year and then on furthur checking (after the house is in foreclosure) it was found they were both unemployed but selling one house to pay for the next.
LMAO! You begin and end coherently by describing 'greedy speculation' spurred by stripped away government regulation, lobbied ridiculous capital gains real estate give aways, inflationary interest rates maintained by Fed Reserves, private banks, and then conclude by exempting all players except the politicians who are under the material influence of the same forces of speculation!
And you perpetuate the idea that Big Oil conducts its business through the spot and futures oil markets because you are so concentrated on physical gold and silver which IS traded on the spot market. And you left out one scenario that is happening right in front of you - statification. Don't you find it interesting that IndyMac Bank was not liquidated, but reborn as IndyMac FEDERAL BANK, F.S.B.???? And one more thing, you express concern for the middle classes (what, no working class?), but you are willing to throw the mass of seniors with dwindling resources on the mercy of private medicine by liquidating the most functional safety net we have and the model for a national health plan- Medicare. Yes, go ahead and take physical possession of gold and heavy silver bags of coins, and then hope you don't lose it all to a home invasion robbery if the scenario you hope for comes to pass.
______________________...
Whether we like to admit it or not, the entire market for housing in the United States has been corrupted by government involvement. By subsidizing the availability of credit and by granting huge tax incentives to home speculators, the government helped finance the biggest bubble of all – the biggest bubble in history. It won't be unwound without serious disruptions to our economy and, unfortunately, a tremendous amount of pain.
Fannie Mae and Freddie Mac made it all possible. Released from capital-ratio requirements and backed with a line of credit at the Treasury, they were able to buy a nearly unlimited amount of mortgages. Today, Freddie or Fannie finance more than 80% of all new mortgages in the United States. Over the last several decades, their presence in the market greatly lowered interest rates, created an endless supply of credit, and pushed housing prices higher. Meanwhile, the cost of the government guarantee, which lay behind Fannie and Freddie's power, was invisible.
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The above statement either comes from another planet, is insane, or is just an out right fabrication.
The mortgage bubble was created by unreguated Wall St Securization by firms like Bear Stearns of loans originated by firms like Countrywide.
Fannie and Freddie were pushed aside and locked out of this fools party by the federal Government, which leashed the GSEs in favor of letting Wall St, Countrywide and Indymac run wild. Thes firms no longer exist.
In the vast bulk of their business, Fannie and Freddie did not back subprime or LTV greater than 80% except in relatively microscopic ammounts. They numbers of exotic mortages are under 10% of all segments of their business, not to mention their exotics were of higher quality because they retained their underwriting standards compared to the Countrywides and Indymacs.
As of Freddies most recent numbers, they had .77% non performing mortages.
This is why right now, while mindless bashers howl ike fools, the GSEs are the ONE source of liquidity propping up the housing market. IF the GSEs were not performing this service today, the housing market would be 10 times worse off, as the reduced but still significant buyers we now have would be shut entirely out of the market.
Compare what is being written about the GSEs with the actual reality,and draw your own conclusions.
One other thing. This article was published on SUNDAY MORNING and ALREADY HAS 35+ comments within minutes ALL AGREEING WITH ITS ABSURD ASSERTIONS. Think about that!
The article is not even well thought out. It was only in July 08 that this person realized the financials were under stress? Where was he when Countrywide and Bear Stearns fell?
______________________...
Whether we like to admit it or not, the entire market for housing in the United States has been corrupted by government involvement. By subsidizing the availability of credit and by granting huge tax incentives to home speculators, the government helped finance the biggest bubble of all – the biggest bubble in history. It won't be unwound without serious disruptions to our economy and, unfortunately, a tremendous amount of pain.
Fannie Mae and Freddie Mac made it all possible. Released from capital-ratio requirements and backed with a line of credit at the Treasury, they were able to buy a nearly unlimited amount of mortgages. Today, Freddie or Fannie finance more than 80% of all new mortgages in the United States. Over the last several decades, their presence in the market greatly lowered interest rates, created an endless supply of credit, and pushed housing prices higher. Meanwhile, the cost of the government guarantee, which lay behind Fannie and Freddie's power, was invisible.
______________________...
The above statement either comes from another planet, is insane, or is just an out right fabrication.
The mortgage bubble was created by unregulated Wall Street Securization by firms like Bear Stearns of toxic mortgages originated by firms like Countrywide.
Fannie and Freddie were pushed aside and locked out of this fools party by the Federal Government, which leashed the GSEs in favor of letting Wall Street, Countrywide and Indymac run wild. These firms no longer exist.
In the vast bulk of their business, Fannie and Freddie did not back subprime or LTV greater than 80% except in relatively microscopic ammounts. The numbers of exotic mortages are under 10% of all segments of their business, not to mention their exotics were of higher quality because they retained basic underwriting standards compared to the Countrywides and Indymacs.
As of Freddies most recent numbers, they had .77% non performing mortages.
This is why right now, while mindless bashers howl like fools, the GSEs are the ONE source of liquidity propping up the housing market. IF the GSEs were not performing this service today, the housing market would be 10 times worse off, as the reduced but still significant buyers we now have would be shut entirely out of the market for lack of mortgage availability.
Compare what is being written about the GSEs with the actual reality,and draw your own conclusions.
One other thing. This article was published on SUNDAY MORNING and ALREADY HAS 35+ comments within minutes ALL AGREEING WITH ITS ABSURD ASSERTIONS. Think about that! Also there seem to be comments predating the article post date?
The article is not even well thought out. It was only in July 08 that this person realized the financials were under stress? Where was he when Countrywide and Bear Stearns fell? This guy just wrote an article about the mortgage/housing boom bust WITHOUT MENTIONING BEARS STEARNS, WALL STREET, COUNTRYWIDE OR INDYMAC!!!!!
" the track record of every experiment with fiat money is 100% perfect: In every case, the currency regime was eventually destroyed by an inflationary crisis."
I don't know if the author ever heard of countries like the United States of America, UK, Japan, France, Germany, Sweden, etc. that have had fiat money for a long time and their currency regimes were not "eventually destroyed."
Another factually incorrect statement:
"No government in history has ever repaid debts as large as those already assumed by our government (in terms of GDP)."
Even if the US assumes the whole $5 trillion of Fannie and Freddie's debt, having a total (100%) loss on their assets, the public debt would still be less than 150% of GDP. Several countries repaid debts larger than that (with a little help from inflation), including the United Kingdom, which emerged from WWII with debt in excess of 200% of GDP. Chile is another example. The US debt problem is manageable if action is taken. Of course, if the country continues in its current direction debt repudiation, either through inflation or outright default, is inevitable.
I think I'll dig out that cd :)
Stansberry's articles are generally based on extensive research, including evaluation of the company finances. His dire forecasts may not come to pass, but they were not made lightly.
and that does seem to be in the offing.
Regardless of the path taken there will be wide spread pain. I do expect a nationalized health care plan and that will be the solution to the medicare dilemma.
This does not need to be the socialized disaster suffered by our northern neighbors. All Americans should see this series: Sick Around the world. Its available on the PPS web site
www.pbs.org/wgbh/pages.../
He recommends zero coupon bonds as 50% of a portfolio under that scenario.
He also recommends a 20% weighting in energy stocks (oil services and alternative energy companies mostly) in case that opposite happens -- high inflation.
The more I read, the less I seem to know about the biggest questions out there that will impact our collective future:
1. Inflation or deflation?
2. The US as world economic engine still or decoupling? Can the world economy (Asia, Europe, Latin American, Africa and the Middle East) operate normally with a vastly devalued US dollar and enfeebled US economy? I suspect not but am not sure, the Chinese know how to make a lot of things now...
3. How much can we really expect in additional losses from US financial institutions?
I am natural inclined to be pessimism about the economy but even I am beginning to feel like that pessimism is overshooting.
The most likely scenario for the world economy is that we all muddle through as we adjust to a difficult period of deleveraging and a decline in aggregate demand in developed countries (due to lower birth rates) and an increase in aggregate demand in developing countries (due to higher birth rates and a increase in total factor productivity).
Tiedeman
Lieberman
Go to Above Top Secret dot com. It will scare the living daylights out of you, but you will be prepared and enlightened about how serious some people view this crisis.
In fact, maybe everybody needs to take a look, because it is people like Regina and the Average Joe caught up in this catastrophe that are going to determine what the future of America looks like. For those that are a little better off - they are likely to buy what they know - gold and silver as their hedge. They don't make charts, they just make decisions.
As I have said before, before you put your $$$ anywhere, consider how a panicked middle and lower class will react....
GM is in "trouble" in the US because of legacy costs, to quote the CEO. They are roaring in India & China. Wal-Mart has gone from 23% to 37% profits overseas in just 4 years (how do I know these two things--first on Alpha Alerts, then back to the original sources). McDonald's and a host of other top companies now do over 50% of their profits overseas. Wal-Mart was #1 US retailer in 1990; in 2008 their balance sheet (staggering strong) doesn't look like the same company. Housing had been one of the last rollercoasters in this economy. IP, Consumer, Retail have become increasingly solid, diverse, and profitable. We just "know" more so it seems worse. And YES because of this kind of dialogue, emulated by Jeff Jacoby in the Boston Globe, is focusing on how govt is messing around with economics, without understanding it. That's all good. Things aren't worse than they've been; there is just more light on it, such as with this author, Jacoby, and the other 51 writers. Keep after 'em. Keep it going.
My little company, Simply Software (simplymagazine.net, simplysoftwarecds.com, simplymedia.com and 20 others to the same site), just went to 24/7 downloads at $3.99 each of our 142 audiobook/software products we own outright (no royalties; no tails; ergo, no litigation). Over 50% of the sales are coming from off shore (not North America); 1% when we shipped physical products. Productivity is at 100% (all autopilot; not touched by human hands). So a $10 product is now $3.99, and we do better. That's happening everywhere, as the GMs cut back head count (aren't they making about the same number of cars with 20% of the people?). Cheer up. Why? Our fastest growing download AND physical sales are in India and China--yes, they are paying the IP!