Green dot is a mere bug born out of this centrally planned virus. Copping with the effects of the last 4 years since that fateful fall of America’s biggest, banks, insurance firms, and banking investment firms we belly up in the face of a gigantic mortgage bubble, a sell off in derivatives, and followed by the myriad of defaults on credit-default swaps. The infection of a privatized banking system has made people savings, their hard earned work hours, financial independence, a venue for insane stratosphere of profit and compensation. They(banking system) represent the pillar of the new American century as well as building up the ordinary mans dreams from start to finish. They say sovereignty of an individual is breached firstly when a mans god is questioned, but I can tell ya this for sure, for America, its become the man’s an woman’s financial s. For it buys them freedom from the chains of regulations, laws, codes, fines, of this once great and beautiful nation of ours that has been made into a counter-top with a cash register sitting on it. I see no point in fighting a force as powerful as gravity itself. For if you are a dissident with strict selfless intentions, you know women and gentlemen, this man is a man going places in achieving human philosophy as well as human engineering. And these successful individuals who’s own vain-less pursuits of glory end up not only benefiting themselves, but the entire world as we know it. Because the only force big enough to garner the technology of the idea is not one man’s mad insane quest for glory, but all of societies efforts to recognize as a standard idea, product, or sometimes a modern cliché. The free market in a sort funny way act’s like this, cause the free market does not represent the Dow Jones, Americas GDP, the Federal Reserve, it is the collective effort of the people in conducting unregulated productive exchanges to continue the engines of society running. I challenge any man or woman to research the minimum capital requirements to what kind of, premiums, information, time, liability coverage, and just risk there is for a middle class American to obligate his time to a stock, bond, mutual fund, ETF, or currency. Financial freedom of choice are frowned upon words when an American says it, cause he has something rather to hide perhaps? Oh, this is just an example of how suspicion constitutes as crime until proven guilty at a latter date. Cohesion of human nature in this case is the eugenics officer(the government)and society will be a better place if we not only, tax, dictate policy, and prohibit CEO’s compensation in the name and common good of the American people. The government is not only going to change that Ceo’s compensation, but workers rights in a bid to pass bigger hikes on federal capital gains, a hike on the corporate tax(currently the highest in the world), and all that there is going to be left in the end is the never ending apparatus of government agencies to join a work at the rest of your life. Welcome to your life, your country, your state, but its your mind that can change this by a mere refusal. In the words of the famous Irish revolutionary Michael Collins, “they may draft us, beat us, tax us, but we have weapon more deadlier than all in the entire British imperial arsenal, and that is our refusal.

Everyone is complaining about the price of gas being over $4.00 (U.S.) per gallon.  Have you really thought about what could be behind this manipulative move?  Well, the car manufacturers sold large cars in the 1970’s, they were gas guzzling hogs.  Then came a “gas shortage” which spiked the price of gas.  Why?  The car makers can only sell so many cars because there are only so many people.  The average car will last many years before you need to purchase another.  Then what happened in the 1970’s?  The car makers made small cars that boasted high mileage.

Well, the same thing is happening again.  They lowered the price of gas and it got down below a dollar a gallon.  I can remember it being 69 cents a gallon when they began pushing out the large over-sized trucks.  What did everyone do?  They all ran out and bought big expensive trucks.  Gradually the gas began to go up.  We all complained when it hit $1.50 per gallon and it stayed there for a while.  Then it got worse and worse.  As the car manufacturers needed us to purchase more cars the gas prices rose.  Now what are they trying to sell us?  Electric cars and high mileage cars.

The average person is like a sheep and will do what everyone else is doing.  If you can pull away from the pack of sheep and be different you will survive and not only survive but also prosper.  Twenty years ago homes were at an all time low in fact my home is worth the same as what I paid for it at that time.  Back then you could find homes for $10,000 and you can again.  You can find beautiful brick homes for $30,000.  Now is the time to buy and be ready to sell when the property prices explode.  Because if you can learn one thing from history is that history repeats itself time and time again.

Roark, a boy of 9, lay in the dirt. His face was bloodied and bruised. The lid of his right eye was swollen to such an extent he was blind in one eye. He faded in and out of consciousness, each time coming closer to the void. His ears rang from being pummeled into submission. People walked by him, not noticing, and not caring. He was simply another street urchin who had scammed the wrong person. His merchandise, however cheap, was all missing. A week ago he had sold a diamond encrusted gold ring to a man in his mid-thirties. The man must have been stupid to buy something like that from a street kid, but perhaps he was under the impression that it was stolen. None the less, he returned when it had turned his fiancée’s finger green. When Roark had refused to give him a refund, the man proceeded to throttle the 9 year old boy until he was bloodied and broken. The man had emptied the rest of the fraud merchandise into the sewer. He left, leaving Roark to bleed out into the street. Unable to move, Roark soon faded out consciousness, but back into reality.

Roark awoke with a frenzied gasp. Sweat beaded down his forehead and into his eyes as he jolted upright in his Tempur-Pedic mattress. He could hear the clanging of pans and the scurry of his many servants who were preparing his breakfast. His maids were cleaning his house, even at such an early hour, for that was quite a daunting task. Roark, a rough man of 46, had built up a fortune that no others could match. The time of Bill Gates and Warren Buffet was past. Roark now stood atop the wealthy pedestal of America. He had always been a great salesman, even if that sometimes led to trouble when he was a child. Dreams like the one he just had only strengthened his resolve. They were not only dreams, however; they were nightmares of his childhood. His life had been a journey thus far, yet not quite a heroic one. As a kid he constantly fought, stole, and scammed. But still, he jumped the proper hurdles. Time and time again he struggled to reach success.  Finally, he had reached the top. The nightmare that was his childhood was over. Yet still, Roark faced great challenges. Dreams of his childhood, for some reason, only occurred when he faced an extremely high wall; Roark still had to figure out how to climb it.

A week ago a man by the name of Robert Yates had called Roark, wishing to sell his house. His family needed to move, or they would not survive. Robert had been unemployed for several months. He had finally found a job, but it was several hundred miles away. The family had to move out of their cozy, two story house in Indianapolis. And, like any other request, Roark had accepted. His appraisers said the house was worth around $415,000, and the family had bought it for $350,000, but still no one was willing to pay even that amount. Time and again Roark showed wealthy families around the house, hoping for a nibble. This was Roark’s greatest challenge yet, and the journey to a sale turned out to be quite a daunting quest for him.

An hour after awaking, Roark was already dressed and in his private jet. He wore his usual attire, a slick black suit. Today he was flying back to Indianapolis from his home in Miami. He was showcasing the Yates home today to several families. He had a few ideas of how to sell it, and a few of them weren’t exactly ethical. But if his childhood had taught him one thing, it was that the ends justify the means.

The plane arrived in Indianapolis at 1:00 PM. The first appointment was scheduled at 1:30, and Roark arrived just in time. He was showing the house to a couple with no kids, so Roark didn’t have much hope. This house was built for children in mind. The owners had 4 kids, and the house accommodated all of them. It had four bathrooms, 6 bedrooms, plenty of storage space, a two car garage, a large kitchen, and a spacious living room. The house was eloquent, but expensive. There was no way the couple would pay Roark’s price of $420,000. None the less, Roark showed them around. The house was filled with the aroma of fresh baked cookies, along with many other tricks of the trade. Still, the couple turned it down. It didn’t help that the Yates family was still occupying the house, in fact that made it far more difficult. The kids often ran by yelling and playing, sometimes bothering the possible buyers. However, this next couple, Roark believed, would enjoy the kids and the house. This next couple was Roark’s last hope.

The newlywed couple, Mr. and Mr. Stewart, arrived with two small children walking by their sides. Not only that, but the woman was six months pregnant. Roark continued to show them around the house, and they adored the house. They knew they would need the room, but still they thought the price was too high. Roark, attempting to reel them in, told them that the house was actually worth much more than he was listing it as. They believed him, but they were determined to lower the price. Roark was a seasoned realtor however, and he wouldn’t budge. The Stewarts refused to pay the full price, and were soon on the way towards the exit.  Before they could go Roark stopped them to ask Mrs. Stewart a simple question. He asked if he could feel the baby kick, and she accepted happily. Mrs. Stewart had not wanted to know anything about the baby, so she hadn’t asked her doctor anything. Roark, lying of course, made one comment and walked away.

“Congrats! It sounds like triplets! What are you going to name them?” Roark said, smiling mischievously. Mrs. Stewart was stunned, and soon she was storming out of the house with her husband following straight behind. His face was of pure terror. They got in the car, and rode away. That night Roark ate dinner with the Yates, and he was confident he had sold the house. And sure enough, the couple phoned him a few hours later. They agreed to the price of $420,000. The Yates family was ecstatic, especially Robert.

“Thank you Roark, you truly are a hero in this recession. Thank you, so much.” Robert said, a tears building in his eyes.

As soon as everyone had fully directed their attention on the BP Gulf oil spill, the bobbleheads on television started admitting that we are in a double dip recession. Oh, things aren’t getting better now? So glad you told me, because its not obvious at all (sarcasm).

These people, the government and their puppets (mainstream media) are a joke. They are terrible actors. And they think we are stupid. They lie all day long about the unemployment figures and just about everything else, and naturally assume that we all believe them! These people all have egos the size of Mt. St. Helens and they really believe that they are doing our thinking for us. Think again, you low IQ, former jocks and cheerleaders. We are laughing at your inability to even comprehend whats going on, when it is your damn job to do just that!

The housing market is in free fall again. The unemployment numbers have been so skewed for so long, that we will never ever know the real statistics. It is time to stop lying about what is going so that people can prepare. It makes me very nervous to know that so few people are prepared for the fact that the economy WILL NOT BE BOUNCING BACK. Stop listening to these people that want your money and your vote. Turn off the propaganda and find the facts for yourself.

Some of my other articles:

No Money for Unemployment? Then Cut Off Welfare Too!

Riots at G20 Summit Toronto Canada. Police Cars Burning. Pictures

Pensacola Florida Beach Covered in Oil From BP Gulf Spill

Russian President Medvedev Visits America and Brings Armed Naval Warship

BP Media Blackout: Noaa Suspending Oil Spill Trajectory Maps

Katla, Eyjafjallajokull and Now Meet Iceland Volcano Torfajokull

The Supreme Court, Gmo Alfalfa and Monsanto Wins Again

The economy was in the perfect position to suffer a collapse when three factors united to create an economic implosion. Each factor provided its own contribution to the collapse while providing fuel to the others. Markets might have survived one onslaught but the convergence of the three was too much in an economy that had reached an imbalance at its peak.

• Inflated housing prices were jumping after 2000 at a rate greater than the normal rate of inflation. This fueled a housing boom that benefited developers, allowing above normal profits. Consumers were finding housing prices escalating at rates that encouraged speculation. Additionally, to keep the demand high and keep prices going up it was necessary to bring more buyers to the market. This was done with Adjustable Rate Mortgages (ARM’s). The problem here was that these were best for speculators who would buy and resell a house. They were trouble for the individual who bought their home in hopes their income would increase and they would be able to refinance or afford the increase in payments.
• The derivatives market represented an estimated $516 trillion bubble that was based on paper contracts that would have to be met at some point in time. While an article written back in March of 2008, by Paul Farrell for Market Watch, warned of the dangers of this bubble and the cost of unraveling derivative instruments, investors got to see first hand the consequences of lost wealth as the underlying prices (of whatever supported the derivative) began to fall. For those who had derivatives based on the mortgage market there might be no value in the asset for which the buyer has contracted if the loan goes into default (the property belonged to the bank). The value of these contracts, whether hedges or speculations, were lost almost instantly.
• Oil prices: were driven up by speculators, OPEC, and countries who budgeted for higher prices per barrel of crude. One report had Venezuela budgeting for $120 per barrel. As the world economy tried developing and the need for oil products increased the price was continuing to rise but it exceeded the consumers’ willingness and ability to pay. As ARM’s began demanding higher payments the price of gas was also escalating, reducing the amount of disposable income the consumer had to spend. Slowly but surely household reserves were falling and the choice began to be made between gas for work, food for the family, and the house payment.

Housing and fuel prices shifted and at these new prices consumers were unable to find a balance that fit within their income. Basic economics requires that a new equilibrium be found and that must be found within the constraints of consumers’ earning power.

Reality forced consumers to recognize their financial limits. Still the market doesn’t seem to get it. So far all efforts at stimulating the economy seem to run into the wall of consumer resistance. The economy hasn’t yet hit bottom, even though the fall has slowed, because we still have investors, politicians, and banks that don’t seem to understand. They are busy trying to keep the economy bolstered instead of letting it find the new point of balance. Legislators continue to try to fix the economy. Speculators again try to cash in by pushing fuel prices higher.

The reports on market conditions continue to look for a housing market recovery, implying that housing should return to the inflated prices that existed before the freefall. Housing will not recover until people return to work and housing prices return to their normal rate of inflation. The days of 17% and greater increases in housing prices are over. Incomes did not keep pace with rising housing costs and banks were misguided, to say the least, to believe that consumers could keep paying prices greater than their income growth. Housing will continue to fall until prices reach a level equivalent to what they should have been at normal inflation for the local economy. The housing market will remain saturated until the rate of unemployment drops to a point that the number of potential buyers nears the supply. Remember that a new wave of foreclosures has been predicted by some who believe that those who have lost employment more recently will also not be able to manage house payments at current levels.

Producers of crude oil and speculators who hope to make a killing on economic recovery continue to try to artificially drive up prices. Whenever the price goes up usage goes down. Gasoline prices have more affect on the economy than producers and speculators recognize, or want to admit. By driving up prices they continue to keep consumers’ wallets empty and delay, perhaps even stop, economic recovery. Consumers need to buy goods to encourage growth. If disposable income is reduced then fewer goods are affordable and produced; thus fewer jobs are created. Consumers push to keep the portion of their income spent on gasoline prices in an affordable range and to do so they cut back on trips in a variety of ways, adding stops to each trip in order to reduce the number of times they must go out. That means one less cup of coffee bought at the local coffee stand for each trip the consumer can avoid. Shortened vacations or a local trip instead of traveling to a vacation destination reduces tourist dollars. Consumers will not start traveling again until the price of gas moves back to the percentage of their income that allows them to travel and have money to enjoy their time away from home. The price that allows a larger number of potential travelers to enjoy vacations seems to be just under $2.00 per gallon for all grades of gasoline. Above that level grumblings can be heard. Just before the 4th of July holiday AAA was predicting and increase in travel. It didn’t happen in any measurable degree and gasoline reserves increased.

Speaking this one opinion aloud is likely to create criticism but I believe it to be true for a number of reasons. Stop telling people they need to set aside at least a gazillion dollars to retire. “WHAT?” you say. You heard it. The majority of retired persons will not have a million dollars to retire on. They will continue to count on retirement plans and social security benefits. Make revisions to the Social Security program. Increase contributions by 1% or 2% and continue to make tiered benefits depending on retirement age. Improve retirement benefits so that consumers will have greater confidence in the system and feel more inclined to improve their living conditions in preparation for retirement.

Privatize medical benefits but require private carriers to provide minimum benefits. Why duplicate services. Medicare requires a bureaucracy that is not efficient and is costly. States have regulatory commissions for rate increases on nearly everything. Let the states set rate levels according to the cost of medical care in their areas. The government can then use the monies collected through the Medicare tax to supplement insurance premiums.

A better alternative to private retirement savings—most of which just got wiped out with the market crash—would be to encourage home ownership at a reasonable price so it can be paid off before retirement. This requires loosening credit for owner occupied homes and setting an interest rate that allows for a comfortable payment not to exceed 30% of gross income. Go ahead and tighten credit on revolving charge and don’t let auto loans and revolving charge consume as much of individuals disposable income. Consumers will still spend but they will pay cash for goods rather than for interest on credit card payments. Historically, home buyers begin to spend on non-durable goods after the purchase of a home.

Here is one last point, restore consumers’ credit. I know this may be unfair to those who have not defaulted on home loans or filed for bankruptcy because they became over indebted by trying to make house payments they couldn’t afford. It may also sound contradictory when I advocate tightening credit in other areas but to restore the economy banks need to restore credit, although not as carelessly as was seen over the past six to seven years. For instance, many consumers now have poor credit. How much has been a result of the current economic situation? In such cases it would be better to discount poor history if the consumer has been making current payments on a reduced debt. Allow those who have lost a home or vehicle to repurchase if they can demonstrate a budget that allows them to succeed at home purchase at the lower value and reduced interest rate. Even if banks take a loss on repossessed homes they will still reduce the cost of preserving assets and have a cash flow from new payments being made. The housing market will see stabilization as homes are removed from the market and individuals will be in a position to begin buying new products for their homes.

There will be winners and losers in any shift of market conditions. Right now the losers are those who could most contribute to an economic recovery. Stabilize consumers through market mechanisms and all groups will benefit. It is not investment that drives the economy. Buy stocks and you have created nothing. Buy a new toaster, new carpet, a TV for your home and someone must make it.

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The “Credit Crisis” is a ubiquitous phrase.  It’s in the headlines of our remaining newspapers.  It’s bandied about by pundits on news programs.  It’s the root of our economic crisis.  And the only explanation that I’ve heard that was both understandable and reasonably objective was by animated eight year olds on the very adult cartoon series “South Park.”   So here’s an alternative explanation, for the benefit of those who don’t get their economic news from foul-mouthed little fourth grade boys in South Park, Colorado.

The word “credit” is derived from the Latin word “credere,” which means to trust or believe.  A lender lends because she believes that the person to whom she extended credit will repay her at a fair return for the risk she takes in lending money.  A creditor believes that the cost of borrowing money is less than the potential return on the investment he makes with that money.  In other words, the lender believes in the creditor and the creditor believes in the economy.

The economic system is based on belief, with money, through cash or credit, as the symbol of that belief.

What Happened – Part I

The Quants

The current U.S. credit crisis happened as a result of “quants” selling an idea to investment bankers, and investment bankers believing that the quants really did figure out a way to package and sell away all the risk associated with mortgage lending.  Quants, by the way, are usually recently graduated MBAs with great grades from Ivy League schools, who use the methodology of Quantitative Analysis to develop and analyze financial products with specific respect to risk and reward.

The quants found that, in reviewing U.S. history, at no time did home values decrease throughout the entire country at the same time.  While there may have been falling home prices in one part of the country at any given time, there was strength, or at least stability, in another region or regions.  Consequently, if one were to package together mortgages with geographic diversity, there would be relative stability in the overall portfolio, regardless of regional problems. 

Eureka!  Wall St. would enter the mortgage business, once the stodgy home of Savings and Loans, who, by the way, had their own crisis when our little quants were napping peacefully in the afternoons with their binkies and blankies.

So far, so good.  Now all we need is a good rating, so investors will buy our mortgage packages.

What Happened – Part II

The Raters

The quants’ bosses then danced off to the rating agencies (Standard and Poors, Moody’s, and the like) to show them their fabulous investment packages, consisting of mortgages with geographic diversity.  Just LOOK at the data.  Very safe.  Very safe indeed.  And such high returns.  Why, they deserve the highest rating, don’t they?  Big, big fees later, the rating agencies decided, why yes!  They were very safe.  Highest rating was granted, and big, big fees were made, without the pesky need to track the details.

Seeing as how lenders could package up all their loans and sell them off without the annoying requirement to see whether they were repaid or not, lending standards were relaxed.  After years and years and years of lending that required 20% down payments, and mortgage payments that could be no more than 30% of gross income, lenders were encouraged to r-e-l-a-x.  Those hard core lending requirements were now archaic.  Too stringent.  How about a 15% down payment?  As long as prices were always rising on a national level, why be so strict?  How about 10% down?  5% down?  No down?

Mortgage lenders were now selling the loans to Wall St., who sliced them up into tiny little pieces and sold them to widows and orphans packaged together with hundreds and hundreds of other mortgages.  And, with overall rising home prices, these packages were be super safe, weren’t they?  Sure, a few will go bad, but the whole country has never had home prices decline all at once.  

Thus sayeth the raters. 

What Happened – Part III

The Lenders

Now that their loans were being sold, lenders didn’t need to be so tough about employment standards for our borrowers.  As long as the borrower has a job, that’s fine.  Why, if they lose their jobs, they can still sell their house.   In MOST places, prices are going up, so they’d be fine.

Even lenders who didn’t want to play this game of hot potato found themselves making difficult decisions.  They either relaxed their underwriting standards, or they lost their loans to lenders who would refinance with relaxed lending standards.  Either the lenders had to play, or lose their assets.

What Happened – Part IV

Demand-Push Housing Price Inflation – Then Deflation

What the quants didn’t factor in, nor did their Wall St. bosses mention (flooded in profitability as they were), is that by increasing the demand for houses to include squillions of people who would have never qualified for mortgages under the old, archaic rules, prices would be pushed up to unsustainable levels.   It’s in Econ 101, and it’s called demand-push price inflation.

For those of you who live productive, fulfilling lives without having taken (or remembered) Econ 101, if you increase the demand for a thing, the prices will rise until demand equalizes.  Unfortunately, before demand equalized, the result of lax underwriting standard produced the inability for many of the people who took loans with newly relaxed standards to actually make payments.  And the unthinkable happened.

Those houses all went up for sale, and housing prices throughout the U.S. fell at the same time. 

No one knew exactly what percentage of all those loans that were packaged together were the bad ones.  They weren’t all bad, but definitely some were.  So how much were these packages worth?

No one knew, so no one was buying.  The widows and orphans who owned these things, along with banks, insurance companies, hedge funds and zillions of other investors that owned them, had no buyers.

We lost faith in these things.  We became non-believers.

What Happened – Part V

Depressing, But Not Depression

Housing is a big part of the economy.  It’s generally the largest asset owned by a family.  When our house is worth a lot, we’re worth a lot.  No matter that if you actually sell the house, you’ll have to buy another one that’s also worth a lot. 

We feel rich.

Housing prices are falling.  AND, Wall St., a party to this housing problem, also fell, in part because it had sold assets, those packaged mortgages, on which nobody could set a value.  Two big parts of the economy went ppppppfft.  Our 401(k)s and our houses are both worth a lot less now.  Unemployment is over 8% – and climbing.  In some parts of the country, it’s over 10%. 

We feel poor.

Back when we felt rich, we were fixing up our houses, going on vacations and going out to dinner.  Now, we are putting off spending because we’re scared.  Banks are scared to lend money, and we’re scared to spend it.

Back at the beginning of our discussion, we said

A lender lends because she believes that the person to whom she extended credit will repay her at a fair return for the risk she takes in lending money.  A creditor believes that the cost of borrowing money is less than the potential return on the investment he makes with that money.  In other words, the lender believes in the creditor and the creditor believes in the economy.

Why did we stop believing?  We felt poor. 

What’s Happening Now – Part VI

Renewing Belief

How do we start believing?  We look at the facts.

Ninety per cent of us who want a job are still working.  An enormous amount of money has been allocated to banks by the Treasury, in order that they start lending money again.  These are hard times, to be sure.  But the world is not coming to an end. 

A huge financial stimulus package is on its way into the economy that is designed to create jobs. 

As soon as we start believing that this will work, and behaving in accordance with that belief, the economy will strengthen.  Generally, about six months prior to an economic recovery, the stock market will move up.  Chairman of the Federal Reserve Ben Bernanke says that he forecasts the beginning of economic recovery at the end of the year.  And, we’ve recently seen a 20% upswing in the stock market from its lows.

There are signs that buyers are coming into the housing market, with interest rates at historic lows and lower prices.

All is not lost.

Do you want to help the economy? 

Start believing in the recovery, and acting accordingly.

The Federal Reserve forecasts that the US Gross Domestic Production (GDP) will decline by as much as 1.3% in 2009.

They also project that the unemployment rate will reach 8.8%  in 2009, will not decline below 8% in 2010, and will range between 6.5%-7.6% in 2011. The Bureau of Labor Statsitics, in its January, 2009 report, revealed that nonfarm payroll employment fell sharply in January by 598,000,  and the unemployment rate rose from 7.2 to 7.6 %,  Payroll employment has declined by 3.6 million since December 2007, with about one-half of this decline occurring in the past 3 months.  In January, job losses were large and widespread across nearly all major industry sectors. 

The Housing Market

The root of the financial and economic crisis exists in the housing market, where foreclosures have risen above 3.4-million homes, and is forecast to worsen in 2009 as more than 3 million sub prime, option pay mortgages reset around mid-year. Another 2 million are scheduled to reset in 2010. We may see as many as 6.4 million foreclosures through 2011. Currently, we are averaging  about 9,000 foreclosures daily.

In 2008 the median price of housing fell 15.3% from the December 2007 figure of $207,000. The Real Estate Housing Predictor national forecast, predicts an average decline of 12.6% in home values in 2009.

Recently released data for 2006 revealed the worst housing market in 17 years. Sales of existing single-family homes fell 8.4% in 2006, to about 6.5 million, the biggest annual decline since 1989 when sales fell 14.8%. Housing sales continued their decline in 2007 and 2008.  Further disheartening data was released recently by the S&P/Case-Shiller index of home values nationwide which indicated a 19% decline in the past year, 2008, and a 26.6% plunge from its peak in June 2006.  Thus many owners with mortgages can’t afford to sell, and that along with tight mortgage credit will keep the financial markets in disarray.   

Consumer Spending

Consumers are cutting spending drastically, and remember aggregate consumer spending accounts for about 80% of the U.S. Gross Domestic Product (GDP). In December, 2008, consumer spending fell by 1 percent, the 6th straight monthly decline. With companies cutting payrolls, incomes fell by 0.2 percent after November’s 0.4 percent decline.

With broad indicators of US market activity showing a dismal picture can this all be turned around soon? It depends on how focused the new President’s stimulus package is on the root cause of the problem.

Banks are still in deep trouble, and a great deal of the bailout funds are not being used properly by them to assist the financial markets.  The bailout funds are being used to protect the bank’s own butts, and to gain market share by buying competing banks.  So, much of the credit system is still frozen.

Wall Street is in the toilet, and may be flushed even further down. But much of what happens in the stock market is driven by the psychology of investors. Are investors happy? Not right now. How can we make them happy and restore confidence in the economy and financial markets?  More importantly, are consumers happy? Not right now.

Changing the consumer mood, from pessimism to optimism is the most  important key to revitalizing the economy and financial markets. Investor confidence will then follow on the heels of consumer confidence.    We must have an urge to positive action rather than the inaction we have today in the financial sector.

So, lets take a quick look at the sequence of events that got us where we are.

 It’s all about the bank and mortgage company’s sub prime, action pay mortgage instruments.  And they are getting bailed out for their mistake. Wrong. To get the housing market going again, Obama’s stimulus package must allocate much more money to the foreclosure problem.

The $75 billion homeowner assistance parcel, in the stimulus package is insufficient. At least half of the 2nd portion of the bank bailout fund of $350 billion should be added to the $75 billion, so that at least $250 billion is allocated to handle the homeowner foreclosure problem.  This is a call to positive action, not the banking inaction we see now, and will begin to create the optimism the country desperately needs to move ahead.

Specifically, we must stop the 9,000 daily foreclosures that are happening as we speak, and clogging up the housing market. Here is what needs to happen now, while the policy-makers in government are setting up a plan of action for the proposed $250 billion homeowner foreclosure fund.

1.     An immediate moratorium on all foreclosures, similar to what J.P. Morgan Chase & Co., Citigroup Inc. and Bank of America Corp. have committed to, while the government works on a financial stability plan. However, the moratorium should be extended to mid-year from the present March 6,  2009 deadline.

2.     Strong mortgage modification plans must be implemented, and since the banks and mortgage companies will not do this voluntarily, it will have to be required.  Not just lower interest rates and payoff period extensions, but principal forgiveness as well.

3.     And Principal forgiveness is justified since the carrot of the sub prime pay option plan enticed people to refinance higher mortgage balances to get more cash by reducing their equity in their homes. That was the bank’s bad decision. Now they need to face the music.

4.     Any foreclosure plan should include the rewriting of sub prime, option pay mortgages so they can not reset at higher interest rates. Larger principal balances associated with increases from unpaid interest should be removed from balances. These bank losses and losses from other principal forgiveness efforts, can be at least partially paid for with the $250 billion homeowner foreclosure fund.

5.     So, the banks will get bailout money from the $250 billion homeowner fund, but it will be earmarked for principal forgiveness, rather than just a big chunk of funds that has no specific purpose as they are receiving now in their $700 billion bailout package.

6.     Now, for those who feel that we should not assist homeowners that overspent their budgets, and perhaps were too greedy, lets put their concern to rest. After all, taxpayers are funding the massive bank bailout, and the banks were greedy with their sub prime mortgage instruments. So we can rest our case on that, can’t we?

It is time for action and optimism now, so let’s get started.

Unemployment is growing, 401(k) plans are shrinking, housing prices are falling and banks aren’t lending money even after We the People gave them about $300 billion. 

We’re mad about the bonuses that were paid to brokers at Merrill Lynch after part of that $300 billion went to bail it out.  We’re mad at the Treasury Secretary nominee for not paying his employment taxes.  We’re mad at the people who were supposed to be policing the financial system that didn’t see Bernard Madoff coming.  We’re collectively in a VERY bad economic mood.

Who could blame us?

In a recent five-part series, I tried to put these issues into historic perspective.  Our unemployment rate, for example, is higher than it was at the peak of the 2001 recession, but is not nearly as high as it was at the peak of the recession in the early 80’s.  And both the capital and real estate markets are actually working off excesses in a “bubble” produced by extraordinary demand pushing prices to unsustainable levels.  While these economic times are unpleasant to live through, they are not new, and history shows that the US economy is extraordinarily resilient, and has definitely survived worse. 

Responses to these articles reflected our bad economic mood.  While I expressed no opinion, just data to show where we were with some perspective, responses were venomous. 

·         “Oh, you think we’re fine, do you?  Well, let me tell YOU something. . .”   

·         “Warren Buffett is buying?  Well, good for Warren.  I don’t have one extra cent, and if I did, I wouldn’t give it to those crooks.” 

And so on.

No one with thirty years of financial experience, especially a woman, is a fragile little hummingbird egg.  I’ve fielded angrier questions than these.  But, now that I’m (semi) retired, the one component that I don’t have is my clients’ singular, quirky, witty and laser-sharp point of view. 

Generally, my clientele were creative people: writers, directors, art directors, entertainment attorneys and the like.  They were young, successful, enthusiastic – and extraordinarily witty.  During the days of the dot com bubble, I refused to allow them to buy so-called dot come businesses with little more than a shoddy business plan and a slick presentation.  Others, who did, mocked my clients, waving their bloated brokerage statements and went on and on about their plans for early retirement, fast cars and young blonde consorts.   One of my clients, a writer, said to me, “I don’t think it’s good that all these 30 year olds become multi-millionaires, Kitty.  No good can come of that.” 

That stopped my explanation of the lack of viability of that dot com business dead in its tracks.  How insightful and funny!  There’s a good explanation of an asset bubble, if I’ve ever heard one.

So, back to our bad economic mood.  Sure, we have plenty of reason to be angry.  We have plenty of people to point our anger at.  We can blame the regulators, the loan agents, the rating agencies, Wall St., the Bush Administration and many, many more.  We can turn on CNBC and see Mark Haines be snarky, Larry Kudlow be angry, and Jim Kramer yelling at the top of his lungs.  These guys know what they’re talking about, right?We can join them in righteous indignation at our current predicament, put our money in our mattress, and white-knuckle it until the economy starts to recover. 

On the other hand, we can give a moment’s attention to the fact that Warren Buffett, notoriously silent about his investments, is publicly announcing not only that he is actively buying stock in US companies, but also which companies he is buying.  We can acknowledge the seriousness of this situation AND the fact that we’ve weathered worse.  We can learn the tried and true lessons of continued savings and investment, proper diversification of those investments, the long term viability of home ownership and the inadvisability of “get rich quick” schemes and “it’s different this time” explanations.  And, we, as both women and a society can stop buying things we don’t need and get out of debt.

None of those things, however, will improve our bad mood.  What will?  Why not go to www.thelintscreen.com and see what gifted writer Pat Scullin says about Madoff and the Fonzie scheme?  That’s what I did.

Then, we can go out for a walk, have a low fat ice cream cone and quit our bitchin’. 

It’s bad for the economy.

The Federal Reserve can start buying homes across the country. Before you start saying that’s crazy and not legal think about it. If the Federal Reserve started buying homes it would have a tremendous effect on the economy. Home prices would not only stop declining they would start going up. The Federal Reserve has all the money it needs to buy as many homes around the country as it wants. As the money flows into housing not only would home prices rise but credit markets would also start to open up again. Why? Because a great deal of the bad assets on banks balance sheets are bad mortgages tied to the decline in home prices. As the bad assets become good again banks would be free to lend more money as their own balance sheets improve.

As far as the Federal Reserve having the legal right to purchase homes that is covered completely in the Federal Reserve Act. The first sentence in the Act states that the Federal Reserve exists, “to create an elastic currency.”  Buying homes and putting money back into the US economy would create an elastic currency which is something this country has not had for well over one year now.

As the money used for the home purchases flowed through the US economy we would see consumers starting to spend their own money again at normal levels, asset prices would stop declining, wholesale prices would stop falling, business sales would start rising again, businesses would stop laying off workers and would actually start hiring again so the unemployment rate could stop rising and overall business activity would turn positive again.

What would the Federal Reserve do with all the homes it purchases? As the housing market picks back up it could sell the homes and make a profit. Or sell the homes to low income families. Or keep the homes and rent them out. Or tear down the homes and sell the lots. It wouldn’t matter what it did with the homes.

If in fact the real problem in the US economy today is the housing market the Federal Reserve can quickly and easily solve this problem by going into the housing market and purchasing homes until home prices stop declining and start rising again.