- Feb 15, 2006
- 3,244
- 274
What’s gone wrong with the US economy and why .
Like many of you , it seemed like just last year life was booming and the sun was shining , now we’re surrounded by rain clouds pouring down on us .
I know that there are many of you out there wondering , why their 401ks are shrinking in value , why their home values are decreasing overnight and why it’s seemingly impossible to get a loan for anything these days when it was just yesterday that one had to sort through the mail throwing out credit card offer after credit card offer .
In a nut shell the root of our problem is greed , we strove for too much ,in the same way Icarus flew too near the sun , and now we’re falling .
The major shift in our countries fortunes is due to a combination of many factors , over building and the high price of oil are the major culprits in my view …
For the last 6 years our nation has been on a housing boom , with residential homes springing up overnight in all areas of the country . This explosion of affordable houses on the outskirts of major suburban areas provided houses that in the beginning of the boom were attainable by the average joe if he or she was willing to drive a little further in order to own one …. With investment flowing like a river through the nation ,people with even sub par credit scores were able to attain financing in order to own that dream home so many had always sought .
For years we were always taught it was better to own than rent , and with interest rates so low on homes it was viewed as a sound long term investment to buy one , after all ,the value of a home would only go up with time . At the start of this ,all was well , the materials to build houses were cheap and labor costs were low …. But as the years progressed the price of homes began to rise at rates never seen before , as evidenced by the inflated tax assessments on property values . Everyone began to buy into the real-estate market, because of all the purchases in our lifetimes nothing is as large and expensive as a home , real-estate agents were rolling in money along with home builders , when banks began to understand that they could get a piece of the action they jumped in providing as many loans as they could to people , even people who couldn’t prove their incomes , balance sheets were overflowing profit … lowes and home depots began to spring up everywhere and established homes started rising quickly in value leading lenders to offer 2nd mortgages for home improvements ,new cars , debt consolidation and whatever else you can think of … with everything secured by a real tangible asset “homes†,if a few people defaulted it wouldn’t matter because the banks would be able to reclaim the houses and sell them again for ever more money …
Then the price of GAS began to rise , slowly at first , then more and more painfully .. The couple who had purchased a home 30 miles away from their work place who drove the v8 truck began to reconsider their location as the price to fill the tank became more and more shocking … soon people were talking about 100 dollar fill ups and even the well off began to feel at least the psychological effects of high oil prices … People began to sell their homes and move closer to where they worked …. Meanwhile as oil prices rose so did the price of labor and the materials to construct the homes … people began to look at the 300K priced houses 50 miles outside of the city and balked at the thought of such high mortgages on top of the price of gas required to commute to work everyday … and so they stopped buying them … During this entire time of building there were many who were gaming the market , buying bigger and bigger houses to sell for higher and higher returns as home prices rose …. Eventually the music stopped and they were left with homes far greater than they could afford to pay mortgages on . Those who weren’t lucky enough to find buyers simply let the homes that they couldn’t afford slip into default , and thus began the drive down in home prices .
Before we continue, let us pause and look at the commercial side of the housing boom … not only were new homes built in ever greater number , but so too were new business that would be required to take care of the new occupants , more KFC’s and dunkin dounts would be required to entreat the population , along with new strip malls , eventually the pace of construction became so brisk land investors began to speculate the locations of the next development and started building the restaurants and shopping centers in anticipation of the homes too come …
Wall street noticed almost from the offset the incredible potential for profits from this new boom , much the way they did at the start of the technology bubble of 2000 when the internet and it’s profits seemed limitless . Soon mutual funds who are responsible for your 401k’s were investing in banks that were posting huge profits due to the home loans that they had been selling in higher and higher volumes ..After a time , banks were mass producing so many home loans it became more efficient to simply bundle the loans into large packages and sell them to investors … with the security that these investments were backed by real property it was a sure bet for wall street … wall street however didn’t take the TIME to analyze these jumbo packages , if you didn’t buy them today someone else would and you’d have missed out on another great investment , so buy they did . These jumbo loans were SO large it would have been quite an undertaking to verify the credit worthiness of the people who comprised the loans, so everyone began trusting one another ( a bad idea in a capitalistic system ) , besides the investors figured , the loans were made by banks , responsible institutions who take the time to check on whom they loan too …this however stopped being the case at the height of the home giveaways as I like to call it ..
Don’t forget while all of this was going on , credit cards were being tossed around like food in a school food fight , along with second mortgages …Cars began to get sold in ever higher numbers , new TV’s bought and financed from new credit lines , trips to veags … the list goes on …
Back to the bigger picture … to really expand your view , not only was there a housing and credit boom in the united states , but throughout the world as new wealth looked for ways to keep increasing … The mutual fund companies were making so much money from the mortgage backed securities that they needed new and diverse places to invest …. They turned to the UE .. Dubai , African countries , Asia … all over the globe the profits from homebuilding began to flow into new and different streams of investments …
like all rushes , after awhile people are just gonna get to the river and realize there’s no more gold in the stream …. With Americans essentially tapped out from over spending and under saving (we have the bad habit of not keeping enough money in our savings accounts ) the markets began to panic ….
Like a snow ball rolling down hill the level of defaulting has begun to increase to epic market destroying proportions ….(this is why it’s so hard to get loans for anything these days ) Homeowners on the outskirts who were getting bled dry due to high gas prices and high property taxes decided to bolt on the homes that had a year prior been at least what they had paid for them but were now in some cases much much less . Other homeowners facing adjustable rate mortgages that had been convenient to get in order to help finance their homes found that their monthly payments had in some cases doubled … they began drawing on their credit cards and cutting back on non essential purchases , no more trips to the golden arches , new cars or anything else for that matter as these homeowners attempted to save their residences … in many cases these people went bust having to default on the now maxed out credit cards ..a quick side note , did you know that 3/4ths of the us economy is driven by consumer spending , as people stopped spending companies stopped hiring , or worse yet let staff go , thereby making the snow ball that much larger …
At first wall street and the US government didn’t initially notice or care that a few people had stopped paying their mortgages , the market would correct itself was the old adage … sure gas was a problem , a problem that poor people had to deal with .. Who on wall street would think that 3 or 4 dollar gas would cause hardship for people or consumers to cut back . It was hard for them to understand this when your making 50K bonuses each year . The same went for Washington , high gas prices became just another wedge issue like illegal immigration or healthcare reform and the real after shocks to the nation went unseen …
Soon due to the high price of gas everything began to go up , from eggs to airfare …the sense that we as a society were getting less wealthy instead of more began to spread …. Finally enough people pulled back on their spending for the effect to actually hit wall street …. Private investors began to catch on to what was happening across the country ..
A bank called country wide which was in the business of taking the mass of home loans and selling them to investors one day placed a new jumbo loan on the market for the investment community to buy , and a strange thing happened , no one bit …no one wanted to take on their loans as default rates began to rise in other previously sold mortgage backed securities … the cycle of blind trust had ended as investors grew suspicious of whom the mortgage loans had been given too , after some checking it became apparent that many banks had lent to people who couldn’t qualify their income , called liar loans where the person taking out a home loan simply told the loan agent they made XYZ amount a year and the loan officer did no checking on income and simply approved the loan , these loans resulted in people who made 50 k a year living in million dollar homes …(they had hoped to flip the homes for profit , but when the music stopped their luck ran out )
By the time the awful truth was discovered in late 2007 the entire financial community (almost world wide ) was locked in or somehow connected to these mortgage loans …..
Greed makes people do strange things , in the quest to pursue ever more profit businesses started keeping less cash on hand and running on smaller margins … as an example lets say I open a new restaurant , at first I keep 1000 dollars in my cash draw so I have enough change for my customers and other expenses , as time goes on however I see that if I build a playpen for the customers kids I can make more money by brining in more customers so I take 500 out of the draw and use it to finance the construction of the play pen … I’m doing fine with just 500 in my draw when I decide that with a new coffee machine I can double my sales of drinks , so I pull out 300 to purchase it and am now running my store operations with only 200 in the draw to make cash …. One day a salesman walks in and asks me if I’d like to market my store to draw more folks in and it will only cost me 180 dollars , at this point my future is looking so bright with all of the customers who are already coming in and are expected to come in , I say what they heck!… now I’m left with only a 20 in the draw to make change for my customers , but I figure with so many coming and going constantly I should be able to manage it …
Then one day the tax assessor comes around and slaps a new immediate tax of 50 dollars on all local restaurants , at this point it’s more than I have in my cash draw so I call my banker and ask for a loan , which he agrees to provide me so I can pay my new tax assessment , I pay the tax and am now once again resting easy …however the next day I receive a bill from my invoice company where I get the food and supplies to run the restaurant … they state in the bill that due to the high cost of gas they’ve had to revise the cost of the materials I need higher , I’ll now have to pay them an extra 100 dollars for the food and supplies …once again I call my banker and ask for credit so I can keep my business running , only this time he has to deny me because so many other restaurants have called him asking for money, that he can no longer lend anymore out …
unable to pay my bills i go out of bussiness .
That example illustrates how our major banks and businesses such as lehman brothers,country wide , Washintgon mutual ,etc have fallen ..
Think of the banker as the American tax payer or the private investment community fielding call after call from desperate restaurants requesting money to stay in business because they didn’t keep enough in the till … the really frightening thing here is that now the customers who frequent these restaurants are staying home for personal reasons because they can no longer continue to eat out as often (probably due to higher state taxes, property taxes , loss of their job , high gas prices for their cars ,increased airfares, higher supermarket costs , higher credit card rates etc ) , so when the stores close , we will be on the hook for the loans ..
This basically explains what’s going on in the US and world economies .. Stock markets are losing faith in company after company because not only do they not have enough in the till , but they made bad investments by anchoring themselves to the rise and fall of home prices …. So as home values decline, people default and credit cards go unpaid , these companies that have invested in the market such as mutual funds find themselves in the same sinking boat with everyone else … hence why your 401k is going down …
I wish I could say that things were going to improve soon , or that everything is going to be alright , but the truth is the American economy was going 100 miles an hour when we hit the wall . We haven’t even begun to see the rise in credit card defaults to massive levels …
As for credit to free up anytime soon I wouldn’t hold my breath … most of the major institutions (banks etc )who generate loans are holding all the money they have left in their till as new problem after new problem arises that requires them to pay out .This in its self contributes to the economic snowball that is engulfing our nation , without a new generation of buyers with home loans in hand , those folk who are currently trying to sell their homes will have to offload them at a lesser rate to attract those few buyers who can even qualify for a home loan these days ….
And so home prices continue downward along with the market , job creation and every other economic indicator in this country …
E pluribus unum
Annuit cœptis
Novus Ordo Mundi
Freedom
Like many of you , it seemed like just last year life was booming and the sun was shining , now we’re surrounded by rain clouds pouring down on us .
I know that there are many of you out there wondering , why their 401ks are shrinking in value , why their home values are decreasing overnight and why it’s seemingly impossible to get a loan for anything these days when it was just yesterday that one had to sort through the mail throwing out credit card offer after credit card offer .
In a nut shell the root of our problem is greed , we strove for too much ,in the same way Icarus flew too near the sun , and now we’re falling .
The major shift in our countries fortunes is due to a combination of many factors , over building and the high price of oil are the major culprits in my view …
For the last 6 years our nation has been on a housing boom , with residential homes springing up overnight in all areas of the country . This explosion of affordable houses on the outskirts of major suburban areas provided houses that in the beginning of the boom were attainable by the average joe if he or she was willing to drive a little further in order to own one …. With investment flowing like a river through the nation ,people with even sub par credit scores were able to attain financing in order to own that dream home so many had always sought .
For years we were always taught it was better to own than rent , and with interest rates so low on homes it was viewed as a sound long term investment to buy one , after all ,the value of a home would only go up with time . At the start of this ,all was well , the materials to build houses were cheap and labor costs were low …. But as the years progressed the price of homes began to rise at rates never seen before , as evidenced by the inflated tax assessments on property values . Everyone began to buy into the real-estate market, because of all the purchases in our lifetimes nothing is as large and expensive as a home , real-estate agents were rolling in money along with home builders , when banks began to understand that they could get a piece of the action they jumped in providing as many loans as they could to people , even people who couldn’t prove their incomes , balance sheets were overflowing profit … lowes and home depots began to spring up everywhere and established homes started rising quickly in value leading lenders to offer 2nd mortgages for home improvements ,new cars , debt consolidation and whatever else you can think of … with everything secured by a real tangible asset “homes†,if a few people defaulted it wouldn’t matter because the banks would be able to reclaim the houses and sell them again for ever more money …
Then the price of GAS began to rise , slowly at first , then more and more painfully .. The couple who had purchased a home 30 miles away from their work place who drove the v8 truck began to reconsider their location as the price to fill the tank became more and more shocking … soon people were talking about 100 dollar fill ups and even the well off began to feel at least the psychological effects of high oil prices … People began to sell their homes and move closer to where they worked …. Meanwhile as oil prices rose so did the price of labor and the materials to construct the homes … people began to look at the 300K priced houses 50 miles outside of the city and balked at the thought of such high mortgages on top of the price of gas required to commute to work everyday … and so they stopped buying them … During this entire time of building there were many who were gaming the market , buying bigger and bigger houses to sell for higher and higher returns as home prices rose …. Eventually the music stopped and they were left with homes far greater than they could afford to pay mortgages on . Those who weren’t lucky enough to find buyers simply let the homes that they couldn’t afford slip into default , and thus began the drive down in home prices .
Before we continue, let us pause and look at the commercial side of the housing boom … not only were new homes built in ever greater number , but so too were new business that would be required to take care of the new occupants , more KFC’s and dunkin dounts would be required to entreat the population , along with new strip malls , eventually the pace of construction became so brisk land investors began to speculate the locations of the next development and started building the restaurants and shopping centers in anticipation of the homes too come …
Wall street noticed almost from the offset the incredible potential for profits from this new boom , much the way they did at the start of the technology bubble of 2000 when the internet and it’s profits seemed limitless . Soon mutual funds who are responsible for your 401k’s were investing in banks that were posting huge profits due to the home loans that they had been selling in higher and higher volumes ..After a time , banks were mass producing so many home loans it became more efficient to simply bundle the loans into large packages and sell them to investors … with the security that these investments were backed by real property it was a sure bet for wall street … wall street however didn’t take the TIME to analyze these jumbo packages , if you didn’t buy them today someone else would and you’d have missed out on another great investment , so buy they did . These jumbo loans were SO large it would have been quite an undertaking to verify the credit worthiness of the people who comprised the loans, so everyone began trusting one another ( a bad idea in a capitalistic system ) , besides the investors figured , the loans were made by banks , responsible institutions who take the time to check on whom they loan too …this however stopped being the case at the height of the home giveaways as I like to call it ..
Don’t forget while all of this was going on , credit cards were being tossed around like food in a school food fight , along with second mortgages …Cars began to get sold in ever higher numbers , new TV’s bought and financed from new credit lines , trips to veags … the list goes on …
Back to the bigger picture … to really expand your view , not only was there a housing and credit boom in the united states , but throughout the world as new wealth looked for ways to keep increasing … The mutual fund companies were making so much money from the mortgage backed securities that they needed new and diverse places to invest …. They turned to the UE .. Dubai , African countries , Asia … all over the globe the profits from homebuilding began to flow into new and different streams of investments …
like all rushes , after awhile people are just gonna get to the river and realize there’s no more gold in the stream …. With Americans essentially tapped out from over spending and under saving (we have the bad habit of not keeping enough money in our savings accounts ) the markets began to panic ….
Like a snow ball rolling down hill the level of defaulting has begun to increase to epic market destroying proportions ….(this is why it’s so hard to get loans for anything these days ) Homeowners on the outskirts who were getting bled dry due to high gas prices and high property taxes decided to bolt on the homes that had a year prior been at least what they had paid for them but were now in some cases much much less . Other homeowners facing adjustable rate mortgages that had been convenient to get in order to help finance their homes found that their monthly payments had in some cases doubled … they began drawing on their credit cards and cutting back on non essential purchases , no more trips to the golden arches , new cars or anything else for that matter as these homeowners attempted to save their residences … in many cases these people went bust having to default on the now maxed out credit cards ..a quick side note , did you know that 3/4ths of the us economy is driven by consumer spending , as people stopped spending companies stopped hiring , or worse yet let staff go , thereby making the snow ball that much larger …
At first wall street and the US government didn’t initially notice or care that a few people had stopped paying their mortgages , the market would correct itself was the old adage … sure gas was a problem , a problem that poor people had to deal with .. Who on wall street would think that 3 or 4 dollar gas would cause hardship for people or consumers to cut back . It was hard for them to understand this when your making 50K bonuses each year . The same went for Washington , high gas prices became just another wedge issue like illegal immigration or healthcare reform and the real after shocks to the nation went unseen …
Soon due to the high price of gas everything began to go up , from eggs to airfare …the sense that we as a society were getting less wealthy instead of more began to spread …. Finally enough people pulled back on their spending for the effect to actually hit wall street …. Private investors began to catch on to what was happening across the country ..
A bank called country wide which was in the business of taking the mass of home loans and selling them to investors one day placed a new jumbo loan on the market for the investment community to buy , and a strange thing happened , no one bit …no one wanted to take on their loans as default rates began to rise in other previously sold mortgage backed securities … the cycle of blind trust had ended as investors grew suspicious of whom the mortgage loans had been given too , after some checking it became apparent that many banks had lent to people who couldn’t qualify their income , called liar loans where the person taking out a home loan simply told the loan agent they made XYZ amount a year and the loan officer did no checking on income and simply approved the loan , these loans resulted in people who made 50 k a year living in million dollar homes …(they had hoped to flip the homes for profit , but when the music stopped their luck ran out )
By the time the awful truth was discovered in late 2007 the entire financial community (almost world wide ) was locked in or somehow connected to these mortgage loans …..
Greed makes people do strange things , in the quest to pursue ever more profit businesses started keeping less cash on hand and running on smaller margins … as an example lets say I open a new restaurant , at first I keep 1000 dollars in my cash draw so I have enough change for my customers and other expenses , as time goes on however I see that if I build a playpen for the customers kids I can make more money by brining in more customers so I take 500 out of the draw and use it to finance the construction of the play pen … I’m doing fine with just 500 in my draw when I decide that with a new coffee machine I can double my sales of drinks , so I pull out 300 to purchase it and am now running my store operations with only 200 in the draw to make cash …. One day a salesman walks in and asks me if I’d like to market my store to draw more folks in and it will only cost me 180 dollars , at this point my future is looking so bright with all of the customers who are already coming in and are expected to come in , I say what they heck!… now I’m left with only a 20 in the draw to make change for my customers , but I figure with so many coming and going constantly I should be able to manage it …
Then one day the tax assessor comes around and slaps a new immediate tax of 50 dollars on all local restaurants , at this point it’s more than I have in my cash draw so I call my banker and ask for a loan , which he agrees to provide me so I can pay my new tax assessment , I pay the tax and am now once again resting easy …however the next day I receive a bill from my invoice company where I get the food and supplies to run the restaurant … they state in the bill that due to the high cost of gas they’ve had to revise the cost of the materials I need higher , I’ll now have to pay them an extra 100 dollars for the food and supplies …once again I call my banker and ask for credit so I can keep my business running , only this time he has to deny me because so many other restaurants have called him asking for money, that he can no longer lend anymore out …
unable to pay my bills i go out of bussiness .
That example illustrates how our major banks and businesses such as lehman brothers,country wide , Washintgon mutual ,etc have fallen ..
Think of the banker as the American tax payer or the private investment community fielding call after call from desperate restaurants requesting money to stay in business because they didn’t keep enough in the till … the really frightening thing here is that now the customers who frequent these restaurants are staying home for personal reasons because they can no longer continue to eat out as often (probably due to higher state taxes, property taxes , loss of their job , high gas prices for their cars ,increased airfares, higher supermarket costs , higher credit card rates etc ) , so when the stores close , we will be on the hook for the loans ..
This basically explains what’s going on in the US and world economies .. Stock markets are losing faith in company after company because not only do they not have enough in the till , but they made bad investments by anchoring themselves to the rise and fall of home prices …. So as home values decline, people default and credit cards go unpaid , these companies that have invested in the market such as mutual funds find themselves in the same sinking boat with everyone else … hence why your 401k is going down …
I wish I could say that things were going to improve soon , or that everything is going to be alright , but the truth is the American economy was going 100 miles an hour when we hit the wall . We haven’t even begun to see the rise in credit card defaults to massive levels …
As for credit to free up anytime soon I wouldn’t hold my breath … most of the major institutions (banks etc )who generate loans are holding all the money they have left in their till as new problem after new problem arises that requires them to pay out .This in its self contributes to the economic snowball that is engulfing our nation , without a new generation of buyers with home loans in hand , those folk who are currently trying to sell their homes will have to offload them at a lesser rate to attract those few buyers who can even qualify for a home loan these days ….
And so home prices continue downward along with the market , job creation and every other economic indicator in this country …
E pluribus unum
Annuit cœptis
Novus Ordo Mundi
Freedom
