Saturday, November 24, 2007

Fasten your seat belts ...

... it's going to be a rough ride.

It is entirely possible that all of the U.S. banks are currently bankrupt. Just because Citicorp generates billions of dollars every day in revenue doesn't mean that it has any equity left. Between 2005 and 2007, over a quadrillion dollars of collateralized debt obligations (CDOs) were underwritten. A one percent writedown would amount to at least a trillion dollars worth of losses. Most CDO analysts at the large investment banks have already publicly stated that they expect at least several hundred billion in writedowns, although to date, less than a hundred billion has been announced.

More from Ann Lee on Huffpo ...

My comment:

So, where do you think that's all going? Projections of several hundred billion in write downs with only less than one hundred billion "recognized"? If you think the housing market is depressed now, well, you ain't seen nothing yet! Just multiply what you're seeing in your neighborhood by the "several" (twice, three, four times? more?) that still haven't hit the books. Foreclosure rates are at an all time high. (1, 2, 3)

Profit is a wonderful thing. Government regulation outlines how one can legally make profit. Without government regulation, any way you can make profit is legal. There has been little government regulation of lending practices for the last decade and a half ... from the time the Republicans took control of Congress in the mid-90's to now. The current credit mess is the result lenders making loans that never should have been made ... on the premise of leverage. Leverage is using the assumed future value of a purchase to finance the purchase. Leverage, in and of itself, is not a bad thing. What is bad, however, is when lenders allow people to leverage their home purchases based on the assumption that the value of the purchase would ALWAYS increase. Obviously, that doesn't ALWAYS happen. The problems start when that planned increase in value doesn't happen; when the market reverses, and all these people who shouldn't have been taking on debt they couldn't afford get a dose of reality.

The only time leverage is useful and productive and secure is when you have alternatives. On the other hand, when it's the only way you could buy that .... thing ... whatever that thing is ... the practice is very questionable.

But, no. We need "business friendly" legislation. Profit is the priority! Regulations (those laws and rules that define how profit can legally be made) get in the way of making profit. The "invisible hand of them market" will correct for any problems that might arise.

Well, even if that were gospel truth, it takes time and people who are living from paycheck to paycheck don't have that kind of time.

It's going to take the better part of the next decade for the economy to recover from the effects of this hiccup. Taxpayers are going to end up footing the bill and that means you and your children are going to pay for the "fiscal responsibility" of so called conservative policies that have not favored regulation. The guys who lobbied for that legislation --- the bankers, mortgage lenders, and hedge fund managers are not going to be paying for their mistakes --- you are. You and your kids are. For years ... because this is going to be bigger than the last fiasco, the savings and loan crisis of the 1980s. Much bigger.

Don't ever let anyone tell you that the national economy is different from your household economy. The only difference is the number of zeros involved. Otherwise, it all boils down to income and expenses. Leverage is debt ... and debt has to be repaid at some point.

For years people in the financial "industry" have been telling everyone that there's "good" debt and "bad" debt ... that a mortgage was "good" debt. The current situation is underscoring the point that there is only one kind of debt ... debt that has to be repaid. That mortgage ceases to be "good" debt when the price of housing falls. It's not "good" debt when you owe more on your house than you can sell it for. The decrease in value comes out of your equity, not out of what you owe.

If you voted for Republicans during the last decade and a half, I hope you're happy with the results. They've been all in favor of borrowing ... I wonder how they feel about paying back. Actually, it probably doesn't bother them one bit ... its your children who'll be paying back on the debts they incurred

My grandparents and my parents lived through the depression. I was told about the depression. I was also told it could never happen again ... that government regulations were in place that would prevent such a thing from ever happening again. Well, I've always been a skeptic.

If you didn't listen to the stories from your great-grandparents, your grant parents ... and your parents (if they had their heads firmly screwed on) ... listen now. Things are going to get tougher than you ever imagined. Could I be wrong? Sure, I could be wrong. But wouldn't it make sense to prepare for some very rough times and find out I was wrong than to not listen and get blind sided by some very troubled times?

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