My thoughts on the economic mess
Posted on September 25, 2008 5 Comments
Thanks for sharing your thoughts on the economic situation. Here are a few of mine. I’m weary to share because I really feel like I’m wading in dangerous waters here, but I think dialog is really important, too. Here it goes…
INFORMATION GAP: From what I understand, bad mortgages and foreclosures are at the heart of the current financial crisis. I read yesterday’s explanation of the $700 billion bailout in the Wall Street Journal and found one vague paragraph saying the package would extend to housing. If bad mortgages are to blame, why does it sound like the package is so light on homeowner help? Even if the lending companies get money to stay afloat, won’t there still be millions of people who can’t afford their mortgages? If you have a link with the answer, share it here.
ONE MORE QUESTION: On the other hand, if we give the homeowners money to keep their houses, won’t housing prices stay inflated? Isn’t that bad for the economy, too? The next generation of people will just have to borrow more to buy homes, and what happens when government support runs out? More foreclosures?
TALES FROM THE FRONT: My cousin was in the midst of selling her house – the movers were supposed to come this weekend – when the buyer’s financing fell apart. Because they couldn’t afford to pay two mortgages, she and her family couldn’t get their new home in Texas (she lives in Illinois now), where her husband’s new job is located. I guess that’s what they mean when they say the Wall Street Crisis can directly affect Main Street.
CONFUSION, FEAR… How credible are all the politicians who are warning of imminent economic failure if we don’t act now? The general impression from Washington, based on Sec. Paulson and Chairman Bernake’s congressional appeal, and Bush’s speech, is that if we don’t pass the bill, OMG WE WILL ALL LOSE OUR JOBS TOMORROW AND THE US WILL GO DOWN IN FLAMES!!! Is that really where we are? Cuz I just heard some billionaire on 20/20 complaining that “the hardest thing he ever had to do” was give up his private jet due to the crisis. Come on guys, give it to us straight. Are we all about to lose our jobs and homes, or are a few billionaires about to lose their personal jets and one piece of property? I’m getting mixed messages. One politician says the entire economy is on the brink and that no cash is flowing, and the next minute Warren Buffet’s throwing millions of dollars into investments as a sign of faith.
I HAVE TO ASK: Investments in the US are all about risk and reward, right? I mean, that’s why people risk SO MUCH — because the rewards are so great. Investment profiles and 401ks are based on “risk tolerance” or “risk aversion.” Anybody who visits Vegas knows you can’t win big unless you bet big. But now, essentially what we’re saying is, “Go ahead, take huge risks. Bet ALL your money on red! If it doesn’t work out, we’ll still help you!” How do I get a sweet piece of that deal? …Stupid me! I could have been betting big this whole time!
Seriously, though, shouldn’t companies be allowed to fail because they made bad bets? I know, I know… these companies can’t fail because too many people are invested in them and then we’d all lose our jobs.
CONFLICTED? YES!… If you’re watching the news, you’ve no doubt heard the contradiction, “Bailouts are bad … people made bad decisions and they have to pay!” “Bailouts are good … companies made bad decisions and they need help or else we’re all going down!” Huh?
MY 401K… I have not looked at it in two weeks. Thank god I don’t need it for a while.
Something tells me I’m out of my league here, so I’m going to leave the economic discussions to the economists and resort to just reading about it. I’m swimming in the deep end without water wings, so now it’s time for me to go back to the kiddie pool, into safer, more familiar territory: budgeting and saving. I think a lot more people may be looking for real-world advice on those topics soon!
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5 Responses to “My thoughts on the economic mess”
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September 25th, 2008 @ 4:34 am
The whole situation just makes me sick. People buying bigger houses than they could afford, mortgage companies loaning more than they should and now I HAVE TO EAT THEIR MISTAKES BECAUSE I LIVE, HAVE LIVED AND CONTINUE TO LIVE WITHIN MY MEANS??!!! Stinks to me ~ real bad.
Why can’t the executives who made all this money. . .give some back???? Those huge bonuses, etc.?
Blessings,
Sher
September 25th, 2008 @ 5:01 am
Well, from reading MSN Top Stocks, all I can glean is this:
The $700 billion bailout would barely touch the homeowners. It would focus mainly on the banks. Also, Paulson is asking for total discretion in how he uses the money: no review, no consequences, nothing. Scary stuff.
As for the homeowners getting help, here’s what I think I’ve understood:
1. They will probably get a tax break, which is something, it not quite as immediate as they’re hoping.
2. If we use the bailout to help individual homeowners, the government will spend months (or longer) wading through to find charlatans and deadbeats. So that’s not much of an option.
3. We can use the money to give to the banks who need to get rid of bad mortgages clogging their capital etc. But again, homeowners won’t see much actual help.
4. Essentially, if they rush the bailout like this, we’re left with the option of giving money to a few foundering corps and hoping that the renewed amount of capital gets paid forward in the guise of lower rates for struggling homeowners. This, as you pointed out, may keep housing prices high.
Really, I see no good solution as of yet. But a bunch of economists wrote to Congress begging it not to approve Paulson’s request, so hopefully we get a few more specifics before the gov’t forks over that kind of moolah.
September 25th, 2008 @ 1:57 pm
The President, in my opinion, made another major mistake last night. This is a “crisis of confidence” and he certainly didn’t help any. If you want to know the real reasons behind all of this, I would recommend you go to this link and read “Here’s a Plan to Avoid a New RTC” by Brian Wesbury. Being that I’m in the business, I understand it, but it may or may not be in layman’s terms for you. http://www.ftportfolios.com/Retail/Research/EconomicResearch.aspx You can also watch the two part segment of his interview with Dave Ramsey at the same site.
September 25th, 2008 @ 10:58 pm
I’ve only been reading your blog for about a month. I stumbled up it when i was googling information on student loan litigation. As a lawyer (w/a lot of student loan debt), who deals in banking law (I have worked on both lender and consumer sides), I’m going to throw out a comment that may be a little offensive politically to some readers-but here you go-I didn’t vote for Bush, I voted for Gore and Clinton before him and I’m a Hillary Clinton supporter-(except for that whole 30% tax on your 401k bit her and Pelosi want to get passed-just this one time, until next time) Ok, back on topic-the reason we are in this mess, is because of Bill Clinton. Under his administration, he promoted Home Ownership and tasked the banks with finding ways, “Creative” ways to get everyone into homes so everyone could “realize the American dream”. There were two solutions. 1) Securitization-ie bundling loans into investments and selling them on Wallstreet and 2) not requiring people to put money down on their loans). Everyone was on board. If you look back historically since the Great Depression, homeownership nationally, typically ran around 55-60% of the population. It jumped up to 80% before things began cooling in late 2006.
The market needs to correct itself-people will suffer, sure, but the people who will suffer are the people that bought too much house, or should have never bought a house. The majority of people I see in foreclosure end up there because they were two income households when they bought the house. When the banks ran their numbers, they said “based on 2 incomes, you can afford X amount) and they ran out and bought their dream McMansion. One person leaves or loses their job and suddenly, the house is unaffordable. These are not subprime loans on their face. Good 5.5% interest rates. The problem, people didn’t put a dime down on the home. They’re not invested in it, they want the bank to roll over and give them their house for free because the bank should have never given them a loan in the first place. Come on people, buy assuming the worst case scenario, what can you afford if one of you loses your jobs. This is my first time rant on a blog ever and I have strep throat, thus why I have time to comment on a blog-so I apologize for any disorganization.
September 26th, 2008 @ 2:35 pm
I really do welcome comments of all political stripes on this site. Thanks everybody for your feedback. Interesting stuff!