What you don’t know can hurt you...And why the current crisis will not end anytime soon

Implications: Can the Federal Reserve bail the United States economy out of a recession? Can a politically motivated economic stimulus package bail out the economy? Are the economic fundamentals so strong and flexible in the United States that the Nation’s economy can rebound quickly with very little damage to its financial infrastructure? Is the media over hyping the problems besetting the Nation’s economy? The answer to the above depends if you believe the underpinnings of the economy are in good shape. But the further you scratch beneath the surface the scarier things look.  

Analysis:  The current housing crisis or should it now be said banking and credit crisis has no doubt spread throughout the entire credit system. From top to bottom there is a problem. Yes the subprime mortgage situation was the spark, but generally that is all that is needed to start a raging forest fire.


The banking system is trying to work itself out of the troubles its own practices had created. Yes the Federal Reserve will come to their rescue, be that fair or not, the last thing the Federal Reserve or the United States needs is a banking collapse.


This contagion has now spread to the bond insurers themselves who face their own capital crisis as the rate of home foreclosures keep rising. Ambac and its rival, MBIA are scrambling to get funding sources or fear their ratings will be lowered by the Rating Agencies which would virtually put them out of business. Besides mortgages these companies insure municpal bonds and the like.


On top all this Fannie Mae has gone against its own charter to buy “subprime” or “near subprime” mortgages as those mortgages are insured which made it OK...surprise they may not be if the bond insurers get a ratings demotion. Fannie Mae’s other problem is when the values of homes that were financed with 80% LTV or lower which were considered “good” loans, not subprime, start to increase above the 80% threshold, those loans can or will be reclassified as being in the subprime category. Unless Fannie can get all the properties re-appraised that should not happen. However, as housing has been treated as a commodity it could happen that Fannie takes a broad swath and devalues home values by a certain percentage across the board or by submarket. As this is un-chartered territory no one knows for sure how this will be treated.


The credit contagion has now spread to other credit products such as car loans, and credit cards. The delinquency rate is headed higher as those that couldn’t use their home equity as a cash machine are now back to using credit cards. These same folks who have relied on refinancing as a way out of their credit card problems can no longer count on being bailed out. The unemployment rate is going up, even with the temporary upward blip, all signs point downward. The financial industry has already shed hundreds of thousands of jobs, you have companies such as Sprint cutting up to 4000 jobs or greater, as well as Motorola ready to restructure. If the auto industry had as many lay-offs as the financial industry has cast off, there would be a loud cry from the UAW and more political pressure to do something. However, since these are “white collar” jobs who cares. These people worked for the evil financial institutions that brought this plague onto the land.


The ripple effect has begun, actually this writer has been saying it all along with many people saying stop being negative and so on. Its called reality, and until such time as everyone realizes this current crisis will not be resolved any time soon the better off they will be. The stock market is telling quite a story, 6 straight down days and not just by a few points but close to a 20% drop since October. The wild swings are anything but good news as there is a battle going on or there are opportunists who are bargain hunting one day and selling for profit the next.

When people see their IRA’s and 401K’s shrinking ever so quickly, while at the same time see the value of their homes decline no matter how much it may have appreciated in the last few years, people will feel a lot poorer. What happens when people begin to feel less financially secure, they stop buying non-essential goods and services. It’s human nature to begin throttling back on household spending, which so many economists and so called experts always seem to skip over.


This explains why the retail sector is feeling the first wave of this crisis after the housing market. The ripple effect will spread to higher office vacancy rates, stalled business decisions, and banks continuing to not lend money until they are convinced the situation has been corrected. Just take a look at your mailbox, and I bet you will now notice the smaller stack of junk mail because there are very few if  any credit card solicitations. Hmmm I wonder why? 


The Federal Reserve is slashing interest rates  for the banking system’s benefit as Mr. Soros explains. The business person or consumer is not wanted at the loan windows of many banks at the moment and for the foreseeable future. The banks can not off load the loans they are sitting on, which they would have ordinarily have sold as securitized debt on Wall St. As there is virtually no market for these instruments, they now must carry the loans on their books. How ironic, that the very same loans they were pushing out the back door as CDO’s, CMBS or other securitized debt obligations as Highly Rated, now will be written down due to the fact they can not be sold or they are not as secure as they had been underwriting them when selling to Wall St ,who in turn sold to the public markets. Wall St and the Banks, including the Federal Reserve have themselves to blame. But blame is not going to solve this problem. Time and smart thinking will and relying on one’s own research and knowledge will save the day on an individual basis.

The financial power of the United States is slowly shifting as Mr. Soros explains, and its time to pay attention. If you don't think that is the case then why are the major financial institutions going abroad begging for capital infusions. And further notice which countries are being asked to contribute...those that are holding the most United States Debt or those countries where there are enormous trade imbalances such as the Gulf Oil States and China.


By the way, I am not a big fan of Mr. Soros, but when someone makes a good point or case, you have to listen and disregard your own bias if what they are saying makes sense. In this case it does...