Debates are raging across the blogosphere about whether there should be a bailout for the housing crises. In American politics, it’s already been decided there needs to be one; the debate is how big and for whom.
Here’s what we’ve seen so far:
- A Bush plan to freeze mortgage interest rates for a very limited number of homeowners. It will be amazing if this plan helps more than 100,000 Americans out of the roughly 2 million facing mortgage resets. (Failure out of the starting gate.)
- A Federal Reserve plan designed to allow banks wider access to credit via international credit auctions. The Term Auction Facility, as this plan is being called, allows cash-strapped banks to borrow money at a slightly better rate than they currently can. (A small solution for a HUGE problem.)
- A super Structured Investment Vehicle Fund that allows banks to sell their highest-quality junk before writing off their worst quality junk. (Starting to look like a failure.)
- The Fed has lowered the lending rate several times. (This has failed to help the credit markets, but has done much to devalue the dollar and our homes via inflation even further. Total failure.)
So dear parent, I bet you are wondering what all this means to you. Nothing. And everything.
As you might have noticed, these plans do nothing for the average American except for the interest-rate freeze, which one could argue is nothing more than window dressing on a problem so big that our leaders are scared to fully contemplate.
The other bailout efforts are designed to help the stopped-up credit markets and give big banks a way out of their current financial mess, which can be measured by billions and billions of dollars in write-downs, which here means a total loss. Thomson financial is predicting another $140 billion of such write-downs over the next few months, reports The London Telegraph.
Notice that helping the credit markets does little to resolve underlying problems: how does increasing credit help the average American – or business for that matter – get rid of crushing debt? Nothing. The sad reason political and financial leaders want to get the credit markets moving again is so that Americans can continue to increase their debt load and in effect keep the economy going.
Meanwhile, the average American will continue to struggle for a variety of reasons: increased difficulty getting mortgages, higher bank fees and job layoffs. As banking problems grow, the more bailouts we’ll see. Eventually, bailout money will come directly out of the U.S. budget. Taxes will rise.
Worse: More Americans will lose their homes due to foreclosure than we’ve seen in our lifetimes. The economy will continue to slow and eventually fall into recession, despite what all those happy analysts claim on CNBC.
(Look, I don’t want this to happen. But 10-10 = 0. And 10-100 = -90. )
But the worst woes may be reserved for Americans who have been fiscally responsible. Here’s why:
1. For most, home values will drop, eroding borrowing power and in many cases crushing retirement dreams. Inflation will further depress home values.
2. As home prices drop to near or below their purchase value, many Americans will be reluctant to take losses rather than move. In a way, these Americans will pay for the mistakes of others. (Conversely, those who lose their homes will need to move into rentals or buy homes that are suddenly more affordable.)
3. The economy will contract as losses in housing, banking, furniture, lumber and other associated industries trickle down to the rest of the economy. Don’t be smug about strong employment reports: All the new jobs created in November were in the service industry. Most of those jobs are likely to evaporate next year as the holiday season comes to an end. And while the overall number of jobs went up, a closer look at the numbers reveal a drop in manufacturing and financial jobs. Not that you can trust those numbers anyway, as The San Diego Union-Tribune reports.
4. Homeowners will start to feel real pain as interest rates on first AND second mortgages start resetting. While many Americans will hold on to their houses, these folks will have less money to spend. That will further slow our consumer-driven economy.
5. Sooner or later, we will start to see a significant increase in personal bankruptcies. Actually, it’s already happening, reports CNN. “High household debt and the fallout from rising mortgage costs could contribute to a surge in bankruptcies in 2008,” Samuel Gerdano, executive director of the American Bankruptcy Institute, said in a statement.
6. This recession won’t hit all at once. It’s going to take time for the markets to slow down. Still, I’m guessing that early next year, the truth of what is about to happen will be revealed. That’s when Fourth Quarter earning reports come out. That’s when Americans desperate to sell will start putting their houses back on the market. That’s when the largest number of mortgage resets will occur – January through March. That’s when our credit card bill – gah! – for the holiday season will be coming in.
I realize that for a couple years now I’ve been hinting that an economic downturn will happen in the near future. Now that time has come. Because of this, I hope to provide a better picture of what has been going on in the economy over the next few weeks. Now, if I could just make a living at this.