The world financial markets was working in overdrive through the weekend, till the amazing $2 a share deal of Bear Sterns from JP Morgan. You have many factors and loses are play here. First, is the 14,000 employees of Bear Sterns. I know first hand that many of the employees are beyond fearful. Bear Stearns is (WAS) a culture of very cocky and brash individuals. After losing their big stick swagger, looks like the job boards will be flooded with candidates.
- Hate.info
I have been saying for nearly two years, that this is the first time that we have had a negative savings rate since the great depression, but are we in a credit crisis?
Alan Greenspan (former chairman of the US Federal Reserve) wrote recently,
The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities.
Home price stabilisation will restore much-needed clarity to the marketplace because losses will be realised rather than prospective. The major source of contagion will be removed. Financial institutions will then recapitalise or go out of business. Trust in the solvency of remaining counterparties will be gradually restored and issuance of loans and securities will slowly return to normal. Although inventories of vacant single-family homes – those belonging to builders and investors – have recently peaked, until liquidation of these inventories proceeds in earnest, the level at which home prices will stabilise remains problematic.
The American housing bubble peaked in early 2006, followed by an abrupt and rapid retreat over the past two years. Since summer 2006, hundreds of thousands of homeowners, many forced by foreclosure, have moved out of single-family homes into rental housing, creating an excess of approximately 600,000 vacant, largely investor-owned single-family units for sale. Homebuilders caught by the market’s rapid contraction have involuntarily added an additional 200,000 newly built homes to the “empty-house-for-sale” market.
OK, so what do we need to do. Simply put, we need to change our ways. As I have said on this blog the last 2-years and Dave Ramsey has said for much longer, save and live off the saved cash.
But Kevin, if we do that the economy would get even worse.
Yes, that is true. However, once people started living on cash and not credit the economy would get stronger.
The problem is that not only are the citizens living on credit, so are our governments. As a result our economy is falsely lifted by spending of money that we don't have. So, yes, the economy will fall, but can rise to new heights once we, as I have said already, are spending money that is already in the bank.
In Greenspan's article, he wrote:
In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons. But we cannot hope to anticipate the specifics of future crises with any degree of confidence. Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.
The following cartoon from the Washington Post, helps explain the crisis.
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go ahead share your thoughts with me now.
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We are in a really tough situation. Our economy is consumer oriented. If people are buying stuff, retail hurts, banking (read credit companies) hurt, manufacturing hurts - it is the other snowball effect. On the other hand, we can't just keep doing what we have been doing.
ReplyDeleteI don't have any answers for the overall economy. But I am with you on the quest to become debt free. My wife and I sold our house recently and walked away with a pretty sizable amount of cash. We were able to do this buy buying a piece of junk, putting a lot of sweat equity in it and living in it for six years. We never let ourselves get into it for more than what we knew we could get out of it in a worse case situation. We are fortunate to live in an area that is behind the curve on the housing crunch. We are renting now, looking for our next junker. We are making offers on foreclosed homes that we can pay cash for and have enough left over to fix up. We have been driving old cars for years. In 30 years of marriage we have only bought one new car - that was a huge mistake. Our present vehicles cost us $3,000 and $4,000 respectively. We wrote checks for both.
This weekend we were leaving a resteraunt and a young man driving a sweet looking sports car made looked at my 15 year old Toyota and said, "nice car." I smiled and thought, yea and when you make your $400 car payment and your $300 insurance payment this month just remember this old man.
Anyway, keep it up. It has taken my wife and I 30 years of mistakes, perseverance, hard times and faith to get to the point where we are going to be debt free - with a paid for house. God willing and by his grace we are almost there.
Well Kevin I'm not feeling any kind of "credit crunch". In fact, in addition to my $175,000 credit line, my lender (Countrywide) has offered to refinance me at a lower rate for a 15-year fixed to replace my 30-year. My Honda is 25 so I've got the other commenter beat. ;) I've rented out my house and I'm relocating closer to the Y so I will drive less, pay less for housing, and work out more. Things are going great for me. If this holds through the recession I plan to give to many charities because the last session was terrible for me.
ReplyDeleteThe current credit crisis began early in 2007 with rising delinquencies in the subprime mortgage sector. Like a slow fuse, these difficulties spread throughout the global financial system as investors realized that these bad mortgages had been securitized, pooled together and sold to financial institutions around the world.
ReplyDeleteBy early August, parts of the financial system were close to frozen and central banks were forced to inject billions of dollars to add liquidity to maintain the workings of the credit markets.
Over the last two months, some markets have recovered, but problem areas remain, particularly in the London market for structured investment vehicles, or SIVs. There is concern in financial markets about bank exposure to these investment pools and concern that possible forced sales of their assets might shock already jittery credit markets.
Separately, Bank of America, JPMorgan and Citigroup are leading a plan to raise $80 to $100 billion to help buy some of the assets held by SIVs facing collapse.
But these same international bankers spent last weekend in the corridors of the International Monetary Fund's annual meeting urging government officials not to rush to adopt new rules to get the financial market turmoil under control.
I don't think there will be a huge crisis, certainly not a new great depression. What I can see is the housing market dropping considerably in the next few years. Simply - less and less people are able to secure mortgages - at least for the amount they need - and more of a deposit is usually needed now (bad news for 1st time buyers). This means less people will be able to buy & so the house prices will have to come down if they are to sell. What sort of knock on effect this will have, i don't know...
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