What’s ahead of us if housing/mortgage mess is not cleaned up
Posted by Frugal on March 3rd, 2008
A couple of people raise objections to my solution for the housing crisis. I welcome their objection, but I just want to explain further my thoughts.
I prefer my solution of tax subsidy to all homeowners much better than the secret proposal by Bank of America, where all kinds of direct bailouts to the fraudsters fester.
I also think it’s more fair to make this subsidy to all homeowners instead of new buyers. If it is not to all the homeowners, people will always find ways around to beat the system, possibly abandon the existing homes, and then buy a new one.
I personally don’t want to see any kinds of subsidy, whether it’s tax credit to big oil companies or alternative energy, or homeowners. But in light of this super-crisis, I would opt to have this solution implemented than having seen the consequences to come full fruition.
Again, few people understand how big this crisis is. What I see ahead of USA with the unfolding crisis is
1. several failed rescues via bailouts due to the bottomless pit in mortgage land.
2. A 20% lower stock market than Friday’s awful prices (and don’t think you can buy the low, because the low level will persist for 4+ years). This level doesn’t include panic lows which can go lower.
3. An $US dollar going lower continually, and with violent episodes of dropping dramatically. $US index is heading towards high 50 (today it is at 73ish).
4. A dramatically higher oil price above 200, partly due to lower $US.
5. Massive credit problems in the USA. Massive bankruptcies and job cuts at city/county levels. Serious state budget problems which require serious job cuts and raising state tax. Less and less student loans will go thru, which means less college educations for the regular folks. Elevated corporate bankruptcies.
6. Hyper-inflation will come in (some 4+ years later), and wipe out majority of the middle class and middle-upper class savings (if there is any left). The hyper-inflation will move the stock market higher, but only in the nominal prices. Adjusted by inflation, stock market returns will be going lower (but still much better than cash).
And you think if you are a renter, and you won’t be benefited by my tax subsidy proposal?? You have to think what you and your family might lose if the housing mess is not cleaned up. We are all in this big mess together, created by those unscrupulous bankers, home flippers, and debtors. Certainly, it is not our faults, but very unfortunately, we will all share the pain.
If you are a renter with the above housing crisis unfolding,
1. you will be much more likely to be losing your job (due to a weakened economy).
2. you will much more likely be UNABLE to accumulate savings, due to an increase in general commodity prices in a subdued economy. The overall living standards in the USA will continue to decrease (which translates into less net savings).
3. there will be very few investments where you can put your money and have some real return. Chances are your nest eggs will get a haircut in one of the continually unfolding financial crisis.
In other words, the fraudulent homeowners will end up with nothing, and probably similarly for majority of you and me. It’s only a matter of time.
Of course, I tried very hard to invest my money to counter these big trends and forces that will de-value everyone’s net worth. But how many of you like to have your saving and investment in something (commodity/natural resource/precious metals/etc.) that can go down by 20% to 40% in a couple of months?? It’s just extremely volatile. One has to be “crazy” like me to put so much money into such investment to cause you stomach pain and heartache on a quarterly if not monthly basis.
So if USA economy needs to take medicine, I would say, let her take the right medicine. Don’t waste more time and more money on the wrong medicine.
By the way, please don’t be appalled by my extreme bearishness. You should be happy that I don’t know you personally as a friend, because I won’t even dare to tell my friends about my bearishness because they will be totally shocked.. Only on this blog, you can see everything that’s going on in my head. But in my heart, I hope that I am just totally wrong.
I prefer so much that this world is a better and more prosperous place for everyone, than having my own investment returning terrifically. The only problem is that I MUST invest according to my mind, rather than how my heart feels for the imperfect world.
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March 3rd, 2008 at 6:37 am
Frugal-
I figured out the stealth agenda for the stimulus package. It’s a $160B bank bailout. As soon as you get your check, you can put it checking, put it in savings, or pay off debt with it. It’s like government is paying off $160B of consumer debt to help us help the banks. Then they’ll tax us later when we can afford to pay off the debt they took out for it.
In this sense, it was a good move. That money will enable at least $1 trillion in new lending, providing further liquidity.
March 3rd, 2008 at 7:24 am
You might be right in your analysis. What does government do.. whats the scope of investments going out to developing country and poor countries.. To me USA has been monopoly in worlds market which need to change.. but not the phase you mentioned. I was thinking more of slow drift towards global economy for greater good.
March 3rd, 2008 at 1:22 pm
I think one of the biggest flaws of our economy is cultural. It has to do with the unequal distribution of wealth that we seem to champion. You should read the Wikipedia entry for The Great Depression, the quote from Marriner S. Eccles. He basically makes the point that the concentration of income that leads to more and more capital investment cannot be sustained if it forces earners at the bottom to go into debt to support the new production. You can only extend so much debt before consumers stop spending and instead attempt to pay the debt off. This inevitably leads to less demand, less income, less employment.
The wealthy should see that it’s in their best interest to compensate everyone with a living wage. If they want the game to continue, everyone must have chips to participate. Business is already greatly subsidized by the government, that is their payoff for investments in lobbying. I like the idea of a large scale deduction for homeowners. It would be mutually beneficial to consumers, govt, and big business. But we won’t fix things until we reach a balance between sustainable levels of income and debt.
March 3rd, 2008 at 5:46 pm
We don’t need the government to help. They are the reason we are in this mess. Massive deficit spending is helping to depreciate our dollar. Plus, anytime the economy slows the Prez is on tv asking us to spend, spend , spend. What we need is for the dollar to strengthen. This can only happen as deficits shrink and consumers start to save. If we did these two things, our economy would get better much faster.
March 4th, 2008 at 1:28 am
I don’t think US has any options besides inflating away the massive debts at every levels. I have predicted a moderate to high level of inflation for the next 6 to 10 years at least back in 2006. US dollar must fall, or else a serious economic depression will develop.
What’s the most important is the focus of today’s post, making the printed money to go to the right people.
Although it’s probably not very likely, wages must inflate along. Otherwise, stagflation is with us.
I definitely agree that wealth distribution is a serious problem. But that is the inherent problem with globalization and capitalism. I actually believe that in the next century, there will be a new way of running economics, not communism, not socialism, not capitalism, but something else. Capitalism leads to violent extremes, and concentrated wealth. Once it’s broken too many times, people will eventually come up with a new and better system.
But that’s thinking too far ahead of my life span.
March 10th, 2008 at 12:51 pm
i like to tell my friends like it is.
only they don’t really believe me. Just like they didn’t believe me when gold was $500 and I said it was going to $3000. Or back in summer of 2005, when I said home prices in San Diego were going drop 45% (they currently at 30% discount from the peak). Or when I said oil prices were going to double to $100/barrel.
People believe whatever they want to. it has no bearing on reality whatsoever!