Subprime Mortgage Meltdown / Credit Crisis

In Five Short Blasts, I spoke about the federal government’s penchant for working on symptoms instead of real problems. This is a good example. Too many people begin to default on their mortgages, and so what does the government do? The Federal Reserve tries to pump more liquidity into the credit markets and Congress and the White House begin to work out schemes to offer better credit terms to unqualified buyers. The symptom is that the average person can no longer afford an average house without resorting to credit terms they can‘t really afford. The real problem is that wages haven’t kept pace with the cost of housing. Certainly, the run-up in housing prices (fueled by money pouring into real estate as it fled the stock market beginning with the market crash in March, 2000) is a factor, but so too is the steady decline in wages and benefits over the past three decades.

The real underlying root cause is our trade deficit, now over $700 billion per year. We give away a huge piece of our economy and finance it by selling off American assets. For example, whatever portion of your home is financed, which for most people is almost all of it, your home is owned by your mortgage company, right? Probably not. Although you make your payments to your mortgage company, in all probability they have obtained their financing by rebundling your mortgage into some type of mortgage-backed security and selling it to some foreign entity. Where will all of this end if the government doesn’t take action to balance trade? As more American assets are sold off, their value slowly declines until they will become worthless. (Thus, the rapidly declining value of the dollar we are experiencing today.) What happens when something an investor owns reaches that point? Do you continue to pour money into operating it? No. You shut it down and abandon it. If that happens – if our foreign investors walk away – the entire global economy could collapse. We won’t have money to buy their products – shutting down their factories which will shut down their economies just as quickly – a nightmare scenario. Will it come to that? Maybe. Maybe not. Stay tuned.





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