Perhaps it is just reader fatigue, but why should I or most people care whether any more about the troubles on wall street? I assume at least some of their bonuses have been cut and I feel for them, but other than that, what is the big deal? The news keeps saying that people won’t get loans if Wall Street seizes up. Well, I refinanced my house a few months ago and the process consisted of stopping by the local mortgage company, which sold me my old mortgage, asking them for a quote, signing a bunch of papers, and going home. If I need a car loan, I mention it to the friendly folks at the credit union and they are more than happy to help. I am not selling my house any time soon. We have a couple of homes in the neighborhood that got foreclosed and we are pissed that the grass isn’t being cut, but other than that homes are still selling. The agents I know are all saying that homes can still be bought and sold-for the right price.
Anyway, to my question, outside of the few people trying to do leveraged buyouts of some big company, who is going to be affected by the bankruptcy of some banks in New York? When IndyMac in California went belly-up, the process was the same as all the other times since the 30’s that banks went out of business. People’s deposits were insured (in the US) up to a limit and everyone got their money. Long lines formed, and they got their money just like the people who waited a few days to avoid the crowds. No big deal.
I understand that people are finding it harder to get liar loan mortgages, but that doesn’t qualify as a problem in my book. Consumer loans, when the loan is in the interest of the buyer, seller and lender, will continue. The Iowa farmer will still sell his corn and the Brazilian farmer will sell his soybeans-perhaps financed by a bank in China now, Walmart is still importing cheap socks by the shipload. I don’t see the big problem for the vast majority of Americans or the vast majority of people (counting mostly people around the world plugged in to the modern economy) in the world. People trying to get a bank loan to start a new business might have trouble, but that is a small percentage of the total population. I know small business is the engine of the economy etc, but the operative word is small. If Ms. small businesswoman can’t open a store, she and a couple of her friends won’t have the opportunity to risk their life savings on a high-risk investment. Still a small fraction of the total population. I also understand that I am losing my shirt in my retirement investments where the mutual funds I bought have exposure to the various banks that are going bankrupt. So there is one place, the stock market, where lots of people are being hurt. I am losing some money in my retirement fund, bad news but hardly worth the daily drumbeat.
this post needs to be moved. I started it as a question, but before I finished it had devolved into an opinion. Would a mod please move it over? Sorry. My intentions were good, but I wandered away from the facts.
Now, to find out how to notify a mod of a problem…
You really should care, not that you can do anything about it. I don’t have time to sketch out all the consequences, but there are some very clear ones.
You may not be feeling the shock of the lending crisis if you have excellent credit, but further declines in the credit market will effect the borrowers on the margins. Fewer and fewer of them will find willing lenders at reasonable rates. Meanwhile the marginally credit worthy home owners won’t be able to refinance their existing loans. So you have a shrinking pool of qualified buyers and a growing pool of foreclosures. Not only does the value of your home fall, you start to find that the move you planned at retirement isn’t practicable anymore because you don’t have the equity for the new purchase and no one wants your home.
The securitization of mortgages was supposed to allow the sharing and spreading of risk across many institutions. This risk sharing meant that companies could price your loan fairly. If they can’t share the risk they will demand a higher premium in terms of credit rating and eventually interest rates.
Consider also that you have, or should have, a retirement account invested in equities. Many of the value oriented stocks are in the financial industry. Their stock prices were built on a presumed level of future profitability. If the credit markets don’t recover they can’t meet their earnings expectations and the stock declines. You watch your 401(k) balance fall.
Its funny, this stock market downturn isn’t really very bad in historical terms, but I see more concern than would normally be warranted. I am pretty sure that is because people are watching their net worth decline precipitously. If you add up everything you own including your home and your savings the decline may be alarming. In many previous market declines, including 2000-02 the net worth of home owners stll increased due to climbing home values.
So, in short, I think it effects everyone, but deciding you shouldn’t worry about it because there isn’t much you can do about it is a pretty rational reaction.
Do you pay taxes or live in the United States? Than you should care deeply.
Why?
The U.S. Government has just taken on what amounts to $5 trillion (yes, trillion) in debt obligations. That effectively doubles the national debt. Now, not all of those mortgages will default. But many, many will.
Why should you care? How does the U.S. Government fund its obligations (such as the debts assumed by bailing out Fannie and Freddie)? It does so by printing currency and/or issuing T-Bills and/or raising taxes.
The more it does of that, the higher inflation rises, the less your retirement savings (denominated, I would expect, in dollars) are worth, the less you can buy with your take-home pay, the more expensive it is for you to buy a new house or re-finance your house.
Oh, did I mention that there is serious speculation that the U.S. may (as a result of this and other events) lose its AAA credit rating? If T-Bills are no longer AAA, the Government has to pay more to borrow (and borrow it will), which is passed through to you.
That’s the final kicker – how can your taxes not go up with all this Government spending? They will go up, and go up substantially, under almost any scenario you can imagine. You will face a double whammy of your dollars being worth far less, and far more of them being taken by Obama, or whomever.
thanks
I understand the issues with taxes and an increase in national debt. I suspect that will happen whether or not the mortgage crisis happened or not-though of course not quite this fast. The vast majority of the 5 trillion are good loans and will be paid back. More than one can say for the 1 trillion we burned in Iraq or on homeland security. Losing the AAA rating will be a blow to US pride-but treasuries are sold at auction every week. It isn’t like the people buying US debt needs a score to know what is happening to the country. The interest on the US debt will go up regardless of the rating-if the fundamentals require it. And if China cuts back on buying the debt, interest rates will go up as soon as people realize it. But the US isn’t like a corporation. It will pay it’s debts. It will just use dollars that are worth less. And the interest rate will go up to compensate. Hmm. looks like all roads lead to higher interest rates for federal treasuries. Got it.
What I am really thinking is somewhat different. Borrowing is going to be harder for some, and more expensive for all. Like anything else, there will be less of it if the price goes up. People will adjust. Banks will continue to loan money. They will look at each loan more carefully and not make the assumptions of the last ten years. But when the loan is worth the risk, the bank will make the loan. What I think we will see is an era where people are living within their means and not taking spending money out of their “appreciating” houses or trading up for financial reasons. They won’t build commercial property assuming renters will show up. An era where institutions will want to actually know what they are lending money for (no bundles of millions of loans and fractions of loans with no clue as to what is behind those loans). In short, dial back 20 (or more) years. I think it will have at least as many positive as negative effects-certainly there will be lots of effects! As for impacting people’s daily lives, I guess that is where I started. Certainly people are losing their houses. Painful. But you know, if they had been scrutinized when they first applied, they wouldn’t have gotten that house in the first place. They would have moved someplace that they could really afford. Kind of like what is happening now. It isn’t that they lost their home. It is more like they have to give up something they wouldn’t have gotten except for these special loans. They are going to end up where they would have if these loans hadn’t ever existed. It isn’t so much they will have less income, just not the extra. Certainly there will be fewer windfalls, and I guess fewer jobs catering to people spending windfalls, but outside of construction jobs unique to McMansions, people will still want houses and, as we have seen, the price will fall till the buyers can afford to buy. Cities will cut back on expenses until their expenses are in line with their income. It will be painful for all, but we are giving up things that simply weren’t going to continue no matter what.
In My Humble Opinion, the problem is that we have people who got paid to manage money and they did a lousy job. All those people who created these exotic loan instruments should never have gotten away with it. They, and their bosses, created this mess and the more they suffer, the more thoroughly lessons will be learned. The mortgage brokers and new homeowners fed the beast, but they wouldn’t have been able to do that if the beast didn’t exist. Well, now the beast is dead-maybe. The US Gov’t has reached it’s limit (I hope) in rescuing these people/institutions. But I believe, I hope, that it will be more painful for the people who caused this crisis and less painful than we expect for those who didn’t. We shall see.
BTW, I will ramble because I am now in the correct forum. Soome time ago, I read about a recently retired engineer who had noticed that all his coworkers where the same age as he. There are very few young engineers coming into the business (in this case satellite design). So he asked around. visited universities. What he found was there were few young Americans interested in working in engineering-the smart ones were going into finance where they could start at five figures. Working at DoD for civil service wages didn’t appeal. With any luck that problem will begin to right itself. Maybe General Motors will get some new ideas in their engineering and marketing departments and learn to build and sell better cars and trucks. Maybe some of those jobs will come back from Japan because there are people in the US to do the work. Yes, I know that there are many engineers in the US who can’t find jobs. But that is a solvable problem. Universities need to teach better, students need to learn better, and companies need to hire better. Companies can’t afford to continue to look just at the next quarter, because unless they plan for the future, they won’t be in it. Anyway, I can dream can’t I?
I understand about the reduction in 401(k)s. I assume that the price of my house has fallen. But perhaps it is just me, but I never figured in the value of my house in my retirement income. I have to live somewhere. If I sell this house for a big windfall, I assume that wherever I buy a house will be proportionally more expensive. And if I sell my house for not as much, I assume the house I buy will be proportional. My house is for keeping the rain off, not making money. So the decline in the market in 00-02 was a big blow, one I had just recovered from when the next downturn hit. What happened to my house value didn’t factor in then and it doesn’t factor in now. All those homeowners in 00-02 whose “net worth” increased because of increases in home values, what did they do? Sell their appreciated homes and move into rentals? I know some did, they were the smart ones. I don’t know, but I suspect many took out loans based on the new value of their homes. Well surprise, it turns out their net worth hadn’t increased like everyone thought. And using the same logic, their net worth hasn’t decreased as much as people think. They can’t get loans to pay living expenses-but that isn’t a bad thing.
Hey, when Wall Street has even a minor hiccup my Superannuation balance here in Australia (the essential equiv. of your 401k program) takes a nosedive. I care, and I’m half a world away!
I woke up to the news that Merrill Lynch was bought by Bank of America. I have a small 401K with Merrill Lynch. I think it was probably a good move, in order to avoid the fate of Lehman Brothers, but frankly, I don’t know enough about Bank of America to know what or how they think. My dad’s entire portfolio is with Merrill Lynch. Does anyone here know if this BOA thing was a good move?
To be fair, a couple facing retirement whose kids are getting ready to move out may do well to sell their current house in favor of a smaller, less-expensive house; the idea is to use the equity in the former house to pay for the latter. This is a personal decision that must be part of other retirement planning.
That being said, home equity was supposed to be as good as cash. People were encouraged to borrow against it to finance home improvement projects, their kids’ college tuition, consumer goods like vacations, and so forth. Now people are on the hook for these loans and many of them are upside-down, which means their houses are hocked for more than they’re worth.
I’ve been seeing the value of my investments go down over the past year. This has me concerned because I retired two years ago and while my pension has been covering my living expenses since then I was counting on being able to tap into those funds in later years in case my expenses go up more than my pension does (my pension includes an annual cost-of-living- increase, but a good-sized chunk of that gets swallowed up by increases in my health insurance costs).
For retirement - when my parents could no longer take care of their home they sold it before it deteriorated, moved to a rental where they wouldn’t have to worry about maintenance, repairs, and upkeep, and invested the profit from the home sale conservatively which has paid off very well for them. Sometimes, insisting on private home ownership isn’t the best option, you really do have to look at your personal situation.
A lot of the consequence talk in this thread seems to assume everyone is a homeowner - well, I’ve never owned a home, still being a renter in my mid-40’s. I side-stepped the whole mortgage-home equity-falling prices-foreclosure crap, but I assume the current economic meltdown will touch me as well. I find it both ironic and sad that some people who called me stupid for not getting onto the home ownership carousel are now homeless and bankrupt whereas I am still poor but still solvent.
I actually have a credit score in the 800’s because I’ve borrowed little but paid back on time everything I’ve borrowed over the years. If only the rest of the country had acted as frugally. What pisses me off is that I’ve lived within my means all my life and yet this current situation could make things very uncomfortable for myself. I already lost a good job last year and I am currently living on 1/3 of my prior income (yet still paying my bills - damn, but I’m good with a budget!). I no longer have health insurance. Despite all that, I am far from a worst case scenario and there are others up crap creek. Even if financially I keep my head above water, the mere fact so many other people are drowning is going to have an effect on me sooner or later.
The assets in the brokerage account are protected through SIPC. Every big brokerage firm keeps the actual securities themselves at the Depository Trust Corporation. http://www.sipc.org/
The real concerns are the very real possibility of high inflation and then more taxes. More taxes, I can deal with because as a percentage of GDP, it’s not that bad now, or even historically. As for high inflation, that is the real concern. Things will get more expensive and buying power will be less.
I’ve always been curious about buying gold. I’ve heard people talk about it being a good idea, but I’ve never really understood why. Is it a good idea? What do you do with it after you buy it?
This is pretty much why it’s a good idea. Or, at least, was a good idea. Gold’s a little different than many commodities in that it’s perfectly reasonable to possess the physical asset yourself. My grandmother has about $25,000 worth of coinage distributed throughout personal security boxes and a few family safes.
It’s pretty neat to have a thousand bucks sitting neatly in the palm of your hand. Gold really does have something alluring about it that you don’t really get to appreciate in a simple ring.
