It’s Not Just Sub-Prime, It’s Credit And Debt Everywhere

New York MagazineNow these funds, which were supposed to be brimming with cash—the “liquidity” you hear about all of the time—turn out to have not much at all, and there are virtually no buyers anywhere for these mortgage-backed bonds, because who knows if the mortgages that are in them are worth anything? We only know that each day they are worth less than the day before, because every week, thousands of borrowers are being foreclosed.”New York Magazine, 08/20/07

Chicken Smith View:
A lot can change in a month, however, if you’ve been following financial news for the past year, you’ll know that the general media has only recently been waking up to our economy’s financial disaster and even so they are still quick to pigeon hole it as a sub-prime problem. The truth, however, is that our forthcoming financial collapse is not limited to just one part of the mortgage industry.

What we’re experiencing is a credit problem on a grander scale. Since 2001, there has been too much easy money going around. Whether it’s sub-prime mortgage loans, re-finance loans, grade A business loans, auto loans, credit card loans, or even student loans, the interest rates (often introductory rates) have been too low not to take advantage of. And that’s just what every Tom, Dick, and Harry did. They made use of their credit, worthy or not, and took on loans through the nose.

Enter debt. Eventually all loans need to be paid, and because many folks have been borrowing from Peter to pay Paul, some of these debts were never, realistically, going to get paid. That’s when defaults, bankruptcies, and foreclosures happen. Enter disaster. It’s almost too surreal to believe, but none of the lenders thought that the day would come when a good portion of these debts would not get paid.

Ok, maybe not none of them, but beside the sub-prime lenders, many lenders thought they were investing in safe and secure lending practices. After all, they’re just following the Fed’s lead (aka Alan Greenspan’s deluded measures to avoid previous “corrections”). And the real money is in the late fees, right? And if customers can’t pay those, the loans can simply be sold off to collection companies or hedge funds? And if the hedge funds lose, well, at least it’s all been chopped up into so many pieces that no one will get hit with the full brunt of the losses, right? Wrong.

None of this will bail anyone out if the majority of borrowers are not paying back their debts. This is yet to be seen, however it can happen. The outsourcing of white collar jobs is expected to increase over the next few years. Yes, accountants, graphic designers, middle-management, etc. Basically, anything that does not require a physical body state-side. That in addition to any blue collar jobs that might be remaining will all but disappear.

Money will be harder to come by as banks and other lenders tighten up their lending practices. There are already 20% down prime loans that are being denied. Some credit card companies are no longer allowing a double-digit minimum payment (ie $15) to carry an over 4-digit balance (thousands). So many who have been using credit cards to help them through the tough times, will not be able to do so anymore.

But wait, there will still be jobs such as construction, entertainment, dining, etc., right? Well, yes and no. While yes there will still be some of those jobs, it will primarily be to cater to the wealthy who will still need such services, however for middle-class America, there won’t be much money to put food on the table, let alone going out for dinner and a movie and renovating the kitchen, so a lot of those jobs will see a decline.

With less jobs, comes less money, comes less consumption, come less corporate profits, comes less jobs, comes a whole new vicious downward spiraling cycle. But wait, I heard that employment is up, corporate profits are up, GDP is up, inflation is moderate, our economy is strong, and you expect me to believe this crap?

As the famous 19th century prime minister of England, Benjamin Disraeli, once said; “There are three kinds of lies: lies, damned lies, and statistics.”

Don’t believe it? Just wait and see. When looking at stats, look at charts, don’t just see what’s up or down today. BTW, core inflation looks dandy, but it’s not reality. Unlike the Fed’s idea that it shows long-term inflation rates, it really just covers up the fact that current inflation is quickly rising. And don’t forget, we’re nowhere near the bottom, we’ve barely just begun.

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