When Money Fails

This year has seen some of the greatest financial failures since money was invented.  A lot of people are standing by, wondering how in the hell this all happened.  The rest are ducking and covering, hoping to avoid moral and legal prosecution.

Not to blow my own horn, but I predicted this whole mess way back in 2003.  I’m no financial guru, but I spent a decade in the Ginnie Mae market, in real estate, writing mortgage paper when interest rates were 18%.  I know a thing or two.

Following the tragedy of 9-11, the geniuses that run our economic behemoth here in the good ol’ US of A decided that it would be a good idea to drop interest rates, to forestall what they perceived was a huge economic threat.  And once done, it’s hard to get off that mortgage rate train.  It worked a bit…for awhile…and so the fed kept dropping rates.  Effectively, they forced people to buy houses?  How could you not?  Interests rates had never been that low in most our lifetimes.  It was a no-brainer.

What most people failed to realize, and what the geniuses failed to tell us, is that whatever goes down…must go up again.  Eventually, interest rates would go back up, the desperate grabbing up of real estate would stop, and we would be facing a crisis.

Back in the good old days, you couldn’t write a mortgage for more than 90% of a property’s value.  But mortgage brokers and bankers alike found ways around that, eager for their piece of the pie.  If someone wanted to borrow $200,000 on a house worth $180,000, the mortgage people just had the appraiser list the value as $220,000.  That way, the buyer was borrowing the real full value of a house, and the prices were driven up.  Doomed to collapse.

And once things started to slow, people stopped buying, and houses stopped leaping in value, the bankers were stuck.  It all defaults to an old financial term of OPM…Other People’s Money.  Banks were lending THEIR money, they were lending money based on loans they took out.  They were holding $14 billion in outstanding loans, but that was okay, cuz they had borrowed $30 billion from somebody else.  Except now, people were holding a $300,000 mortgage on a house that was only worth $200,000.  They couldn’t sell it for the value of the mortgage.  They had no equity.  They had nothing.  Families did the only thing they could do…they walked away.

And so, we saw the failure of Freddie Mac and Fannie Mae…and their subsequent buy-out.  Wall street took a hit.  The government bailed them out and we pressed on.  Lehman failed, and AIG.  Lehman was gobbled up by Bank of America, AIG was bailed out.  Now, if you owned a corporation and it failed, would anyone step in and bail YOU out?  Not a chance.  But now, suddenly, the government regulators who hadn’t been paying attention, were paying keen attention.

Remember, this OUR money they’re bailed the banks out with.

It all boils down to greed.  All the financial geniuses who worked for those failed financial institutions drew MILLIONS of dollars in salaries over their tenure.  They don’t really care if the institution fails or not.  They’ve got their pie.

But what of the rest of us?  Well, we’ve got the FDIC, after all.  We’re safe.  Not true.  At the financial apex of this country, there has only ever been enough money in the FDIC to pay back  one third of the country’s depositors.  That means that if your bank goes down and you have $60,000 in that bank, you’ll get back $20,000.  Do you like the landscape I’ve painted here?  Thought not.

So, how do we fix it?  Obama says he will.  McCain says he will.  But if the financial gurus and regulators who have been running this store for so long don’t have a clue, how could they?

First of all, we have to strangle the hell out of mortgage markets.  Yes, I know, real estate is already in the crapper.  But think of this: if we go on writing paper, even good paper, based on money that has been borrowed from the borrowers, eventually the borrowers will fall into a giant circle-jerk of financial doom.  ALL the banks will fail.  Everywhere.  So, interest rates must be raised…and they will be.  There’s no way to stop it.  First of all, the failure of so many banks and the devaluation of Wall Street has made foreign investors and banks leery of us.  Remember now, that those are the people whom the federal government borrows money from.  You know that big deficit we’re always talking about?  Well, we owe that money to foreign banks and they quite literally own us.

So, if they’re leery, they’re going to charge the US government a higher rate to borrow their money.  They will have to charge banks more, and the fed will raise the rates.  How much? A  little at first, to test the waters.  After all, we don’t want to panic people.  Then a bit more and more and more…I think it will probably top out at 16% before it stabalizes, but it could be as high as 18%.

So, mortgage money is hard to find, the real estate prices will drop.  And drop…and finally end up back where they SHOULD be…where they were before the real estate boom that killed us.  Wall street has been over-valued for nearly 20 years.  There’s no way the dow should be around 10K.  It ought to be half of that.  And we will see a correction.  We’re seeing a bit of it now.  The safeguards installed on the computerized models that all run Wall Street, will kick in…but it won’t save the stock market.  It has to drop.  There’s a saying…when interest is high, stocks will die.  When interest is low, stocks will grow.  There’s no formula for that.  But it’s true.

The stock market has also been affected more and more by the price of oil.  If oil is high, stocks will die.  And Vice versa.  With those two things working against it — the price of oil WILL drop after the election — the stock market doesn’t have a chance.

How do you survive?  You don’t.  We’re all going to take a hit, and we’ll be taking it for about another 20 years as we fight to fix this, and to repay the enormous amounts of money that the US gov has borrowed to fund our current crisis, coupled with the Iraq debacle.  But if you’re smart, you’ll pull back every dime you’ve got, get it out of the stock market, and out of American banks.  Putting it in Switzerland is the safest place…but a Canadian bank is nearly as good.  Those two countries have financial systems which seem to be more stable and less affected by foreign trends.

Bank of America just bought up Lehman and a huge amount of debt along with it.  They are going to be struggling for a long while to fix that…if they can.  If not, they’ll be the next casualty.  There are more hits that the stock market has to dodge.

More than anything, we have to tighten regulation on our financial system.  And we have to go after those who put us in this situation to begin with.  Prosecute a few oil speculators and see how fast the price of gas drops.  Prosecute a few of those financial geniuses who talked us all into sub-prime mortgages and see if we don’t see a lot of mortgage brokers fired.  And for the love of God, force some of those CEOs and CFOs to cough up their billions to bail out the financial institutions that made them their fortunes.  or beat them with big sticks in the streets.  Either way is good.

So, hold onto your hats, boys and girls, the end is not nearly here.  And if you think we’re in the financial crapper now, you ain’t seen NOTHIN’ yet!

You heard it here first.

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4 Responses to “When Money Fails”

  1. Eric Hundin Says:

    I found your blog on MSN Search. Nice writing. I will check back to read more.

    Eric Hundin

  2. Interest Rates » When Money Fails Says:

    […] Read the rest of this great post here […]

  3. Sedie Says:

    Very interesting piece. I know this is here for a while so I guess arming myself with information and acting on it is the best I can do. Thanks!

  4. David Says:

    See, she’s a genius, and that is why I love her…

    Unfortunate for us that geniuses know better than to run for office…

    TRISH IN 2008!


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