A Ledgie wants to know: Economy Edition

[HejiraNYC]

Originally Posted by strandinthewind

I think the fall of Wall Street can be nothing but a bad thing in that if that happens, the US and world will suffer.

I think Wall Street, if not the U.S. economy as a whole, has been like the emperor's new clothes. The U.S. dollar (which has not been backed by the gold standard for a long time), combined with the lack of a manufacturing base, has really been held aloft by speculation and the notion that it is the de facto exchange currency due to its relative stability. That notion is drawing to a close as investors become wary of the true value of the dollar, combined with the emerging super-economies in Asia and the lack of confidence due to what I believe are some hasty, irresponsible interest rate cuts. In a nutshell, why would you have faith in a monetary policy that insists that you simply crank up the printing presses every time there is a tightness in credit.

As for the large salaries, I am not opposed to them becuase that is what the market is paying. Now, if they break the law, that is another thing.

There is the law, there are ethics, and then there is common decency. None of these are regulating the behaviors on Wall Street. How can you break the law when there aren't that many laws to break in the first place? Wall Street created this mess by borrowing money recklessly and lending money to anyone who can fog a mirror (which in turn caused the housing buble). They packaged these liar loans into securities that they deceptivelyresold as "AAA" rating at premium prices, paid themselves handsomely, and basically did nothing except pay themselves even more when it all came out in the wash. These securities ended up not being worth the paper they were printed on. But instead of taking responsibility for their own reckless, irresponsible behavior, they called on the U.S. government, i.e., the U.S. taxpayers to bail them out. And the bailout is now just beginning to the tune of hundreds of billions of dollars. We are left holding the bag while these amoral criminals are riding off into the sunset with their golden parachutes. I don't know how anyone can find this anything less than outrageous.

As for the housing market tanking - housing prices overall in the US have fallen, but not by huge amounts. That will change though if a few things happen.

Some markets like Las Vegas, Phoenix, San Diego and Miami are already down by as much as 25%. And we are just getting started. Unfortunately New York has been able to fend off the housing crash so far, but I don't see how much longer the party can last here.

The first is no matter how much you owe on your house or how much the value of your house has fallen, it is all academic until you have to sell the house.

Agreed, aka, "mark-to-market."

In other words, as long as you make the payment, you likely will ride out any decline in value that likely will go up again.

On an inflation-adjusted basis, it will be decades, if ever, before prices reach this level again.

The second is right now, only seven or so percent of houses are in forclosure. That is a relatively high number but it is no staggering enough to drive housing prices down but a few percentage points overall - though some areas will be effected more.

That is actually an incredibly high percentage; the areas that had the highest subprime loans and/or speculation will be pummeled.

If, however, that foreclosure number gets to, say 15-20 percent, then I think housing prices and values will spiral to over 50% or so. This is because the market will be flooded with product and not enough qualified buyers. In layman's terms, it will be a fire sale. I do not see the Feds letting that happen though.

But what can the Fed do besides cutting interest rates (which do not necessarily correspond to mortgage interest rates)? They're running out of wiggle room before cutting all the way down to 0%.

In reality, the bankruptcy laws likely will prevent that as well. If you cannot make your house note right now because it along with the average credit card debt is too much, the smart thing to so likely is to declare bankruptcy. A Chapter 7 will wipe out all unsecured debt like credit cards and you can keep your house and possibly renegotiate the terms of the mortgage, though that is very hard to do now, but likely will be easier as this crisis moves on. A Chatper 13 plan will not wipe out your debt, but it will exclude your house from the plan and you pay anything remaining to the creditors, which can be as little as 25% - over a five year period. Yes, bankruptcy is a harsh option and your credit is ruined for awhile (but certainly not forever, esp. if you make a good salary) - but, it is no worse than losing your house in a foreclosure and defaulting on the credit cards as well.

I think the tendency is for people who are underwater on their mortgages, i.e., they owe more than the house is worth, is simply to mail in the keys and walk away, credit score be damned. Although truly ethical people would choose to stay and pay down a loan commitment, regardless of the value of the property, a shocking number of people don't care about values and responsibility. If the value of the property goes up, great. If it goes down, it ain't my problem so I'm turning in the keys.

In the end, during the last part of the 90's the tech bubble caused havoc and many of the largest companies in the US imploded, causing massive layoffs and investors to lose trillions. The economy bounced back (ironically, mostly though housing) then and it will again.

The most recent run-up post 9/11 is unprecedented in U.S. history. It was clearly unsustainable. It really is time to pay the Piper.

So, in the end, pay cash for your stuff and make your mortgage and you will be fine.

But that's not the American way! We've been in a negative savings rate for the past couple of years...