The housing ,
bubble, sub-prime meltdown and the bubble in the oil markets. Like a witches brew straight out of Macbeth, it all comes together like an evil potion to make life miserable for all. Hindsight being 20-20, we can look back and see how one thing led to another to bring our economy to the painful point at which we now find ourselves.
For a charm of powerful trouble…
The days of ridiculously easy money, creative loan products and a total lack of oversight led to a real estate bubble of historic proportions. People with no experience thought that they were going to become the next Donald Trump by flipping houses. We know how that turned out. The rate of appreciation was totally unsustainable and, like a game of musical chairs, the music stopped and the bubble deflated. We now have a different kind of bubble, one filled with an extraordinary number of foreclosures.
Like a hell-broth boil and bubble…
When the runaway appreciation came to a screeching halt, we were left with the sub-prime mortgage crisis. There have been over 260 failures of lending institutions since late 2006. Those who invested in these risky loans have been left holding the bag. Major institutions have been brought to their knees. Bear Stearns and Countrywide were the prominent names, but there have been many other casualties as well. The FBI is now investigating hundreds of cases of fraud in the financial markets by lenders, brokers and borrowers. Although it may be a case of shutting the barn door after the horses have escaped, heads are going to roll here.
Double, double toil and trouble…
Former Federal Reserve Chairman Alan Greenspan called, “The current financial crisis in the US is…the most wrenching since the end of the Second World War.“ The Government was not going to sit idle while people were screaming for them to do something. In an effort to stimulate the economy and, at the same time, mitigate the effect of rate adjustments on mortgages, the Federal Reserve slashed interest rates. The idea was that adjustable rate mortgages (ARMs) that were adjusted based on treasury rates would not rise as much. The hope was that the rate of foreclosures would slow enough to avoid a total collapse of the economy. This has worked to a degree and , while still a huge number, the number of foreclosures is nowhere near where it could have been.
Fire burn, and cauldron bubble…
In physics there is a law that states: every action has an equal and opposite reaction. The flip side of the interest rate cut is that the dollar plummeted in relation to other currencies. The slowing of our economy only made the dollars plunge more pronounced. A weaker dollar makes the cost of imported goods more expensive and our number one import is oil. While well down from its all-time high, oil prices have gone through the roof. Gas prices effect just about everything we do and have an impact on almost everything that we buy.
There is no easy fix for this. The politicians point fingers at each other and the candidates claim to have the solution. I’ll vote for the first one to admit that they don’t have a clue about what to do next. The road has been rocky and it’s going to get worse before it gets better. As investors we need to watch for the opportunities that arise while exercising caution and restraint. The foolish among us have lost a great deal of money, but those of us who have the nerve to take calculated risks can profit handsomely from this turmoil.
Formula for success: Rise early, work hard, strike oil.
J.Paul Getty
Related posts:
- The Top Housing Bubble Blogs
- Senate Hearing: The Housing Bubble and its Implications for the Economy
- Greenspan and the real estate bubble
- Think You’re In Trouble? Look at the Sacramento Real Estate Market
- Top 5 Mistakes Made By Real Estate Investors During the Housing Bubble
Article Author: Richard WarrenRichard has written 176 articles for us.
Visit Richard's Website: http://www.rehabberseye.com
Joshua Dorkin
{ 6 comments… read them below or add one }
You didn’t mention the single biggest problem with the falling dollar. It’s not oil. It’s the deficit. We fund our government spending by selling T-bills to Russia, Arab Sultanates, China and Japan. If the dollar stops looking like a good investment, they’ll stop buying it. And then the government has three choices:
1. Cut discretionary funding entirely. No military or national parks.
2. Cut social programs like social security, medicaid, etc. across the board and without warning.
3. Bounce a check and cease to be the world’s reserve currency.
Obviously, none of these are good ideas, for different reasons. I’m betting that if push comes to shove, it’ll be #2.
Richard,
Very well written my friend!
Brock,
Spot on with number two!
JC
You make some very valid points. I totally agree with Brock about the deficit being the biggest problem with the declining dollar.
The situation is very difficult.
But Mr. Warren is correct in pointing out that there are opportunities emerging out there.
We have to work hard at it, but my firm is still making deals, closing loans and getting projects financed.
The banks have taken themselves out of the picture (due to the liquidity crisis) but private investors and hedge funds as-well-as international firms (Europe and Mid-East) are still looking to put money to work.
The current economic situation makes this average investor wonder: when will we start to hear a little good news?
Thanks for the ray of sunshine, Glenn
Great Blog! Expect me back soon! Thanks for writing!