Sometimes, I’m amazed at how much I know about the financial markets and the economy. I don’t understand any of it, but I know a lot of stuff, thanks to my friend and mentor, Richard Walrath, who’s been to the market more than once. He says when George Bush brags that the economy is booming, he’s probably right. The economy is exploding with a big boom, and Walrath says now we are engaged in a great battle to see how long this country can endure.
The Fed just poured a bunch of money into the market, which was news to me, but Walrath said the Fed has been manipulating the market for years, especially during the Bush years.
"There was great fear the United States was going to follow Japan into a period of deflation and recession — maybe even a depression," Walrath said. "Interest rates were cut close to zero while hundreds of billions of dollars were added to the National Debt through tax-cuts for the rich and ‘Big Bidness.’ And it gets worse just at the time the National Debt limit has to be raised again."
With things as bad as they are, Walrath says it’s going to be interesting to see how this crisis is handled. Congress may have to return early to pass legislation to raise the National Debt. But it makes more sense to me — since the bulk of our lawmakers were so eager to get out of school for recess, that Bush could decide to handle the whole thing like he does everything else to avoid partisan jawboning or oversight — just dash off an Executive Order.
But the National Debt is just one of many problems battering our economy. Walrath points out a major problem is "all those margin accounts out there with people getting calls to come up with some real money because their stock is down. As you might expect, this led to speculation in housing — let’s flip it — and millions of people who couldn’t afford to pay their rent bought houses."
Wait a minute…Let’s flip it? What does that mean? Nothing comes to mind — okay one thing does — but Walrath never takes such a cavalier attitude about economics.
Let’s flip it, Walrath says is when "–you buy the house with no intention of ever living in it. You add a kitchen, spruce up a bathroom, and "flip" it, or put it back on the market, hoping to make a profit.
This goes on all the time, Walrath says, but there were more flippers than buyers this time around because it cost almost nothing to own a house while you were waiting to sell it. That’s sub-prime credit. You could buy a house with no money down, no income, no job, no assets.
Of course! Now I understand. If you buy a house with no money down, you have little or nothing invested. Just walk away. Let the banks worry about selling them.
But to whom will banks sell them? What are the banks going to do? "That’s why houses for sale are now piling up all over the country," Walrath said. "It’s a terrible situation."
Donald Trump begs to differ. When you’re in a hole, keep digging as hard and as fast as you can. Trump’s advice, according to Walrath is to "just go back and make another deal with whoever holds the mortgage. Trump says you’ll get a better deal this time than the one you had before. Don’t walk away from it — go make another deal. The last thing the bank wants is your house. What are they going to do with it? They can’t find anybody to buy it."
So, who’s flipping whom in this credit seizure?
According to an unsigned editorial in Saturday’s Wall Street Journal, the root cause of this credit correction was the Federal Reserve’s willingness to keep money too easy for too long.
The Journal warns an "emergency rate cut, as some in the market seem to be anticipating or hoping for — carries the risk of introducing even greater moral hazard into the financial system."
We can’t have immorality in our financial system, now can we? Oh, the horror!
While chiding Democrats such as Senator Hillary Clinton for proposing a $1 billion federal bailout fund for homeowners at risk of default and foreclosure, the Journal goes on to channel Barbara Bush’s flash of morality when speaking of homeless Katrina victims — "No one wants to see someone lose his home to foreclosure. But many of those most at risk bought their homes with little or no money down, and so have very little at stake economically. Bringing in the feds to bail them out would send precisely the wrong message — that risky or overly aggressive borrowing will be rewarded by the government rather than punished in the marketplace. To the extent that bad loans were made, the market needs to clear, not be propped up by federal-aid programs."
Unfortunately, despite what the Journal and the endlessly bleating "Money Heads" on TV would have you believe, millions of Americans are in deep trouble. CNBC’s Jim Cramer "flipped out" last week in a torrent of truth about the current economic situation.
Walrath agrees, and says if we continue in the direction we’re headed, Bush’s "boom" will make the Savings and Loan bail-out look like a Girl Scout Cookie Sale.
According to Walrath, there are four sets of losers in this housing meltdown…
- Those caught with the homes they bought for flipping purposes are not going to be able to find buyers. They are going to lose whatever they have invested, plus whatever mortgage payments they make. It may be cheaper for them just to walk away.
- Those who own homes will see the value of their houses go down because of the current oversupply due to overbuilding when interest rates were lower and people were buying homes with little or nothing down with the idea of flipping the houses as soon as possible.
- Those who bought homes with variable-rate mortgages are having trouble making payments because those payments keep going up, and there’s nothing they can do about it. Many did not even realize they had such a mortgage. Millions are going to lose their homes.
- And then, there’s the murky many — the banks and the hedge funds which ended up with mortgages used as collateral for junk bonds, which ended up as holdings by French and German and English banks, not to mention those in this country.
"This is the dog that worried the cat that killed the rat that ate the malt that lay in the house that Jack built, and we ain’t seen nothing yet," Walrath says.
"When it comes to saving the rich from losing money, no expense will be spared. Actually," Walrath mused, "the economy is good — if you’re rich. For the rest of us, there’s not much to write home about."