Personal Finance Blog by Debit versus Credit

Breaking News: Recession Since Dec 2007

December 2, 2008 | Filed in: Miscellaneous | 1 comment

If you like this post then please consider subscribing to my RSS feed. You can also Subscribe to Debit versus Credit by Email and have new posts sent directly to your inbox.

It’s a shame that sarcasm is so difficult to convey over the web.

Most of you have likely heard by now that it’s official: the U.S. has been in a recession since last December. My question now is, does this surprise anyone out there? I’ll admit that I’m actually a little surprised it’s already been a year. It does make sense though, especially when looking at consumer spending last Holiday season. It didn’t increase by much.

Looking at a history of past recessions (since WW2) it’s interesting to note that the majority of them lasted no longer than a year. It’d be nieve of me to believe that because they didn’t often last longer than a year in the past that this one is just about over now, but it is an interesting statistic nonetheless.

Many economists believe that this recession could end sometime in the second quarter of 2009, which could potentially make it the longest economic downturn since the Great Depression. What’s interesting about that is this would make some of the doomsday-callers partially correct in their prediction that this would lead to another Great Depression. Obviously it hasn’t turned into that at this point, and hopefully it won’t, but they would be right at the very least in the length of time of this downturn.

Just some interesting information. Any thoughts?

Tags: Economy, housing bust, recession

The End of the World As We Know It: National Bankruptcy!

September 19, 2008 | Filed in: Debt, Miscellaneous | 6 comments

If you had to take a close look at the U.S. markets and the financial system and give an estimate on the absolute worst-case scenario for our economy, what would you predict?

Martin Hennecke, senior manager of private clients at Tyche, has done just that and he has publicly declared that he believes that the U.S. government will be forced to declare bankcruptcy due to all of the private-sector bailouts that they have been sponsoring.  I saw this article over at CNBC and thought that it was interesting and something that I would like to cover.

I’ll quote the highlights of the article here, but you should definitely read it and see what Mr. Hennecke has to say on the matter.  There is also a video attached where they interview him, which is a pretty decent way to blow eight minutes.  I’d like to point out that although Mr. Hennecke doesn’t say so (he may not even believe so) what he’s proposing is more or less a worst-case-scenario.  More on that later.  I’ll begin with his first major (and the biggest) point.

“We expect a depression in the United States. We expect a depression, very possibly, also in Europe,” Hennecke said on “Worldwide Exchange.”

We may not even be officially in a recession (at least by the dictionary definition) but Mr. Hennecke believes that the U.S. and Europe are going to face an actual depression.  He believes that the United States Government will have to accounce a National Bankruptcy as they will not be able to afford the bailouts that they have promised.  For those unaware the government is planning a new bailout, this time to bailout literally every institution having issues with solvency due to mortgage-backed securities.  They plan to purchase these securities for pennies on the dollar, thereby ending any crises related to solvency.  It’s important to note, however, that this article was posted on the 11th of September.  Which means that the last bailout that had been made at the time of publishing was the Fannie and the Freddie bailout.  Since then we’ve invested $85 billion in AIG to bail them out as well.

When the government can no longer pass the United States’ “immense debt” on to taxpayers, it will turn to the holders of U.S. dollars, leading to the eventual downfall of the currency, Hennecke said.

It’d be stupid to pretend that the U.S. is not facing huge debt levels.  In fact we’re close to $10 trillion at this point.  You can see for yourself at the U.S. National Debt Clock.  Things aren’t looking well at all when it comes to the health of our U.S. government.  The problem with this extreme level of debt, and the reasoning behind Hennecke’s predicted depression, is that the U.S. will be forced to print billions of dollars of cash in order to cover the debt and the interest.  He believes that this will lead to HUGE inflation levels which of course will have devastating effects on the American people.

I don’t necessarily think that we’ll ever get to this extreme of a crisis here in the U.S., but it’s worth thinking about.  Just in case something like this ever did happen it wouldn’t be a bad idea to have some money invested in something that wouldn’t be devastated by hyperinflation and depression in the U.S.  If you follow what Mr. Hennecke is doing then you would want to invest in Asian countries, especially China.  He also recommends investing in Gold, as it is a natural hedge against inflation.

Tags: Bailout Nation, Depression, housing bust, Inflation, National Bankruptcy, National Debt, recession

The Bailout of Fannie and Freddie

September 9, 2008 | Filed in: Miscellaneous | 1 comment

The United States of America has officially become a nation of bailouts.  With the government takeover of Fannie Mae and Freddie Mac on Sunday, September 7 they have also become the nation’s largest mortgage provider.  They now own (or back) around $5-6 trillion in mortgage loans, which is roughtly half of the existing mortgages in the U.S.  What does this mean for the taxpayer?  For the homeowner?  For the investor?  For the financial markets as a whole?

Expect To Pay More In Taxes

Fannie Mae and Freddie Mac are HUGE companies.  They alone service over half of the mortgages in the U.S.  They have trillions of dollars worth of liabilities as well.  In fact according to the former president of the Federal Reserve Bank of St. Louis, William Poole, they have up to $6 trillion dollars in liabilities (as reported by the Wall Street Journal Online).  He believes that it would not be unreasonable to assume that they may end up taking a loss on as much as 5% of their loan portfolio which would provide taxpayers a burden of some $300 billion dollars.  While this would more than likely just be added to the national debt of almost $10 trillion dollars it would eventually have to be paid off and those who are ultimately responsible for this debt are the taxpayers.  You, me and your neighbor.

Mortgage Rates May Finally Drop

The rising level of defaults on mortgages over the past year or two has forced Fannie and Freddie to get more defensive and stop buying up so many mortgages.  This has led to an increased risk for mortgage originators, as they might not be able to sell off their risky loans.  It has also decreased the amount of cash flowing through the mortgage market and as such has had a strong effect on mortgage rates.  Because of the increased risk and the limited capital mortgage lenders have been forced to raise mortgage rates and keep them high.  Now that the U.S. has virtually guaranteed the success and liquidity of Fannie and Freddie mortgage originators are likely to have a less difficult time securing cash and selling off their loans.  This should lead to a drop in mortgage rates over the next six months or so.

Start Investing Now If You Haven’t Already

The markets rebounded on Monday with the Dow Jones Industrial Average ending up almost 300 points (or 2.59%).  Investors are excited about the future now that they don’t have to worry about Fannie and Freddie.  If the Treasury Department and Paulson are right (and I personally doubt they are) then this bailout should fix everything.  After all the housing market is the primary cause of the “recession” that we are currently facing.  By shoring up the two largest mortgage companies and providing much-needed capital to the mortgage industry they’re hoping to end this downturn once and for all.  Things aren’t quite that black and white however but we’ll come back to that in the next section.  In the meantime for the purposes of investing they (the feds) may be right about one thing.  By taking over Fannie and Freddie they should increase investor confidence and lower mortgage rates.  This should have the effect of a declining bear market if not the return to a bear market.

The Financial System Is Nowhere Near A Full Recovery

It is true that the primary cause of the economic turmoil that the U.S. is currently facing is due to the uncertainty in the mortgage markets.  It’s also true that the decreased cash flowing into these markets due to Fannie and Freddie’s cutbacks was having a negative affect on the entire market.  However one would have to be nieve to assume that by taking over Fannie and Freddie and providing capital to the mortgage markets that this mess will clean up quickly.  The fact is that homeowners are not walking away from their houses because their mortgage lender was unable to sell their mortgage to Fannie - they are walking away because they are upside down on their house by a lot of money and they are unable to afford the payments.  Losses will continue to come.  The process may be slowed down and stopped sooner than it might have without this bailout (due to the increased affordability of purchasing a home) but unfortunately home values have not reached their lows, as most would-be homeowners are not ready to jump into the market even with today’s home prices!

The fact is that homes are STILL unaffordable in many markets across the U.S.  Homeowners are losing money and are bailing ship which is slowly decreasing home prices but there is probably quite a ways to go still before the buyers start to line up.  Bailout out Fannie and Freddie may help some, but as I stated already, the financial system is nowhere near a full recovery.

Technorati Tags: Fannie Mae, Freddie Mac, mortgage news, stock market, investing, taxes

Tags: Economy, Fannie Mae, Freddie Mac, housing bust, housing market, Rants, Real Estate

1 2 Next Page »