Herman School of Business
Are we swirling the drain?
Is this the economic death spiral we caused by spending money we really don’t have? Today’s stock market tells us it is. House prices are falling which also tells us it is. Unemployment figures are rising telling us it is. And when recession is finally an accepted word and no longer denied anywhere at the major financial institutions, then someone has indeed pulled the plug and we are swirling the drain.
The holders of all those mortgages exploding with readjusted interest rates bought them from someone else who took the money and ran. That mortgage holder has never done “modifications” to loans, which means actually changing the terms of the loans…they merely let the borrower stretch out the loan, with additional interest payments and bank fees, meaning you might be in trouble and owe two hundred thousand but with the new figure you owe the mortgage holder growing enormously it will be much higher than that, while the value of the house is shrinking. In short, they are taking the bomb going off now and planting it back in the ground to explode later. Modifications would actually mean new terms, not just longer time frames and higher money added onto a loan you can’t pay.
And it is said that every foreclosure lowers the value of at least four houses around it. So, on present course we are crashing the value of neighborhoods we artificially raised with these hair-brained mortgage products over the last few years. Doesn’t anybody remember what goes up must come down? Now, don’t forget while our houses were doubling in less than ten years many stayed home but took the money out in Home Equity loans, which means we treated our homes like a piggy bank…and with equity shrinking, we aren’t so rich anymore. Why do Americans never get the fact that we are not invincible, in any way?
Five years ago the Euro was 80 cents for every dollar. Today it is 1.50 dollars for every Euro. The false economy keeps putting out more money into the system without worry about the ultimate cost, we have now devalued the dollar around the world, because they “get it” and we don’t. Some are too young to know what this can mean, and many older people are too much in denial to face the truth. Gold just hit an all time high, doubling in value since last July.
But hey…in addition to being a realist, I am also an eternal optimist. Half the country will come out alright on this and half will pay dearly for the ways of all of us. To be in the better half at the end of this down cycle please follow these instructions: 1) create no new debt, 2) anything you planned to sell in the next two years, sell it now as prices are falling on everything, 3) if you have a job learn all you can about your companies finances, especially how well their customers are doing because without customers you may be gone soon, 4) look at your stock portfolio and don’t think prices can’t keep falling, ask those who stayed forever in the dot.com crash, rather then sell out at huge losses, because in the end they lost it all, 5) crisis manage cash…see if you can make more with a part time job to eliminate debt, look at starting a low cost business to earn more, and watch out for buying opportunities as this is the time you can buy dollar bills for seventy-five cents.
Oh yeah, one more thing…keep reading this blog and send it to a friend…thanks, Herman.
- Posted: 16 January 2008
- Comments: 0
- Category: Business failure
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