Bulletin, Bulletin, President Bush says “Economy is in Danger
Well it finally happened. President George W. Bush stepped forward and said “our economy is in danger” and faces a “great challenge”. Where did all of this begin and where do we go from here?
The war with Iraq might well have been the starting point. Consider this, the war costs $10,000,000,000.00 per month, a phenomenal sum. Our Federal debt now stretches out over the next three or four generations.
And, as I wrote in a previous article, each additional dollar which the Fed prints devalues each current dollar in circulation. What we have is a double whammy. Not only are we paying for the war, we are losing purchasing power because of the additional dollars in circulation – all ten billion – each month.
Add to this the high risks being taken by investors and investment bankers on Wall Street, particularly in the mortgage sector. Those risks came with huge consequences. As investors continued to lower the standards for home buyers, the ratio of defaults on mortgages rose. Banks and investors who held or were purchasing those mortgages were losing ground fast. But that was well over a year ago.
Interestingly enough, those most responsible for the largest losses, the C.E.O.’s, were let go or allowed to walk away, but certainly not empty handed. No, to the contrary, they received huge multimillion dollar “golden parachutes”. But the bleeding did not stop there.
There was, and is, a tremendous confluence of circumstances, the likes of which we as a nation have not faced. The value of real estate dropped, and when it came time for some people to refinance out of their existing adjustable rate mortgage, they had neither the cash on hand nor equity in their home to cover the costs. That of course, is assuming that they could even qualify for a new mortgage.
People can no longer refinance their mortgage as readily as a few years back, and in essence use their equity like cash in an ATM, which removes tremendous sums of dollars from all sectors of the economy. This slow down of spending or the reduction of the velocity of spending has a ripple effect throughout the entire economy.
Most recently, the Federal Government stepped in to bailout the nation’s two largest mortgage purchasers, Fannie Mae and Freddie Mac. We’ve also seen well established Wall Street firms and some major banks fall. The Fed also bailed out AIG, a infinitely important insurance company for $85,000,000,000.00, and now we are facing a $700,000,000,000.00 bailout.
I’m curious about two things. One is have you seen this coming for as long as I have? The other is, have you made plans to secure your and your family’s financial future?
Filed under: Business