Monday, May 25, 2009


I wonder why we do not hear more about the impending doom looming on the horizon with the Option ARMs to be recast (versus reset) in the next year or two? The recasting Option ARMs, in addition to the Alt-A mortgages, will exceed the subprime mess. The subprimes were approximately $1 trillion in book value; the Alt-A will be approximately $1 trillion; and the Option ARMs will add another $600 billion on top of that. The worst is yet to come. Here is an interesting link, and here is a 60 Minutes story. And add to this catastrophe the fact that many "low-risk" mortgage holders are falling behind in mortgages (click here), and I think we may very well question the logic behind the benefits behind having promoted home ownership. Many, many people should not have gotten mortgages. Neoliberal economics in the self-regulation of the markets in its finest form.

And I am sure that the banks will be lining up for more taxpayer handouts too to shore up there balance sheets. They certainly are not lending: the bankers that I know and have spoken with specifically said that credit has tightened even more since receiving their first taxpayer subsidy. I guarantee there will be more. There is literally no money to lend, and the small business owner is getting strangled. The worst is yet to come. Did I say that already?

Recall that the vast majority of jobs are created by small businesses. In the past twenty years, small businesses have created roughly 20 million jobs, just about the same amount that the companies comprising the S&P500 indice shed through increased productivity, m&a activity, layoffs, etc. in this same period.

I could go on and on, but right now we will just need to accept a lower standard of living for the overall American. Oh, and one last thing: real wages have been lagging inflation since the mid-seventies, but this is the first time in history that actual wages are decreasing in this country (versus real wages). To someone that studied the economics of globalisation, what is happening is the exact textbook model. More struggles lie ahead for the Average Joe. The toxic mortgages are just the beginning.

Fortunately our government privatizes reward and nationalizes risk. An interesting hybridization of socialism and capitalism, and a win-win for the capitalist. All subsidized by you and me.

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