Sunday, February 22, 2009

Housing: One Catalyst of Many

To listen to Obama and the democrats the root cause of the current economic crisis is the mortgage, credit, and housing market. According to the leading liberal economists and lawmakers all we have to do is pump money into a failing economy and fix the financial market mess and all will be well again. Really nothing could be further from the truth. Many believe that the bursting o the housing bubble is the cause of the economic crisis. many believe that no one really saw this coming. I beg to differ.

In 2005, When the housing market was on fire and I was enrolled in a freshman level microeconomics course, I wrote extensively on the housing market. With little to no background in economics I predicted the bubble would burst. Additionally, I wrote lengthy essays on the reasons for the impending collapse and also the reasons I felt that way. First I believed that due to the artificially low interest rates that more people would be able to apply and receive loans. People that really could not afford homes but because of the interest rates being at historic and unsustainable lows, they qualified for the loans on paper. Additionally, these same people were qualified for much higher principal. This is what created part of the mess that we are in as far as the mortgage crisis is concerned. People were qualified for much higher principal loans due to low interest rates. This phenomenon created a market where the prices for houses rising. People that could only afford a $200,000 house when the interest rates were 6.5-7.0% were now qualified for $300,000 houses at 5.0-5.5% interest. The market adjusted and adjusted quickly. People started to purchase homes that were worth only $200,000 for the $300,000. The house wasn't really worth $300,000 but because banks told potential buyers that they could afford the cost the buyers bought over inflated homes.

Then many of these borrowers could not qualify for traditional 30 year fixed rate mortgages. Instead they qualified for only sub prime mortgages. People committed to 3/5/7 year adjustable rate mortgages. Interest rates really could not go any lower, meaning the only way the mortgage were going to adjust is upward. This is not rocket science. The interest were artificially low to overcome a mini recession caused by the Clinton administration and the attacks of 9/11. They were unsustainable. People that purchased homes in 2001 and 2002, were bound to have their interest adjust upward starting as early as 2004. The early borrowers were saved because the housing market was still booming. But the late comers in 2003, 2004 and later would not be saved. The height of the market was in 2006. By 2007, the borrowers from 2003 and 2004 with 3 year ARMs were seeing their interest rates adjust upward. They were unable to break even on their homes and were unable to afford the higher mortgage payments. In addition many of these borrowers were seeing higher taxes on their property. This combination set off a wave of foreclosures. The foreclosures sent house prices downward, and alas the bubble would burst.

Now we have the problem of houses being worth less the principal amount of the loan. Never mind that these homes were never really worth that much now Obama says we need to save the faithless borrowers. This was preventable but the democrats forced lenders to loan money to people that could never afford the loan to begin with. The Liberals were going to increase land ownership and now the American taxpayer is going to subsidize the American dream for millions of irresponsible and faithless borrowers.

However, the mortgage crisis is but one of many catalysts. Another catalyst for the current economic crisis is the high gasoline prices experienced this past summer. We were paying over $4.00 a gallon for gasoline. This receives very little recognition as a cause of the poor economy because the high prices have now receded to something almost reasonable. In fact, we are paying less than $2.00 a gallon today, half of what we were last summer. However, the high price of transportation took its toll on the economy. Businesses that could not afford the higher transportation costs starting going out of business and liquidating. Unemployment started to rise and people became concerned about the economy. The demand for energy decreased as businesses went bankrupt and consumers tightened their belts. Now because of the receding fuel costs no one recognizes the problem. Mark my words if and when the economy begins to recover these fuel prices will again rise. When they do we will be right back to where we started. Businesses can not afford to stay in business with high energy costs. We are a country built on transportation. Goods are moved across our land by trucks, train, and planes. All of which consume fossil fuels. We need a coherent energy policy that resolves the fossil fuel supply and demand. We as a country need to start drilling our own off shore reserves. We need investment in clean coal technology and nuclear power as well as alternative fuel sources. Instead we have a Secretary of Energy in Steven Chu that doesn't even understand that fossil fuels are an important aspect of our "energy" policy. We have a democratic congress that believes now is the time to raise the gasoline tax because the price is so low. These half baked ideas will come back to haunt the short sighted and over bloated stimulus package. Without fixing and investing in our energy policy the economic recovery will constantly be undermined.

Another catalyst for the economic woes is the increase in the minimum wage. The increase in minimum wage destroyed jobs in an already declining economy. The liberals believe in a living wage and want the minimum wage to be a living wage. However, that is not the intent of the minimum wage. The intent of the minimum wage was to prevent sweatshops and the exploitation of working women and children. Minimum wage was never intended to be a living wage. The minimum wage has done its job. It has produced low paying jobs that would provide our young with employment. Employment creates a history and experience. The experience gained by employment will lead to better paying jobs in the future. However, with the rising minimum wage our young workers are not receiving any job offers. Companies are not going to pay inexperienced and unknown youngsters in relatively high paying jobs. Businesses are unable to assume these kinds of risks. They are unable to afford to employ more people without raising prices (inflation). The alternative to raising prices for goods is to cut the number of employees. Hence another increase in unemployment, causing an even greater strain on the economy.

Another catalyst for the poor economy is the doom and gloom administration. We have a President in Obama that remains on the campaign trail instead of leading a nation towards prosperity. The stimulus package was not written by Obama in fact he was mainly hands off. Obama remains in campaign mode and continues to talk of crisis and catastrophe. Unfortunately, Obama now owns the economy and if he has no confidence neither will the consumer. The package was a pork laden bill written by the liberals in congress. Thus far the Obama administration has been incoherent in all of its policies. Many trail balloons have been floated regarding policies but nothing concrete and no details. The stock market has tanked 2500 points since Obama was elected. The Treasury secretary who was once hailed is now a laughingstock. Every time team Obama says something the market sinks even further. Which leads me to yet another catalyst.

Team Obama is intent raising taxes in a struggling economy. Obama says we tried tax cuts and they failed. Nothing could be further from the truth. The Bush tax cuts increased tax revenues. In fact our government enjoyed the highest tax receipts on record last year. So the tax cuts increased revenue how could we be further in debt. The answer is simple our government spends to much. And team Obama is intent on spending even more.

Unless all of these catalysts are addressed America will crumble under the weight of its own debt. It is like the consumer that borrows to keep afloat waiting for a bigger payday tomorrow. The debt load becomes to much and bills begin not being paid. Then the consumer under tremendous stress stops paying all bills because well the balance never decreases so why pay it all. The consumer goes bankrupt and so will our country if we don't control our debt. Borrowing over a trillion dollars this year and probably next will not resolve our problems. Borrowing at this rate will only accelerate our impending bankruptcy.

The focus of the stimulus package is on housing and liberal pet projects. Without resolving the other catalysts we will become nothing but a third world country with rising inflation, rising unemployment, and declining worth. Housing is important but the market will resolve itself. Some of these other catalysts are much more important to our long term growth.

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