How US mortgage debt could cause a global financial crisis

Moneyweek.com ^ | 7-5-06 | Dan Denning

[goldstategop]

Drive By Media Talking Down Economy Alert

(The Palestinian terrorist regime is the crisis and Israel's fist is the answer.)

[Hydroshock]

Do dispute the facts? This could be bad.

[Hydroshock]

ping

[L98Fiero]

"Do dispute the facts? This could be bad."

Sure seems as though you hope it will.

[Hydroshock]

I hope it won't but fear it will. That is why I am perparing my families finances. We are cutting spending, increasing savings, and paying down debts.

[The_Victor]

We are cutting spending, increasing savings, and paying down debts.

That's sound financial behavior regardless of any doomsday scenarios. That's my (and probably most conservatives) modus operandi.

[facedown]

I'm so tired of the sky falling that I've taken to wearing a helmet.

[Hydroshock]

The problem is that a lot of people spend, spend and spend some more. A friend of my brothers takes the cake. He and his wife cashed out all the available equity in their house last winter and along with new furniture and a trip, she got a breast enlargement.

[Mr. Jeeves]

Everyone in professional investment management believes that the government will end up backing all mortgage-backed securities, regardless of the financial condition of the issuing GSE's. They are considered the equivalent of AAA-rated Treasury instruments. So this article is bit of a red herring - if the government ever refused to shore up the MBS market in a crisis, it would be equivalent to touching off another Great Depression. They wouldn't dare not to do it.

[thulldud]

A friend of my brothers takes the cake. He and his wife cashed out all the available equity in their house last winter and along with new furniture and a trip, she got a breast enlargement.

Debt-free or BUST!

[Hydroshock]

My fear is they will nto hav eth money to do it. We are after all talking about a trillion dollar bail out under the worst cse sceniors. Can they float those bond t pay these securities? Who will buy them if this goes down?

[Hydroshock]

I will take the debt free option thank you.

[Hydroshock]

ping

[Mr. Jeeves]

They don't need all of the money (even governments don't have that much) - they just need to make statements to the effect that they will shore up any breaches that appear. MBS's are ultimately funded by people paying mortgages, and they aren't all going to default at once - there won't be a trillion dollars outstanding at any one time. Like I said, none of the professional money managers I work with are the least bit worried about the stability of the MBS market - they may not be buying FNMA stock right now, though. ;)

The financial health of the MBS market and the financial health of the GSE's are really two entirely separate issues - though the article tries to blur them. As an analogy, GM may declare bankruptcy soon but that doesn't mean every car they've ever built is going to instantly drop dead on the road. That's the kind of improbable thing that would have to happen to require the trillion dollar bailout the article is referring to.

[Eagles Talon IV]

A bit premature. Mortgage rates in the early to mid '70's were at about 15%. This was up from only 6.25% in 1968 when I bought my first home.

Gloom and doom predictions have been around as long as I can remember and I personally no of none of them that were ever made and then came to pass. It always seems that people base their predictions on the NEXT disaster on how the LAST one happened, as if all the circumstances where exactly alike.

One really insane prophesy is the one that says oil will top $100.00 or more per barrel and stay there for a long while (Wayne Rogers). The driving force behind oil prices is demand with the political factor adding about $10-15 bbl. Someone tell me what keeps the demand portion intact when oil hits $100+ and economies around the world go into recession? It is as if these "experts" believe that discretionary spending buy the consumer, which accounts for fully 2/3 of our economy will tolerate any cost for gasoline, heating oil, electricity and anything else that has its cost driven by oil or natural gas, will remain intact no matter how high prices go and the demand and therefore the price of this commodity will stay high. These are the same people who I hear almost daily predict the high cost of gasoline will surely curb consumer spending and who say, when the market sells off that it was the rising price of crude that spooked the stockholder. Of course when the price of crude goes up and the market also goes up they use the excuse that rising oil prices mean more profits for the oil companies and that's why the market went up.

Bottom line is these so called "experts" haven't the first clue what the consumer will do or what the economy will do and the proof is they have a miserable record of being right on any of their prognostications.

[trebb]

No pity for those who spend what they don't have on things they don't need. 18 years ago, I had $700.00 in the bank, owned a 5-year old car and owed $5,600.00.

Today, after just making responsible decisions, I have a healthy retirement fund cranking along, and have enough money banked to pay off my house (didn't have the house until 1992) and to pay off the remainder of my car loan. In effect, I have absolutely no debt and have a decent positive worth. I am not in a high-powered job and the wife makes less than $30K/year. The only reason we're in good shape is that we don't throw money away on fluff. We don't live like Spartans, either. We have nice vehicles (Jeeps) good furniture, we eat well and dine out several times a month, take vacations, etc. I know folks that make twice as much as us and who have no savings and have multiple mortgages to facilitate their "lifestyles".

[photodawg]

if the government ever refused to shore up the MBS market in a crisis, it would be equivalent to touching off another Great Depression. They wouldn't dare not to do it.

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Tell me how the government would shore up a financial imbalance that could effect trillions of dollars of capital.

[Mr. Jeeves]

Answered in post #15.

[stainlessbanner]

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