by Reb Akiva at Mystical Paths
Ladies and Gentlemen. Please remember the words of our emergency lecture at takeoff, and proceed calmly and orderly to the emergency exits.
"Consumer confidence" is an incredibly important part of the US economy. Having created the ultimate consumer nation, the economy became about 70% based on you, the consumer's, willingness at any given moment to part with your money and consume. As your access to credit made extending your consumption almost free, confidence increased and consumption increased to never before seen levels. New homes for the nuclear family had to be build with 4 car garages, for mom had a mini-van with full entertainment package to keep the youngsters entertained, dad had a SUV that could rival an army HMMV in Iraq in outdoor capabilities but had never seen a lick of mud, Billy had a a mustang convertible, and Sally - who just got her license last week - was stuck with only a brand new Toyota Corolla with Bose surround sound multi-CD system and integrated GPS.
The poorer among us were much less fortunate, having only 1 new car and being able to afford only 1 $6,000 High Definition Plasma Television (requiring 3 delivery men to lift into the living room).
The cheap money flow increased, as all those dollars that went overseas to Dubai and Abu Daibi and China came back looking for "safe investments". And what could be more safe than investing in US real estate? Hey, it's as physical and tangible as it gets, right? A business can go out of business, but a house is always a house.
But as the competition not for investment but TO invest increased, it created an unsustainable cycle (take our money, please, we'll pay YOU 1% to borrow it!) Everyone flush with available credit ran to get their better piece of the American dream - a home, a bigger home, a better home, a second home, yet another bigger home. Houses not being an unlimited resource, competition drove prices up while investment competition continued to drive the cost of money down.
As the system reached it's limits, the US Federal Reserve made a fatal mistake. They raised interested rates. As everyone was leveraged to the hilt, a small increase in interest rates was enough to increase their payments 25% or even 50%. The Fed didn't notice what was happening and continued to raise rates to head off a future possible inflation. Not lot, just 1.5% over 6 months.
But that's all it took. People leveraged to a level not seen since the Great Depression were suddenly facing payment increases of 100% or more. They scrambled to find buyers but THEY had bought at the peak, no saviors were to be found.
And with that, what has been called a Housing Bubble but was really a Financial Bubble began the long downhill roll to collapse.
Because it is a low speed disaster, no one noticed. Even if people stop paying their loans, it's a 6 month process until someone repossess. Then the repossesor tries to sell and recover the loss (and in the past, often make a profit as they have a few years of payments in pocket and get to resell the property) and doesn't take a financial loss until it's clear the property won't move.
All that investment money from inside the US and overseas was bundled up in multi-billion dollar blocks of home mortgages. The "good" bundles have lost ONLY 5-10%, the "bad" bundles have lost up to 50%. And which bundles are good or bad is completely unknown!
First impacted where the people who could no longer make their payments. Homes were lost. Then credit tightened up and people stopped the leveraged buying (goodbye new cars, boats, luxury good sales). Now, the investment impact of all that "lost" money is now coming due.
But it's an election year, and the US is over 60% a pure consumer economy. That all important "confidence" must be managed. YOU CAN'T BE TOLD WHAT'S COMING, because if you were really very worried you'd slow your buying, which will make it worse.
Friends, the big impact time is here. The financial firefighters are now pouring water on the flames. But it's clear, much of the building is already lost.
What was an average downswing recession buffered by export growth due to the cheap dollar just became something else.
The Breslev tzaddikim have told their followers weeks ago this may be the last year (or last year in a long time?) that it is possible to travel to Uman (the Ukranian burial site of Rebbe Nachman of Breslev) for Rosh Hashana.
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BS"D - בסיעתא דשמיא