What This Economy Means for You

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    Arrow What This Economy Means for You






    What This Economy Means for You
    by Stephen Gandel and Paul J. Lim
    Friday, October 10, 2008
    byCNNMoney.com

    As the most serious credit crisis in decades rocks your finances, you've got to have questions. Here are the answers.

    Back in January, when it first became clear the economy and the markets were in for a rough patch, the consensus forecast was that we'd have seen the worst of it by now.

    Perhaps you put a bit more cash in the bank, trimmed the fat from your budget and tweaked your 401(k) allocations, but otherwise you were confident you could stay the course.

    Then came the extraordinary events of September: the government's seizure of Fannie Mae and Freddie Mac and rescue of American International Group; the bankruptcy of Lehman Brothers and pending sale of Merrill Lynch; the first money market fund loss in more than a decade; a series of bank fire sales; and a politically charged federal bailout plan that could carry a $700 billion price tag. You can't help but wonder what all this means to you.

    Here are some key questions, from when stocks could bounce back to what's ahead for the economy and home prices. Choose a topic to get some answers.

    The Economy - How Did We Get Here?

    By now you likely know that the crisis in the financial markets is the culmination of years of reckless mortgage lending and Wall Street dealmaking. It's the final gasp of the burst housing bubble. But how exactly did this happen?

    To find the root cause of Wall Street's woes, you have to go back to the collapse of a different bubble - tech. In 2001, after the dotcom craze ended and the bear market began, the Federal Reserve started aggressively slashing short-term interest rates to stave off recession. By eventually reducing rates to a historically low 1%, the Fed reinflated the economy. But this cheap money sparked a new wave of risk taking.

    Homeowners, armed with easy credit, snapped up properties as if they were playing Monopoly. As prices soared, buyers were able to afford ever-larger properties only by taking out risky mortgages that lenders were happily approving with little documentation or money down.

    At the same time, Wall Street investment banks got a brilliant idea: bundle the riskiest of these mortgages, then slice and dice these portfolios into tradable bonds to be sold to other banks and investors. Amazingly, bond-rating agencies slapped their highest ratings on the "best" of this debt.

    This house of cards came down when subprime borrowers began defaulting on their mortgages. That sent housing prices tumbling, unleashing a domino effect on mortgage-backed securities. Banks and brokerages that had borrowed money to boost the impact of those investments had to race to raise capital.

    Some, like Merrill Lynch, were forced to sell. Others, like Lehman Brothers, weren't so lucky. "What we always tell investors is beware of too much leverage in a company," says Brian Rogers, chairman and portfolio manager for T. Rowe Price. "Leverage is the enemy of the investor."

    Sure, everyone from former Fed chairman Alan Greenspan to your friends and neighbors played a role in stoking this casino culture. But troubled banks and brokerages can't pass the blame. "These firms closed their eyes and made very bad bets on risky securities that they didn't truly understand," says Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton business school. "Investments that they did not have to make led to their demise."

    How Bad Could the Economy Get?

    Before the meltdown, economists fell into two camps: those who thought the economy had already slipped into recession and those who thought a recession could still be avoided.

    While forecasters still differ on the timing and severity of a downturn, "the consensus view is that we're headed for recession and will be in one until next year," says Mark Zandi, chief economist for Moody's Economy.com.

    Corporate profits are already on the verge of falling for a fifth straight quarter, according to Thomson Financial. The next shoe to drop will be consumer spending. "Two years ago, people were using their homes as ATMs, pumping out cash," says Robert Arnott, chairman of the investment consulting firm Research Affiliates in Pasadena. "As banks continue to tighten their lending, that spending is disappearing."

    But softer profits and slower spending haven't translated into widespread layoffs yet. "This is the strongest recessionary job market in 40 years," says James Paulsen, chief investment strategist of Wells Capital Management. A jump in unemployment could still be coming, especially given bank and brokerage failures and mergers. But outside of finance and housing, much of the rest of the economy is strong, he says.

    The weak dollar is boosting demand for our goods abroad, and lower gas prices are making Americans feel more flush. Add in the cash that the Fed has been hosing into the banking system and we are bound to see growth in 2009. "If all this stimulus has no effect on the economy, that would be a rarity indeed," says Paulsen.

    Standard & Poor's chief economist David Wyss expects a mild recession that ends next spring. "Gradually we will regain confidence in the market. Lower oil prices and a falling trade deficit will help," he says. "This is a financial panic, not an economic one."

    Of course, that could change if the financial panic doesn't abate soon. If banks remain too scared or broke to lend, would-be home buyers will be frozen out of the market. If that happens, home values could fall even more, crimping confidence and putting the brakes on the economy's greatest engine: the consumer.

    Does All This Mean I'll Pay Higher Taxes?

    Yes. "Taxes will rise regardless of who wins the Presidency," predicts Greg Valliere, chief political strategist for Stanford Group Co.

    It's impossible to say what the final bill for rescuing Wall Street will be. Even before the bill to buy $700 billion of unwanted mortgage-backed debt, the government had already signed on for nearly $365 billion in loan guarantees and other costs.

    The eventual price tag will depend in part on the housing market. If it recovers by 2010, the value of mortgage-backed securities could rise, minimizing the tab for taxpayers, says Brian Bethune, chief U.S. financial economist for Global Insight.

    "On the other hand," Bethune adds, "if the economy continues to tank into a deeper recession, dragging the housing market along with it, then the costs to the taxpayers easily could escalate to several hundred billions of dollars."

    Under Treasury Secretary Henry Paulson's original debt-buyback proposal, some economists predicted the federal deficit could soar to $900 billion in 2009. Even without a bailout, the federal budget was expected to hit $482 billion next year. If government aid pads that figure by $200 billion, the deficit will be back to where it stood in the 1980s - around 5% of GDP. At the very least, that will make it hard for a future President to keep tax-cut promises.

    http://finance.yahoo.com/banking-bud...-Means-for-You


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    That's the consequence of sending people to Congress that I wouldn't trust as a McDonalds cashier.
    Ron Paul 2012

    No gym for home, work out floor with 30, but is it for 20 like 30 lb when you no lift it to be for men, for 30 lbs instead? or half is 10 for 20 pounds?

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    That's a very good short and to the point article. I printed several copies for people that I think might want to read it. Thanks

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    Quote Originally Posted by Hoglander View Post
    That's a very good short and to the point article. I printed several copies for people that I think might want to read it. Thanks
    You never say that about my articles.

    asskisser.

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    Quote Originally Posted by min0 lee View Post
    You never say that about my articles.

    asskisser.
    Your articles are very nice as well.

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    Next President is fucked.

    I feel bad for whoever is elected...

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    Quote Originally Posted by Hoglander View Post
    Your articles are very nice as well.
    Well thank you.

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    Quote Originally Posted by min0 lee View Post
    Next President is fucked.

    I feel bad for whoever is elected...
    I wouldn't want the job...assuming Obama wins (which he prolly will)...I bet he gets white hair in less than 2 years.

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    so a smart man ceases to do business with the banks that foolishly lent their money to high risk borrowers and does his banking with banks that were more sensible. the bankers who deserve to lose their jobs, pensions, etc do. shitty banks who lose peoples money go under... and henceforth our money is a lot safer in the bank than buried out back in a mason jar.


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    Quote Originally Posted by Hoglander View Post
    That's a very good short and to the point article. I printed several copies for people that I think might want to read it. Thanks
    sure, I have been going to Yahoo! lately, I like it.


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    My boss, my manager and I have been saying we have been in a recession for the last 2 years if not longer....maybe not an official one but there were sure signs of it for a long time....

    I think it's about time we bill Iraq for services rendered and start selling their oil to pay ourselves back.
    Coarse edged youth, the irish pendants string from their smiles
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    but oh they have yet to be experienced and that makes aging so very worth it...ML circa2012

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    Money, money, money...


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    I have been paying sloe attention to this trying to understand as much as possible. Some of the best information I have heard comes from a show called "This American Life" podcast from NPR. You can get it for free if you have Itunes or Zune Market Place.
    Fucking Determined!

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    I am years away from having to live off my investments...

    My only concern is the GOVT contracts and/or military bases that will fall to pass if Obama gets into office.

    I still have a job, and the stuff I work on is mostly involving aircraft efficiency, so we are making a dent, and I dont think that will stop...

    Also Globalization does take a chunk out of the american economy, so of course I am ALWAYS "PRO" - "Made in USA"

    Have Problems?... Chances are its due to overpopulation
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    Quote Originally Posted by KelJu View Post
    I have been paying sloe attention to this trying to understand as much as possible. Some of the best information I have heard comes from a show called "This American Life" podcast from NPR. You can get it for free if you have Itunes or Zune Market Place.
    I love TAL, Ira Glass does such a good job of getting interesting stories on there...
    Coarse edged youth, the irish pendants string from their smiles
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    and drag down the features of age,
    no folds or creases from unkempt wear
    eyes of tranquilty, crystalline-beads
    no sign of despair in their hair, nor their hearts
    but oh they have yet to be experienced and that makes aging so very worth it...ML circa2012

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    All we need is for Obama to get elected so his horrific tax plan can dump gasoline on the fire.

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    Quote Originally Posted by TexanTA1996 View Post
    All we need is for Obama to get elected so his horrific tax plan can dump gasoline on the fire.
    You say that like McCain is the second coming of Jesus. Both of them are fairly incompetent, but McCain is going to be dead within a couple of years probably. I don't want Palin as my president.
    Ron Paul 2012

    No gym for home, work out floor with 30, but is it for 20 like 30 lb when you no lift it to be for men, for 30 lbs instead? or half is 10 for 20 pounds?

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    It's really something that people still talk about McCain's age. People live longer than ever , the Supreme Court , the Pope to name a few are how old.People don't want Palin but will choose Obama who has ZERO experience.Bush is blamed, but this mess started years before, anyone remember 1993 and good old Bill ?The last 2 years the Democratic Congress really turned it around .People really need to get real here.

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    Quote Originally Posted by glennmo View Post
    It's really something that people still talk about McCain's age. People live longer than ever , the Supreme Court , the Pope to name a few are how old.People don't want Palin but will choose Obama who has ZERO experience.Bush is blamed, but this mess started years before, anyone remember 1993 and good old Bill ?The last 2 years the Democratic Congress really turned it around .People really need to get real here.
    of course, this is what Republicans always say when they fuck everything up, it was the Democrat that was there before them.


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    Quote Originally Posted by glennmo View Post
    It's really something that people still talk about McCain's age. People live longer than ever , the Supreme Court , the Pope to name a few are how old.People don't want Palin but will choose Obama who has ZERO experience.Bush is blamed, but this mess started years before, anyone remember 1993 and good old Bill ?The last 2 years the Democratic Congress really turned it around .People really need to get real here.
    I'm not referring to experience in this case, I'm referring to intelligence. Obama has some, Palin has none.

    Again if I had my choice I would likely do a Ron Paul ticket. The VP is up in the air for him since there are a lot of very good choices. Maybe a Paul/Perot ticket.
    Ron Paul 2012

    No gym for home, work out floor with 30, but is it for 20 like 30 lb when you no lift it to be for men, for 30 lbs instead? or half is 10 for 20 pounds?

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    primeau
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    I don't think he is running any longer, danzik

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    Quote Originally Posted by lnvanry View Post
    I don't think he is running any longer, danzik
    Paul or Perot?

    Paul would gladly run, there is just no chance of a 3rd party winning really. Perot I don't know about.

    Either way I'm voting for Ron Paul as a write-in.
    Ron Paul 2012

    No gym for home, work out floor with 30, but is it for 20 like 30 lb when you no lift it to be for men, for 30 lbs instead? or half is 10 for 20 pounds?

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    Quote Originally Posted by glennmo View Post
    It's really something that people still talk about McCain's age. People live longer than ever , the Supreme Court , the Pope to name a few are how old.People don't want Palin but will choose Obama who has ZERO experience.Bush is blamed, but this mess started years before, anyone remember 1993 and good old Bill ?The last 2 years the Democratic Congress really turned it around .People really need to get real here.
    True, but the amount of stress he will face if he becomes President may be too much for a man his age......although he is a strong man considering what he went through during the war.

    Has anyone noticed how much Bush has aged?

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    Quote Originally Posted by danzik17 View Post
    I'm not referring to experience in this case, I'm referring to intelligence. Obama has some, Palin has none.

    Again if I had my choice I would likely do a Ron Paul ticket. The VP is up in the air for him since there are a lot of very good choices. Maybe a Paul/Perot ticket.
    I like that also, I'm not sure how Paul is with the military and foreign affairs.

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    Quote Originally Posted by min0 lee View Post
    I like that also, I'm not sure how Paul is with the military and foreign affairs.
    I think he is a genius with how he would conduct foreign affairs. Then again, maybe it's not him that is a genius, it was the founders whose advice he chooses to follow. I'm sick of spending trillions of dollars on our military and foreign military aid. If we spent 3 months of what we spend in Iraq on our national defense, we would be freaking impregnable. Not only that, we need to rebuild our own infrastructure and not that of other countries right now. We are falling apart.

    As for military affairs, that is what we have generals/advisers for. Name a president in the last few terms that knew anything about military affairs - it was their advisers that helped them figure out what to do.
    Ron Paul 2012

    No gym for home, work out floor with 30, but is it for 20 like 30 lb when you no lift it to be for men, for 30 lbs instead? or half is 10 for 20 pounds?

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