“Let me begin by making as direct a statement I can before beginning this conversation, which is that this homeowner bailout is simply a horrible idea.”
Mike Gasior, AFS Seminars
For some reason, awhile ago I began receiving Mike Gasior’s e-newsletter and admit to reading it with some glee, enjoying his writing style and for the most part, although not always, agreeing with his commentary. His most recent newsletter, which is a combination of marketing, economic analysis, righteous indignation and good humor, began with the above quote, with which I totally agree. When the Bush administration released this latest bone-headed plan to “rescue” the U.S. economy by freezing subprime rates over a five-year period, I thought it was a joke. Now I think it’s just downright scary. And led by the likes of Hank Paulson, you wonder if Ben Stein’s column a week ago taking Goldman Sachs to task was even more on target than originally thought (although Wall Streeters ravaged him like hyenas). It makes you wonder: What skin does Goldman Sachs have in this game? It seems all lenders have skin in this game, and apparently the Bush plan would help them more than the borrowers it — at least on a public relations level — is said to aid. Furthermore, those borrowers it does help seem to be the least responsible, those who pretty much borrowed an entire amount of what a house was worth without having the proper credit worthiness. Scandalous for sure, but the bigger question is: how exactly did that happen? Weren’t lenders supposed to assess the creditworthiness of their borrowers? Isn’t this the main reason they exist? So if they weren’t doing their job, were they expecting the government to step in when it all hit the fan?
Now I’m one for helping out my fellow Americans, but I’ve got to tell you, freezing rates on already bad loans is, as Mr. Gasior says, a “horrible idea,” despite being “voluntary” for lenders. Freezing rates or prices — in any way — is bad. Seeing this move, the cynic inside me wonders if the Bush administration would freeze gasoline prices if it would help the energy companies. What this move does is delay the inevitable until Bush is out of office, but I fear it won’t help. This economy has a lot of issues, and despite what my financial planner may tell me, recession could be in the cards for 2008.
In our 2008 Economic Outlook: Wicked housing market spins economy, by Associate Editor Chris McMahon, (page 22) we find that the illness in the housing market is spreading and moving across the entire economy. Right now, in early December, the Street is poised on a “will it or won’t it” crevice on whether the Federal Reserve Bank will cut rates. Last week, it looked pretty good it would. This week, after reviewing the jobs report, a cut of more than 25-basis points is looking less certain. Our analysts provide a long-term view.
In our article, one analyst notes, “at some point the Fed is going to have to disappoint Wall Street and not cut rates when Wall Street is screaming for another cut, just to show that Wall Street doesn’t get to call the tune.” That’s well put, but is it realistic? Gasior notes in his commentary: “Please remind yourself that right in the middle of so many banks and brokers announcing multi-billion write-downs on their subprime holdings, Wall Street was announcing record bonuses for investment bankers and brokers who underwote this garbage. So basically, the employees are out shopping for new homes in the Hamptons and Aspen while the shareholders of their employers are left holding the bag. Nice work when you can get it.” Like I said, I don’t agree with all he says... Not all employees are shopping, the little guys got laid off awhile ago. Whatever the Fed does, one thing is certain: 2008 is sure to be a wicked ride.
