CNNMoney.com is reporting a doom-and-gloom scenario that highlights the chaos on Wall Street caused by banks’ fear of loss threatening to bring down the financial system.

We’re suffering the aftereffects of the collapse of a Tinker Bell financial market, one that depended heavily on borrowed money that has now vanished like pixie dust. Like Tink, the famous fairy from Peter Pan, this market could exist only as long as everyone agreed to believe in it.

So because it was convenient - and oh, so profitable! - players embraced fantasies like U.S. house prices never falling and cheap short-term money always being available. They created, bought, and sold, for huge profits, securities that almost no one understood. And they goosed their returns by borrowing vast amounts of money.

…

How is this slowdown different from other slowdowns? Normally the economy goes bad first, creating financial problems. In this slowdown the markets are dragging down the economy - a crucial distinction, because markets are harder to fix than the economy.

A leading political economist, Allan Meltzer of Carnegie Mellon, calls it “an unusual situation, but not unprecedented.” When was the last time it happened in the U.S.? “In 1929,” he says. And it touched off the Great Depression.

We’re not going to paraphrase the entire article. We’d love to add some insightful KoolAidMan commentary, however the article speaks for itself echoing many of the statements that Drinking Is Believing has been providing since its inception.

So, after all this, we end up with the same old story. Whenever you see a financially driven boom and people tell you, “This time it’s different,” don’t listen. It’s never different. Sooner or later, the bubble pops, as it has now. And you and I end up paying for it.

Drinking is believing…

Financial Market, Credit, Kool-Aid, Investing, Economy, Stock Market | 1 Comment »

CNN is reporting that Countrywide Financial is expanding the scope of mortgage help to its customers.

Countrywide (CFC, Fortune 500), the nation’s largest mortgage lender and home loan servicer, has sought to address the growing number of defaults on its books by modifying loan terms, working out long-term repayment plans and other actions. The company said last month it helped more than 81,000 borrowers keep their mortgage payments manageable in 2007.

It looks like a move to save themselves - modify the loans to help customers avoid higher payments, or keep existing terms and have a large percentage of those loans go into default/foreclosure. What will happen to all the packaged investments that bought into those loans under the original terms? Will the investors get stuck footing the bill?

Under the latest plan, borrowers with subprime hybrid adjustable-rate mortgages, which typically were issued with a low “teaser” interest rate and then adjust higher after two or three years, could be offered the option of refinancing into a lower prime rate loan, or have their initial interest rate frozen for five years.

They weren’t prime borrowers when they first obtained these loans, but all of the sudden they’re given the option to refinance into a prime rate loan? What are the odds that this would work out? With home values falling all over the place, there’s not much incentive to many borrowers who put no money down. There will certainly be some people who will benefit from the new terms, but this will have little effect on hyperinflated bubble cities or regions.

Homeowners with fixed-rate subprime loans who have fallen behind on payments could be offered short-term repayment plans, loan modifications or other adjustments, including having their interest rate frozen or adding their overdue balances to their principal loan amount.

This is no different than a negative amortization loan - you’re behind on payments, so they’ll kindly roll your balance onto the principal (which will generate more interest, which means higher payments).

These proposed assistance or bailout plans sound nice, but they seem like nothing more than last ditch efforts to postpone the inevitable.

Credit, Kool-Aid, Real Estate | 1 Comment »

Big apologies to our regular readers. The KoolAidMan took off on a last minute vacation halfway around the world, in the middle of the Pacific Ocean to be exact.

He’s had very little access to the internet and mainstream news, choosing to go hiking, diving, and fishing instead, but boy was he shocked to turn on the TV to hear the latest news from the Federal Reserve!

Just prior to leaving on this last minute yet well needed vacation, we made a post which mentioned that the Federal Reserve was “ready to take ’substantive additional action’ to cut interest rates in order to support lagging economy.” Well now we see they weren’t kidding around.

Will a major rate cut solve any problems, or is it merely a Band-Aid to temporarily delay an inevitable downturn?

Stay tuned as the KoolAidMan has much more to post in the next day or two related to the Real Estate market in a U.S. territory out in the middle of the Pacific Ocean. Over here it looks just like California only three years behind!

Interest Rates, Credit, Financial Market, Kool-Aid, Economy, Stock Market | 3 Comments »

CNN reports that the Federal Reserve is “ready to take ’substantive additional action’ to cut interest rates in order to support lagging economy“.

We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” Bernanke said in prepared remarks before the Women in Housing and Finance and Exchequer Club in Washington, D.C.

However, some economists suggested that rate cuts may be too late to stop a recession.

While lower rates might provide some stimulus to the economy, they’re certainly not going to help the value of the US dollar. Didn’t ridiculously low rates get us into this mess in the first place? Let’s hope Wall Street uses this as an opportunity to lessen the pain. The cheap money just might keep the economy running on fumes for a little while longer as long as loose lending doesn’t return.

Low rates could potentially help turn things around by allowing any borrowers (individuals or businesses) to refinance their current debts and reduce payments, allowing debts to be paid off. But doesn’t our financial system (and many banker/broker commissions) depend on the continuous creation of new debt? Our economy is heavily dependent on debt - without the ability to obtain credit, most people can’t buy their shiny toys. As long as the Federal Reserve does everything in its power to ensure consumers can borrow money to spend our economy will remain healthy.

At some point down the road the debt needs to be paid back, and that could be a concern. There’s a possibility that a large number of consumers are way over their heads in debt, beyond anything we’ve seen before.

Bernanke also warned that the economic outlook for 2008 is not so good:

“Downside risks to growth have become more pronounced. Notably, the demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets,” Bernanke said.

“In addition, a number of factors, including higher oil prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008,” he added.

It seems like somebody forgot to drink their Kool-Aid today.

Credit, Interest Rates, Kool-Aid, Economy | No Comments »