Yawn, More Billion Dollar Financial Losses
Obviously the housing mortgage problem was bigger than many people thought. No, the losses aren’t just from subprime. Subprime assumes that people were paying a higher interest rate than average because of poor credit. The truth is that creative loans and loose money made it possible for people to purchase homes using stated income while still getting rates much lower than prime while underestimating true income levels.
Another thing that has added to the mess is the ability for homeowners to borrow money against their equity as housing values increased to extremely high levels. This allowed homeowners to borrow extra money while seemingly having very low risk levels to the bank.
This obviously wasn’t the case as borrows took on too much debt and the value of the homes were inflated beyond sustainable levels. Now that the prices of homes have dropped, homeowners are forced to pay down debt as opposed to getting new debt.
The effect that this has had is that it has slowed spending in many different areas of the economy such as car sales, furniture sales and home improvement sales.
Some of these homeowners took on too much debt and are late on mortgage payments. As a result, the companies in the mortgage business are finally seeing the deep losses as a result of this and will probably see more to come.
Everything has been going as predicted with credit tightening, big losses, government hearings on mortgage practices. The economy is following a boom/bust sequence that George Soros described in The Alchemy of Finance. Credit tightening as a sure sign of this.
The government is now planning on injecting even more money into the economy which will make the dollar worth even less. The result of all this is going to be inflation not deflation as some people mistakenly think. This can be seen as European countries increase the price of goods to the US. China and other countries may follow suit.
The US is a country that imports more than it exports so everything is going to start costing more even if it isn’t Americans causing the inflation by rapid spending. This time, the inflation is going to be coming from the weak dollar.
If you enjoyed this post, please leave a comment or subscribe to the feed and get future articles delivered to your feed reader.