Debt Boom Backfires

Bear on Wall StreetIt’s really so simple once you look through his looking glass. J. B. Richards has a simple way of looking at things as an economist for more than 40 years.

“It’s been played out on Americans more than any other place on the planet,” he says. “It’s really a debt boom of monumental proportions. Banks and mortgage companies lent money as freely as they could and then it all came slamming down.

“When you don’t own a house and I mean have title to it without a mortgage it’s really like you’re renting from the bank. That’s the way America has worked for years and the way things are going to change in the near future will be monumental.”

The growth of subprime mortgages and new creative mortgage products made to millions of American homeowners back-fired sending the nation’s financial system into chaos. “It was the failure to properly price such risky products that caused this crisis,” according to former Fed chief Allen Greenspan.

The crisis worsens nearly everyday as home values come down across the over-whelming majority of the country. Housing deflation is running at all-time levels as foreclosures increase monthly. Housing Predictor forecasts that unless government authorities intervene to halt foreclosures a total of 6.4 million will occur through 2011, further damaging the overall U.S. economy. As many as 1 in 10 homeowners could be affected. U.S. leaders are working on a plan to enable more homeowners to refinance homes threatened with foreclosure.

During the height of the boom homeowners refinanced their property at record breaking rates as home values soared, many markets at double-digit appreciation. It was a field day for lenders willing to make mortgages. But its devastating impact has had wide ranging repercussions. Consumer confidence has been lost and the rating agencies of securities have lost the confidence of consumers sending Wall Street on a wild ride for more than a year.

“It will be a new economy with new regulations and laws,” said Richards. “As Congress struggles with the inter-workings of the financial markets fewer and fewer people are investing in stocks and bonds, fearing losses. When the confidence is lost it’s hard to earn back again for any business.”

Congressional leaders are holding hearings to establish new regulations to improve financial markets by re-regulating those that handled the securities, which triggered the mess. “But in the mean time and for many years to come we’ll pay the price,” said Richards. “We’ll see the whole system, including real estate suffer and millions more will lose their homes.”