Help me, I'm dumb about all this!

[5boys2girls]

I don't understand a thing about this economy stuff. Not even a little.
Could someone please help me to understand what is going on in our economy in laymans terms ( I mean like preschool level)
Also, what are your feelings on what to expect in the near future?
I have been praying about preparing, but am not sure what, where, when, who.....
anywho, I'm lost on this and just looking for some economics 101.

How serious is this looming crisis?

Thanks in advance. Please no laughing at me for my ignorance.:hehee

[robinhoooood]

First of all... I would like to say no one is FOR SURE about what will happen. Still I will give you my opinion... and I am no expert.

If you want to know what is going on in the market right now as in... why is it falling... It is basically very simple. After the Tech bubble burst after 9/11 interest rates were cut very low making money lending very easy. Between 2003 and 2006 a lot of loans went out to people so they could buy houses causing a massive bubble to develop in housing. A lot of these loans, approximately 14 million or so were subprime, which basically means the people getting these loans didn't have the best credit, but were given money anyway but they were given money that was susceptible to interest rate changes. So every few years their payments would adjust according to interest rates. Well, starting about 1 years ago a lot of these people couldn't affoprd their houses anymore due to a variety of reason and so foreclosures have skyrocketed across the nation. This leads to a lot of people not paying back loans and basically to banks and hedge funds going bankrupt for taking on debt they should have never taken. In turn this is causing housing prices to fall across the nation which makes it harder for people to borrow against their houses and spend that money on other things... which hurts the economy.

The Big picture is... there is fear now that with all these loans not getting paid... a lot of banks will become very picky about who they will give money too and other institutions will be picky about debt they buy... and so no money changes hands and you get a credit crunch... and when that happens... no one gets loans which mean consumers spend less and buy less which in turn causes the market to fall. This is the fear in the market right now and that is why a lot of selling has happened. Not too mention the market was severly overbought.

As far as what will happen... I would say near term... next 3-6 months... the market will continue to unwind and move down... probably have a decent ways to go... with a small chance of a major meltdown, but for sure at least another 10% correction to the downside. Perhaps the Fed will lower rates in September and the markets will prop up again, but if they do they would simply be extending the problem... The market needs to correct and they should try and let that happen. But after this correction gets kinda ugly.. the FED will lower rates and flood the markets with more money.. I expect after this happens... no one will be ready to jump right back into housing or Tech... I imagine the energy industry and metals will experience a rather large boom... I would certainly have my money in those sectors and hold them if I had them.

Overall there is a very big crisis at hand, but it has more to do with the availability of energy in the near future... check out the latest report from the IEA... gas prices and oil prices... natural gas... it is all going up and rapidly.. and it will continue to do so... this is a major problem... and any preparations you think would be good you should be doing. Anyway that is my opinion...

[CelticMist]

Overall there is a very big crisis at hand, but it has more to do with the availability of energy in the near future... check out the latest report from the IEA... gas prices and oil prices... natural gas... it is all going up and rapidly.. and it will continue to do so... this is a major problem... and any preparations you think would be good you should be doing. Anyway that is my opinion...Ours here are going down and still dropping!!! Which for a California town is very unusual... California is not longing paying a dollar plus over the rest of the nation.... some other states are paying more than we are.

[ddg1263]

Robin is correct about a lot of stuff on her post but let me try to expand on it in simpler terms and perhaps add a few thoughts. As robin said, today’s markets are falling because over the past several years people who could barely get by were qualifying for loan for nice houses. You heard the saying on the streets that if you can breathe we can get you in a new home, well these are the loans that are becoming slow. They would finance those loans with an adjustable teaser rates. When those loans were marketed to the market (in essence those customers started paying regular payments on their homes) they could not afford them. So many are letting those homes go back to the lender. Now these lenders are called sub prime lenders, and this is just the start of those foreclosures. On Wall Street, these mortgages are traded like stocks, and the brokers could not get people to buy them at any price, so they label the problem a liquidity issue. This is highly unusual, and people didn’t know how far things would spread. The USA is a big debtor nation. We as citizens and the government owe a lot of money, so you can see how if we have liquidity issue (not being able to trade tradable loans at some price) would be a big problem. The fed and countries across the globe started buying billions of dollars of these mortgages to prop up confidence in each their countries home mortgages. Our problem spread fears to other countries so they had to step in to protect their markets too. It settled people’s fears for a while, but the question is how much damage this will be to main street USA. Will we as consumers continue to buy? Wal-Mart came out today with lower earnings, and as the major retailer for America people noticed. So folks think we may be falling into a recession (people starting to not spend money). Now banks, seeing all this, really don’t like to loan money to riskier investments. This also causes things to slowdown. But DON’T panic. We have always had recessions. Some have been major ones and some have been minor ones. Our country has a problem with the dollar falling, but that is another post altogether. If you are interested let me know and I will explain it to you, but for now I will just keep the issues on hand as our topic.

Now every, country acted in concert to put the genie back in the bottle this past week by supporting loans in their own country showing that we will not let a small liquidly issue be a problem. The Fed may cut our interest rates to prop up a slowing economy, and to help banks start making loans to encourage people to spend more money. This is NOT the melt down that you see everyone talking about on this board. Things could escalate which I alluded to above talking about the dollar. Where do you put your money? Well, if we do fall into a normal recession you need to put your money into food stocks. It is a safe bet that people will want to eat. If you feel like taking a bit more risk, you may want to invest in health care. People will normally pay to get well if they get sick at any cost. You need to be selective here because health care is a big field to choose from. Robin said that she like oil and gold, I personally do not like these plays because I have seen oil go down to nothing during the early 90 because of a recession. If things slow down, people do not travel much. Airlines do cut back flights and creates big surpluses in gasoline supplies (they use a lot of gas). May be electric companies would be good, and we will always use power i.e. the southern company would be a great safe haven with a decent return. Gold has really lost it’s luster as hedge against inflation or as a LONG term safe heaven. You got to remember that people look for earnings when making investments today. Governments, in the past, used gold to back their currency, now they don’t. So gold and all metals really find their real value in industrial use. I have heard some compelling arguments against gold as a safe heaven. So when you have to scratch your head about a safe heaven investment, I normally shy away from it. But I will say it has been use a lot in the past to protect assets against market volatility. I just would not. Newmont mining is a big gold producer if you want to track their stock. But I will say that Robin may be right about oil in the fact that we are in hurricane season, and one is brewing out in the ocean now. If it hits Houston area or New Orleans again, Oil will sky rocket. But if we hit a bad recession, oil will go down. I hope this helps.

[Big Daddy]

I don't understand a thing about this economy stuff. Not even a little.
Could someone please help me to understand what is going on in our economy in laymans terms ( I mean like preschool level)
Also, what are your feelings on what to expect in the near future?
I have been praying about preparing, but am not sure what, where, when, who.....
anywho, I'm lost on this and just looking for some economics 101.

How serious is this looming crisis?

Thanks in advance. Please no laughing at me for my ignorance.:hehee
Here is a nice clear explanation and also you can visit the link and sign up for a free newsletter that always has current info in regards to world situations.

This is just a snip, but you can view the whole article here, it's there current report
http://www.stratfor.com/products/premium/gir.php

Poke around and you will find where you can sign up for free news. Kung turned me on to this site way back when :)

The origins of the crisis seem fairly clear. Traditionally, when banks look at mortgages on homes, they carefully study the likelihood that the loan will be repaid, as well as the underlying collateral. Their revenue and profits come from the repayment of the loan or the ability to realize the value of the loan through the forced sale of the house.

Two things changed this simple model. The first started a long time ago. Encouraged by the federal government, banks that issued mortgage loans began selling those loans to other entities. This, then, created a large secondary market in bundled mortgages -- huge numbers of mortgages grouped together and sold and traded as if they were simply financial instruments, which, of course, they are.

As a result, banks began to view mortgages less as long-term investments than as transactions. They made their money on closing costs, rapidly selling the mortgages to aggregators, which in turn passed them on to others. The banks then loaned the money again. The more mortgages banks racked up, the more money they made. The risk was transferred to others.

In the past few years, two new groups of players entered the scene, one on either end of the spectrum. The first group comprised mortgage companies and brokers, nonbanking institutions whose business model was built primarily around the transaction. The brokers in particular had no skin in the game. Every time they executed a mortgage, they made money. If they didn't execute one, they didn't make money. The role of evaluating the borrower increasingly fell to these entities, neither of which was going to hold on to the debt instrument for more than a moment.

The second group was the final buyers of bundled mortgages -- increasingly, hedge funds. Hedge funds are monies gathered from various "qualified" investors -- otherwise known as rich people and institutions. They are private partnerships, so what they do with their money is between the managers and partners. No federal agency is responsible for protecting the private placement of money by the wealthy.

In a world of relatively low interest rates, wealth-seeking investors flocked to these hedge funds. Some of the older ones were superbly managed. The newer ones frequently were not. With a great deal of money in the system, there was a restless search for things to invest in -- and the secondary market in subprime mortgages appeared to be extremely attractive. Carrying relatively high rates of return, and theoretically collateralized by fairly liquid private homes, the risks of these deals appeared low and the returns on the mortgages -- particularly when you looked at the contracted increases -- seemed extremely attractive.

The fact is that no one really worried about defaults. The mortgage originators that prepared the documentation for these riskier loans certainly didn't care. They just wanted the mortgages to go through. The primary lenders didn't worry because they were going to resell them in hours or days anyway. The mortgage aggregators didn't care because they were going to resell them, too. And the final holders didn't worry because they assumed the system would permit easy refinancing of loans at sustainable interest rates, and that -- in a worst-case scenario -- they at least owned a portfolio of houses that they could bundle and sell to real estate companies, perhaps even at a profit.

The final owner of the mortgage, of course, is the loser. The assumption that subprimes could be refinanced if need be failed to take into account that higher interest rates priced these people out of the market. But the worst part is this: Many hedge funds leveraged their purchase of mortgages by using them as collateral to borrow money from the banks.

That was the tipping point. When the subprime defaults started to hit, the banks that had loaned money against the mortgage portfolios re-evaluated the loans. They called some, they stopped rollovers of others and they raised interest rates. Basically, the banks started reducing the valuation of the underlying assets -- subprime mortgages -- and the internal financial positions of some hedge funds started to unravel. In some cases, the hedge funds could not repay the loans because they were unable to resell their subprime mortgages. This started causing a liquidity crisis in the global banking system, and the U.S. Federal Reserve and the European Central Bank began pumping money into the system.

Told this way, this is a story of how excess emerges in a business cycle. But it is not really a very interesting story because the business cycle always ends in excess. As economic conditions improve, more people with more money chase fewer investment opportunities. They crowd into investments that seem to guarantee vast or sure returns -- and they get hammered. The economy contracts into a recession, as it tends to do twice every decade, and then life goes on.

[Issachar]

Very useful:

http://www.mises.org/resources/2d18b754-8423-45d6-9a48-29a3a1b29b65

Issachar

[5boys2girls]

Thankyou everyone, I feel like I'm getting it a bit.
If anyone has time, I am interested about the falling dollar.
Thankyou for your help!

[robinhoooood]

Thanks for your elaboration ddg...that was a very clear explanation. The only thing I will say is that it would take a very big depression to cause oil demand to come back under our current supply level, and with a forecast decline in oil supply within the next 5 years... we would be talking a very big depression and slow down. Given the estimates of the amount of cars about to hit the streets in China and India as they strive to live more like we Americans do... you can bet oil demand will continue to rise even in the face of a small recession. Oil has only one place to go... as the market corrects we could see the 50's again, but after the Fed cuts rates and liquidity begins to pour back into the markets... oil is going to shoot through $100 before we have a new president. Just my opinion :)

[jereome]

I don't understand a thing about this economy stuff. Not even a little.
Could someone please help me to understand what is going on in our economy in laymans terms ( I mean like preschool level)
Also, what are your feelings on what to expect in the near future?
I have been praying about preparing, but am not sure what, where, when, who.....
anywho, I'm lost on this and just looking for some economics 101.

How serious is this looming crisis?

Thanks in advance. Please no laughing at me for my ignorance.:hehee

Actually you hear that sound? Its the sound of our economy going down the toilet and we are just seeing the beginning signs.

Some here will say this caused it or that caused it but the truth is that the FIAT money system, and uncontrolled spending of our government caused this.

Right now our dollar is basically worth toilet paper, and as people realise that our dollar is worthless its value will continue to spiral downwords, and thats what we are seeing now is consumer confidence in the dollar at an all time low.

The reason for this is because the dollars worth is based upon our Gross Domestic Product, but as anyone knows we are in a serious trade inbalance with our gross domestic product since we import way more now than we export.

Also the worth of the dollar is being inflated because our government cant balance its own spending habits so they print up new money out of thin air to cover this spending but the problem is that the more money you print up devalues the value of the existing dollars since their are more in circulation.

So basically we are in dire straights here, and are just waiting on either the stock market to collapse which I believe its fixing to or those countries that have been financing our spending habits to dump the dollars that they have in favor of a more stable currency like the Euro.

Once either of these happen, you will see another great depression but on a global scale, where all of peoples savings will be reduced to toilet paper overnight, banks will forclose on everyones home that cant pay their debt in an instant, and the cost of a simple product like bread will soar into a price of 100 or even 1000 dollars a loaf.

[Jack Ryan]

The sub-prime market is not such a big problem, however, when you combine it with a massive federal deficit (almost $9 trillion), job outsourcing overseas and rising energy costs you have the makings of potential market implosion. How it will all shake out is unknown, but I have a feeling that the US economy is in for some tough times ahead. If we do get into a recession or depression with a huge federal debt it will be very difficult for the Governent to spend money in an attempt to jump start the economy.