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Originally Posted by Aliantha
OK...so what's the average American paying on their home loan at the moment then?
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No longer know what the interest rates are. But the problem is this. Triggers on ARMs adjust those interest rates closer to 10%.
Why is this problem? Before George Jr, the average American had an outstanding debt equivalent to 80% of his disposable income. Since the average American income has dropped 2%, then Americans have debts of 140% of disposable income to maintain his standard of living.
Obviously, this meant America should have entered a recession. Recessions fix irresponsible economic activity. Instead, government stimulus encourages new money games so that recession would not occur (rather than address the fundamental problem). People who could not and should not own homes were able to obtain ARMs mortgages - that were virtually non-existent a decade earlier. Even worse, these money games were given to the richer and richest. Suddenly a successful middle class homeowner who could only afford a 3,000 square foot house was now buying 4,000 square foot homes - at even higher prices. ARMs and mortgage backed securities (all with virtually no underwriting) made this possible.
Further making reality ignored were massive investments from China, Japan, UK, etc because the ROI in America was higher due to these money games and because so many American dollars are now overseas. Risk assessement? Virtually non-existent even in risk rating companies such as Moodies, S&P, etc.
Obviously, a lower Fed rate means the banks can offer lower mortgages. But then another consequence of deregulation this past decade creates more problems. Because of those low interest rates, prices of houses increased 40% above real value. How do you refinance a homeowner who owes more than the new house value? He cannot refinance because he is technically banckrupt. Due to credit card and car payments, he cannot acccure equity. Banks just don't know who is safe to offer a loan AND can no longer sell that loan to others who worshipped NINJA (ie mortgage backed securities).
In short, a money shortage is not the problem. Lower Fed rate is how we pump money into the economy. We are literally trying to unfreeze markets by flooding finance companies with even more cash even though many need to first fire bad management. Cold water on ice takes a long time to thaw that ice. Welcome to an America where the spread sheets have been lying for a long time.
The American economy has frozen for reasons created by easy money and economic stimulus where we routinely threw money at problems rather then let recession fix the problem - ie fire so much business school trained management such as Rick Waggoner of GM. Now that the economy is frozen, we will spend almost $2trillion of cold cash to eventually thaw the ice. Then borrow from all over the world or sell off America to cover those $2trillion debts while suffering the inevitable inflation or recession or both.
Only thing I cannot say - how severe economics will punish us and who will be punished for the sins encouraged by the few in highest positions of industry and government.