28 February 2008
Glenn Beck Boils Down Economic Woes
Posted by Joy Bischoff under: World Economy .
Here is the last half of an article from CNN by Glenn Beck. I like his point; we can’t be sure what is coming down the pike but it would be foolish to not be prepared.
by Glenn Beck
Professor Roubini recently laid out what he called the “12 steps to financial disaster.” Unfortunately, they were really complicated, and I have severe ADD, so I’ve boiled them down into five phases that even a rodeo clown like me can understand.
I think of these like our military’s “DEFCON” — or defense readiness condition — scale, except that this countdown could end in the meltdown of your bank account:
• DEFCONOMY FIVE
How you’ll know we’re here: The housing downturn turns into a free fall, making it the worst collapse in our country’s history. That not only triggers massive numbers of foreclosures and lost household wealth, but it also sets off another large wave of bank write-downs.
Odds we get here: Roubini told me that it’s “extremely likely, even unavoidable” that we hit this stage because “the excess supply of new homes in the market is like we’ve never seen before.” Prices, he believes, “need to fall another 10 to 20 percent before that clears.”
• DEFCONOMY FOUR
How you’ll know we’re here: Americans upside-down on their mortgages and unable to pay their home equity loans begin defaulting on other debt, like credit cards, car loans and student loans. In addition, bond insurance companies lose their perfect credit ratings, forcing already troubled banks to write down another $150 billion.
Odds we get here: High. Roubini says that 8 million households are already upside-down on their mortgages and he thinks we could see that number go to between 16 million and 24 million by the end of 2009. A lot of those people, he believes, will simply walk away from their homes and send their keys back to the bank.
• DEFCONOMY THREE
How you’ll know we’re here: Some banks begin to crack under the pressure of continuing write-downs and mounting defaults by consumers. A national or large regional bank finally collapses, triggering hedge fund failures and general chaos on Wall Street, potentially leading to a 1987-style market crash.
Odds we get here: Very good. Roubini says that we’ll likely socialize the losses, “effectively nationalizing the mortgages or the banks.” It would be, he told me, “like Northern Rock (the large bank in England that was recently taken over by the British government) times three.” He thinks the stock market will head south throughout the year as fears about a severe recession are confirmed.
• DEFCONOMY TWO
How you’ll know we’re here: Most forms of credit (both to consumers and businesses) become virtually nonexistent. That results in a “vicious circle” of additional write-downs, stock market losses, and bank collapses, which leads to even less credit being available.
Odds we get here: Good. Roubini says that credit conditions are becoming worse everyday across a variety of markets and won’t be getting better anytime soon. Without extra credit available, people might have to actually (gasp!) live within their means.
• DEFCONOMY ONE
How you’ll know we’re here: Welcome back to 1929. A full economic meltdown results in a complete failure of the underlying financial system. What will be known to future generations as “The Greater Depression” has arrived.
Odds we get here: Not likely. Roubini believes that this will be a “very painful and severe recession” that could last for 18 months or more, but it will be more like 1981 than 1929. Families may be eating soup again, but at least it’ll be in their own kitchens.
Now, do I think any of what you just read will happen?
I have no idea, and that’s exactly the problem. I’m not an economist or a stockbroker; I’m just a guy trying to make the best decisions I can, and picking the brains of real experts helps me do that.
But I do know one thing for sure: Depressions aren’t advertised in advance. Last time around we went from the Roaring ’20s to bread lines in a matter of just a few years.
Anyone who says that can’t happen again either doesn’t know history, doesn’t understand how interconnected the world’s economies have become, or is lying to you. While that doesn’t mean you should panic, it does mean you should prepare — something my grandfather would’ve done a long time ago.
3 Comments so far...
Cavetrollhead Says:
28 February 2008 at 7:59 pm.
I have to admit some of this is over my head. Maybe if I understood what a write down is. . .
SGS Says:
29 February 2008 at 11:37 am.
Cave, I am glad you are blazing the trail here by asking a first question. I am sure you are not the only one. Please understand that I am not an economy expert. I may be wrong; it looks like Joy knows more about it, so hope she will correct me.
A company normally has many accounting ways to postpone the losses. However, when the company “writes down,” the company will absorb the loss. It often will lower their debt rating (like us with our FICO scores). However, their loans are not fixed over a long term. When their rating is lowered, their interests go up. Because they now are paying more in interests and they continue to “write down” loss quarter after quarter (which is inevident as long as our housing market is shaky), they will see less and less profits. This happen with a small number of companies all the time. The difference is that this time around, we may be seeing the above-average number of companies having to write down.
Joy Bischoff Says:
29 February 2008 at 11:49 am.
SGS, I’m glad you took that one. You explained it better than I would have. I’ve been meaning to get to this but forgot. I’m juggling too many projects at once right now so thanks.
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