Like most that might read this, I've been sitting on the sidelines and listening to others and their ideas of how we got into our current financial dilemma. But I now feel compelled to share my own thoughts. Those of you like me that are entering your retirement years must look at the state of things and wonder where the America that we grew up with has gone, and that is what I’d like to talk about.
Somewhere along the line American leaders both in business and politically have sold us out for profit and we let them do it. With all the safeguards that were built into our economic system after the great depression, how can we have a failure in our financial institutions to the magnitude that we are now experiencing? It happens when the people we elect to represent our needs find it profitable to represent special interest groups and the interests of government entities that are bent on cultivating their power and influence on us the voters.
We also must conclude that top executives from US corporations are no longer looking at what benefits the American worker and his purchasing power as they now turn their eyes toward a global marketplace for both selling and manufacturing their products. I want to call this the killing of the goose that laid the golden egg. But I’ll leave that for another blog as that is a discussion in itself.
If we look at the financial disaster we find ourselves in and boil it down to a common denominator, it shows us that the loans made and institutions that we hear about failing could not have happened without low interest rates. That was the direct result of the Federal Reserve and begs the question of why you would push interest rates down and create a false economy. In other words, with lower interest rates more people are going to qualify for loans they never would have under normal circumstances. This creates more demand for housing and drives the price up. This is how we got to the edge of the abyss - a market that goes up faster than the average person’s earning capabilities forms the bubble that will and did burst.
If this makes sense to you, then why would the fine men in charge of the Federal Reserve allow this to happen? I myself can only believe that it was a political decision based on the government's decision to lower taxes and then fight two wars, not to mention a new unfunded prescription drug program. You may not see the link at first, but follow me for a minute.
They lowered your federal taxes to make you feel good. That meant less money being sent to the states via the federal government and less to the counties and local governments. That slack had to be made up somewhere which became the appreciation in property values that are taxed at the local and state levels. It was a boon to these local governments while it lasted. But if you stop and add what your total tax burden is since the reduction of federal taxes, I think you might be surprised. It’s like squeezing a balloon - it gets bigger somewhere else.
We could also go into the bundling of loans that were sold from lending institution to institution like a game of musical chairs, not to mention Freddie Mac and Fanny May, but again remember if we hadn't had artificially low interest rates none of this would have been possible. While we’re on the subject of interest rates, we are still living with low interest rates which are doing nothing to encourage people to purchase property. If you are beginning to see where I'm going here, then we need to let interest rates seek their own level for two reasons.
First, people do not rush to purchase property when rates are steady or going down - they tend to watch and wait to get the best deal they can. But as interest rates rise it sends people to their lenders to make a purchase before the rate goes higher. This creates buyers that will enter a market that they might have continued to sit on the sidelines watching.
This might be the catalyst we need to create the demand in the market to drive real estate in the right direction. If lower interest rates were the answer, they would have already begun to work. If you can see that real estate got us into this mess, then real estate is the only industry large enough to get us out.
The second part that interest rates play is the affect on your purchasing power. If you have any kind of savings account you know how frustrating it is to see the meager amount of money earned at your local bank on your savings. Again, if interest rates were allowed to go up, that in turn would allow people to make a decent return on their savings giving them more purchasing power.
We need to be aware that this would also create a burden on those who have to finance cars and other hard goods, but with the fastest growing segment of our population being retirees this would add a tremendous amount of discretionary spending into the economy. At this point I think we have to consider inflation as part of the discussion as I know there are going to be those that will be worried about it.
I am more concerned about deflation of our currency to the point we no longer are the currency of choice, which could make commodities like crude oil even more expensive than it is now. We purchase too much abroad now not to be concerned about it. Also, inflation usually will stop itself when demand falls because of price. But remember this, we have inflation now with food and oil to mention just two. We normally would have a hedge against it with the appreciation in our real estate values going up along with our wages. Since we have neither, it is an inverted bubble waiting to burst in the opposite direction. At the rate of inflation we now endure, how long can we enjoy even a reduced standard of living without an increase in income from all segments and a stabilization of our property values.
There are many parts to the problems we face and it seems complicated, but if it’s taken a piece at a time it can be understood and solutions found. But if we continue to use the same ideas and the same people that got us here to solve our problems, we will end up with the same results.
There are other things I would like to discuss and if there is any interest I would like to return. Remember I don’t claim to be right only that I have an opinion. Thanks for listening.
Mr. Anybody
