It was Friday and sitting on the couch as I opened WSJ to read the latest news, the first article was on Fed regulators seizing IndyMac bank - a bank that hedged its bet on sub-prime mortgage. Couple of days later, on Sunday night, the news read Federal government decides to back Freddie Mac and Freddie Mae, temporarily increasing the longstanding Treasury line of credit and the Treasury department seeking to buy an equity in both the companies if required. Suddenly all the other bad news is in oblivion. As a common man who lives in a rented apartment, my pain point was oil peaking to $147 which was now relegated into secondary news.
It was a tricky situation for the US government and federal regulators. On one side by backing the two mortgage giants they acknowledged that the two government charted agencies were going in red especially after both the stocks plummeted more than 45% - the general market concern. On the other end, if the government did not act quickly the worst could turn loose with more banks following Bear Sterns except that this time there would be no JP Morgan to save them. The effect would ripple through in the global economy.
Current state:
So far we have only heard of the major financial giants write off bad loans or hedge funds closing or reporting huge losses - all of whom had bet big on housing market. While the above news shows how the bad news has percolated to the root of the housing market which is the government chartered Freddie Mac and Freddie Mae. The trouble at the two big housing giants is probably the peak of the problems creating from the housing boom that occured from late 90's to 2007. Well is it the peak or ? One news is as of 2006, Freddie Mac and Freddie Mae were overshadowed by banks and other investors in issuing mortagage based securities.
How long?
The big question on every one's mind is how long would it be before we are out of this mess. Looking at the housing market specifically, the loans were issued out until mid-2007 in a fashion that is today considered to be reckless and irresponsible. Assuming most of these loans are 5 year fixed APR, the bad loans would surface through out the next 5 yrs and majority of the owners who are big financial banks and firms will continue to write off these as losses. In the best case, even if we could assume that only 5% ( a random number I choose) of these loans would turn into bad loans, there are other factors that have a negative influence. These are a bad economy influenced by an inflation, oil crisis that contributes to a large inflation of basic essentials, the Iraq and Afghanistan wars that will continue for another few years. The best possibility is a remote possibility and can be discarded.
I, personally do not foresee the US economy showing any signs of comfort in the next couple of years and the next President who ever it be - Obama or McCain, will have a rough tenure in handling economy, war, inflation etc.... Good luck President...
Are you frightened? If yes, the good news is I am a ZERO in economics. All the above is based on the general knowledge I have gained reading various new articles. So do not take my words with all reality.:-)
If you are interested in reading about how the housing market got so intricately twined with financial markets, a good read is http://www.imf.org/external/pubs/ft/fandd/2007/12/dodd.htm.
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