Yes, the crisis is expected to end on fall 2010.
Friday, March 20, 2009
Heard A lot about crisis solutions
Seems to me we've had this problem before. The government subsidized agriculture back in the 60's and 70's and created huge agricultural surpluses and about 100,000 farmers that the free market would never have created. To solve the problem Regan stopped the subsidies and paid farmers in surpluses of crops. It was called Payment in Kind. Eventually, those excess farmers all went out of business and we had the "Farm Aid" concerts, etc., that some of you may remember.
It seems to me the best way to address the economic problem we now face is for the government to buy up the foreclosures and sell the properties back to the construction industry over time (at some discount of course) in exchange for them not building new houses. This would be similar to the Payment in Kind program.
The market is adjusting to a housing surplus, and it cannot be stopped. The current financial rescue plan just passed by the senate will not stop it, and will just be a huge waste of money.
Now, this idea would probably be even more expensive than the 700 billion, but it would be a solution.
It seems to me the best way to address the economic problem we now face is for the government to buy up the foreclosures and sell the properties back to the construction industry over time (at some discount of course) in exchange for them not building new houses. This would be similar to the Payment in Kind program.
The market is adjusting to a housing surplus, and it cannot be stopped. The current financial rescue plan just passed by the senate will not stop it, and will just be a huge waste of money.
Now, this idea would probably be even more expensive than the 700 billion, but it would be a solution.
Thursday, March 19, 2009
Refinance
I am receiving a lot of questions about Refinancing.
So I think this definition would be helpful.
When an owner obtains a new first mortgage on his real estate, the homeowner has undergone a home refinancing. Simply put, think of homerefinancing as trading in an old first mortgage for a new first mortgage.
To refinance a home, the homeowner must apply for a new mortgage. During the application process, the subject home will undergo a newappraisal to determine its value, and the homeowner's credit file will be reviewed. The lender will also order a title report on the property to search for any other liens that may appear. Assuming all these items meet with the lender's approval, the loan will be approved.
Once approved, the homeowner will meet typically at the office of the lender or title company to sign the new mortgage. The proceeds of the new loan will be used to pay off the old first mortgage as well as any additional mortgages and liens on the property. Accordingly, the only mortgage showing on the home after the refinance will be the new loan itself.
Homeowners frequently seek to refinance their home when interest rates fall below the rate they had on their mortgage when they first bought their home. For instance, if a homeowner had a 30-year mortgage at 8% and a loan of $100,000.00, it would be wise to seek a refinance if theinterest rates fell to 6%. The savings in such a situation would be $134.00 per month. Over the life of the loan, the savings could reach a total of $48,240.00. If the loan was for $200,000.00, the monthly savings would be $268.00, an almost $100,000.00 savings over the life of the loan. Accordingly, when determining if it is worthwhile to refinance a home, the homeowner should weigh the long term savings against the costs involved in the refinance and the length of time the homeowner intends to stay at the home to insure that the refinance is worthwhile.
Costs typically involved in a refinance include: points, document preparation fees, tax service fees, title expenses, appraisal fees, and other lender's costs. Of these, the "points" are typically the most expensive. Using the $100,000 loan example again, for a refinanced loan with one point (1%), the homeowner would pay a fee of $1,000.00 to secure the loan. If two points (2%) are being paid, then the homeowner would pay $2,000.
Act of 1933
This is from new york times and it will answer your questions about "Are we going back or it's not as bad as 1929 crisis".
Happy reading, pay attention to last sentences.. Amazing...
"In order to begin to understand what happened, it would be quite useful to look back into the past. A "view of the forest" from the historical perspective could help policymakers formulate better policies in the future.
The Glass Steagall Act of 1933
The 1933 Glass Steagall Act of the US Congress was a reaction to the widespread bank failures that accompanied the Great Depression. It was observed that banks invested their deposits in the stock market, underwrote new issues for distribution to the public and lent to the companies that issued stocks that the banks underwrote. It is, therefore, easy to imagine how banks have failed when the prices of stocks dropped massively during the Great Depression.
The Glass Steagall Act separated commercial banking from investment banking. Commercial banks could take deposits but could not do underwriting except for US government securities. Under the Act, no more than 10 percent of a commercial bank's income could come from securities. Investment banks could do securities underwriting and broking but could not take deposits. The Act also created the deposit insurance system to protect the deposits of the public.
The rationale for the Act is quite clear from the historical perspective. It was to prevent banks that were taking deposits from the public from putting these deposits at risk by taking big positions in the stocks of companies. At the same time, it prevented conflicts of interest in banks that were underwriting stocks of companies for public distribution and lending to those companies at the same time. It is like a bank selling a company's stocks to the public so that it could be repaid."
Yes It's new but read why
You sent me tons of messages about economic crisis and although I've been trying to answer one by one, now it's impossible for me to reply all.
So that I decided to answer all your questions about mortgages, crisis, loans and economic crisis as much as I can. I'll be sharing articles that find useful about economy. Believe me it will be answering almost all your questions.
Anyways, thank you again again for your amazing support. You made this one the most popular blog. I'm receiving a huge demand!
Keep it reading! :)
Wednesday, March 18, 2009
Thinking about a Loan?
I found this very interesting:
overnments of most countries seek to encourage Small and Medium Sized Enterprise (SME) growth and the job creation that many believe is fostered by such growth. Substantive growth usually requires expansion capital. It is often perceived that compared with larger firms, SMEs face disproportionately less access to the debt capital they need for start-up, growth, and survival. Consequently, governments and trade associations have often intervened in credit markets by taking on the role of guarantor of loans that financial institutions advance to SMEs. For example, the Small Business Administration in the United States provides guarantees of loans made by banks to qualifying small firms. Similar schemes are in effect in, among other countries, Canada, Japan, the U.K., Korea, and Germany. Trade associations take on such roles in France, Spain, and other nations.
Loans that support the expansion of small enterprises may convey significant benefits to the borrowing firms and, through job creation and retention, to the rest of society. However, to the extent that some borrowers are unable to meet the repayment obligations of their debt, guarantors also face material real costs of honoring their guarantee to the lenders. Loan guarantee programs are designed in a variety of ways. Often these programs do not appear to reflect guidance from economic theory or experience. This paper draws on empirical evidence to compare costs with benefits. In addition, it uses the results and economic theory to provide some guidance for the design of loan guarantee programs. Finally, the study shows that loan guarantee programs can be an effective means of supporting start-up, growth, and survival of new and risky enterprises. The work finds that substantial total and incremental job creation may be attributed to the Canadian loan guarantee program.
The paper reviews previous attempts to conduct cost-benefit analyses of loan guarantee programs. It finds wide variation, internationally, in default rates. Published data suggests default rates vary from less than 5% (Germany) to more than 40% (U.K.). The empirical analysis reported here focuses on the Canadian implementation of loan guarantees, the Small Business Loans Act (SBLA). Findings include (1) loan guarantees granted under the terms of the SBLA provide an extremely efficient means of job creation, with very low estimated costs per job; (2) default rates are higher for newer firms, increase with the amount of funds borrowed, and vary widely by sector (borrowers in the retail and accommodation, and food and beverage sectors were significantly more likely to default than borrowers in other sectors); and (3) the widening eligibility to larger firms and to larger loans may not be well advised and is inconsistent with the goals of the program. Moreover, reducing the loan ceiling would arguably discourage fraudulent applications while servicing those SMEs most in need of early-stage capital.
In addition, analysis of the lenders' motives suggests that default rates on the portfolio of guaranteed loans and, therefore, the costs of honoring guarantees, are particularly sensitive to the level of the guarantee. Small reductions in the level of the guarantee (for example, guaranteeing 80% of principal and accrued interest instead of 85%) could lead to substantial reductions in default rates.
Debate persists in economic theory about whether or not government intervention in the credit market is warranted, in spite of the findings that loan guarantees seem to make positive contributions. Further analysis of these issues is advised.
Tuesday, March 18, 2008
Solutions Of Economic Crisis
Can it really be true?
The stock market has seen its greatest ups and downs since the 1930s. The government has offered a massive bailout to the country's financial giants, but not before one Wall Street titan crumbled in the credit crunch. Even the experts' ideas for solving the crisis are all over the place.
"Certainly there will be increasing amounts of taxes that will need to be paid by the wealthy to finance the cost of shoring up the system," said Mark Wolfson, a consulting professor in accounting and finance at the Graduate School of Business. "I have no doubt that will occur no matter who is the next president."
Not so fast, says a close adviser for one of the men who may hold that title.
"That's backward," said John Taylor, a Stanford economics professor and member of Sen. John McCain's economic policy team. "Who would increase taxes at a time like this?"
So it went Friday during a nearly two-hour-long panel discussion in which five economic experts mixed market theory with gut speculation while taking stock of the world's financial crisis.
The forum, organized by the Stanford Institute for Economic Policy Research as part of Reunion Homecoming 2008, was moderated by SIEPR Director John Shoven.
Speaking just before President Bush's weekend meeting with world finance ministers, Wolfson predicted the stock market might be closed early this week to give Wall Street a chance to stabilize. Taylor said such a move was highly unlikely.
He was right. The Dow Jones industrial average shot up 936 points Monday, the market's biggest gain in more than 70 years. Fueling the Dow's surge was news that the government would invest up to $250 billion in the country's banks—the latest and boldest step taken by the Treasury Department during the current crisis.
A few of the panelists gave high marks to how Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have been reacting, but criticized Paulson for allowing investment banker Lehman Brothers to collapse. That failure helped cause a surge in the rates that measure how much banks charge to lend to each other, which in turn led to the current credit freeze.
It also scared ordinary investors—a drawback some say was greater than Paulson's fear that a Lehman bailout would increase moral hazard by sending a message that the government would always provide a safety net for risky investors.
"When the house is burning down and the fire crew is there and the firefighters are hosing down the house putting the fire out, it's not the time to turn off the hose and give the homeowners a lecture about smoking in bed," said Business School Professor Darrell Duffie.
Despite Paulson's misstep with Lehman Brothers, Wolfson said the Treasury secretary should be given more power to act "unilaterally" in addressing the crisis. He said waiting for Congress to debate and act on any more proposals like the $700 billion rescue package passed two weeks ago could stall badly needed action.
"It's the one great hope of getting our system back on track," said Wolfson, who is also managing partner of Oak Hill Capital Management.
The other panelists also suggested pieces for an overall financial fix.
Taylor echoed several of McCain's proposals, including calls for a government spending freeze and new programs to grow the job market. Anne Casscells, managing director and co-president at Aetos Capital, said Americans need to save more and avoid refinancing their mortgages to pay for vacations, college tuitions and medical emergencies.
Duffie said risk managers at financial institutions need to have a greater say to help put the brakes on runaway profits. And Dennis Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, said those companies and the country's banks will likely restructure their business models if they learn any lessons from the financial meltdown.
But everyone seemed to agree on at least one thing: The mess will not be cleaned up soon.
"I would say we have some time more to go," Lockhart said.
The stock market has seen its greatest ups and downs since the 1930s. The government has offered a massive bailout to the country's financial giants, but not before one Wall Street titan crumbled in the credit crunch. Even the experts' ideas for solving the crisis are all over the place.
"Certainly there will be increasing amounts of taxes that will need to be paid by the wealthy to finance the cost of shoring up the system," said Mark Wolfson, a consulting professor in accounting and finance at the Graduate School of Business. "I have no doubt that will occur no matter who is the next president."
Not so fast, says a close adviser for one of the men who may hold that title.
"That's backward," said John Taylor, a Stanford economics professor and member of Sen. John McCain's economic policy team. "Who would increase taxes at a time like this?"
So it went Friday during a nearly two-hour-long panel discussion in which five economic experts mixed market theory with gut speculation while taking stock of the world's financial crisis.
The forum, organized by the Stanford Institute for Economic Policy Research as part of Reunion Homecoming 2008, was moderated by SIEPR Director John Shoven.
Speaking just before President Bush's weekend meeting with world finance ministers, Wolfson predicted the stock market might be closed early this week to give Wall Street a chance to stabilize. Taylor said such a move was highly unlikely.
He was right. The Dow Jones industrial average shot up 936 points Monday, the market's biggest gain in more than 70 years. Fueling the Dow's surge was news that the government would invest up to $250 billion in the country's banks—the latest and boldest step taken by the Treasury Department during the current crisis.
A few of the panelists gave high marks to how Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have been reacting, but criticized Paulson for allowing investment banker Lehman Brothers to collapse. That failure helped cause a surge in the rates that measure how much banks charge to lend to each other, which in turn led to the current credit freeze.
It also scared ordinary investors—a drawback some say was greater than Paulson's fear that a Lehman bailout would increase moral hazard by sending a message that the government would always provide a safety net for risky investors.
"When the house is burning down and the fire crew is there and the firefighters are hosing down the house putting the fire out, it's not the time to turn off the hose and give the homeowners a lecture about smoking in bed," said Business School Professor Darrell Duffie.
Despite Paulson's misstep with Lehman Brothers, Wolfson said the Treasury secretary should be given more power to act "unilaterally" in addressing the crisis. He said waiting for Congress to debate and act on any more proposals like the $700 billion rescue package passed two weeks ago could stall badly needed action.
"It's the one great hope of getting our system back on track," said Wolfson, who is also managing partner of Oak Hill Capital Management.
The other panelists also suggested pieces for an overall financial fix.
Taylor echoed several of McCain's proposals, including calls for a government spending freeze and new programs to grow the job market. Anne Casscells, managing director and co-president at Aetos Capital, said Americans need to save more and avoid refinancing their mortgages to pay for vacations, college tuitions and medical emergencies.
Duffie said risk managers at financial institutions need to have a greater say to help put the brakes on runaway profits. And Dennis Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, said those companies and the country's banks will likely restructure their business models if they learn any lessons from the financial meltdown.
But everyone seemed to agree on at least one thing: The mess will not be cleaned up soon.
"I would say we have some time more to go," Lockhart said.
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