Jim Cramer says, the root of all financial evil right now is house price depreciation?
Does any one care to take a stab at explaining this statement? How does home depreciation have such a profound effect on the financial markets, etc?
Lisa, I don’t understand what you are saying. Did you address my question?
It seems like you are bitchin in general.
But perhaps I am too dense to get what you are saying.
Think of dominoes. If one tips, the next one in line will soon feel its weight and tip as well, causing a subsequent impact on another economic sector.
The subprime mortgages freely approved and massively generated by the mortage markets created many instruments that were bundled together by investment banks and sold to foreign investors as securities yielding a given interest rate as sound, secured investment grade yields. This situation alone involves the consumer (home owner), the mortgage bank, the investment bank, and the acquiring bank/individual account holders. When the poor quality of many of those loans started to become known due to defaults, then many banks and holders of those mortages had to srtart generating income some other way. Since their mortgages were defaulting, and some people started walking away from their houses, they were left with both no monthly payment income, AND a house that was worth less than market value (predominantly in highly speculative markets like southern California, AZ, NV and Florida). This requires banks to start selling other security holdings to generate cash, because no one wants their poor quality debt instruments. Now they’re stuck, because they have to start selling their high quality securities to raise cash when their large depositors want their cash. This further deteriorates their income base. When they sell their best holdings, this does not inspire confidence in the market and triggers others to sell when prices deteriorate. Because they (banks) are short of cash, when healthy businesses need cash as usual, but can’t secure it (due to the shortage), this raises the rates of available credit (due to scarcity) and causes businesses to have to cut back on their employment, investment, expansion plans, and product inventory and manufacturing. Now, think of all the people manufacturing things for those businesses who are starting to get less orders… and think of all the companies and workers who supply materials and labor for the housing industry who are losin gorders on a massive scale, and income on a massive scale, because they are not working or sellin ggoods. These individuals and companies cannot afford to spend in the economy and help the economy, because their income has been trimmed back, or is nonexistent. All of these things mean the retailers cannot sell as many school supplies, clothing, prepared food, etc. And as the dollar devalued, it made all commodities cost more, such as grains, milk, metals, fuels, etc. It is all an interrelated downspiral just as growth periods are an interrelated upward spiral. Cramer is right to say that if we can stabilize the value of homes, and get homebuyers in action, we can begin to see a bottom, restore confidence in consumers, and get people spending on homes, autos, stocks, etc. across the entire economy, starting a spiral up.
I hope this is of help to you.
This process was unleashed by a lot of liberal politicians insisting that everyone “deserved” their own home, and forcing the legislative climate, easy credit, and unsecured debt to allow it. This is horrible for the economy. Please remember this at election time and vote the Democrats out. The same inept bureaucrats who created the Fannie Mae and Freddie Mac debacle, supplying government funds with no limit, but allowing personal profit and a ridiculous lack of accountability. Throw them out.
Jim Cramer on Smart Investing | “Glenn Beck Program”