Is This Financial Armageddon?

Posted by: Dean Foust on August 7, 2007

Is the subprime meltdown creating a Financial Armageddon? If you’re Jim Cramer—the blustery former hedge fund manager who now is an entertainer commentator on CNBC—you think so. This video clip of Cramer from an appearance on CNBC a couple days ago has been making the rounds on the Internet, and is pretty amazing, even for Cramer. He’s screaming that the Fed is asleep at the wheel, and desperately needs to open the credit window and cut interest rates (we’ll see what they announce at 2:15 today, but I’m betting the Fed does nothing) to keep Wall Street and the economy afloat.

What has market mavens/commentators/carnival barkers like Cramer worried is that the Fed keeps interest rates too high and doesn’t provide enough liquidity, so that we repeat the mistakes that Japanese regulators did in the early 1990s, when, as this thread on iTulip shows, high interest rates…

japanzero.jpg


... helped take down the economy and lead to a decade of stagnation...

japandeflation.jpg

Frankly, I'm not sure even if the Fed cut interest rates whether that would encourage lenders to lend. I think the markets and the economy has to work its way through the subprime/mortgage mess, give lenders time to re-establish their equilibrium until they can assess the true default risk on various categories of loans, given that their past models have proven to have failed. I don't know that a quarter-point cut in rates is going to help that process.

Reader Comments

Just me

August 7, 2007 12:49 PM

FED has no business bailing out anyone. We all have to pay our bills alone. FED rates should be raised. Prices's of homes should fall 25-40%. They are well overpriced as is for last 5-9 years.

Stan

August 8, 2007 1:32 AM

i save money, don't borrow, and can't afford even a tiny house out here in LA on my well above average income. Rates are too low for the interest to ever grow into anything substantial and what's left over gets taxed to bail out idiots. When can i get a bailout?

Brandon W

August 8, 2007 8:09 AM

The U.S. is, in fact, on the verge of a financial Armageddon. But it's an Armageddon of our own making and one we are going to have to face. Home prices are increasingly unaffordable to the middle class which is getting poorer as the real median income declines. Health care costs are crushing the middle class (and poor) further. Our national infrastructure is crumbling (Minneapolis bridge, Northeast power blackout, etc.). Our education system is a disaster; K-12 is crumbling and higher education has gotten so expensive that kids come out buried in debt. The whole nation is in debt and most people are scraping by. All of this is due to the shortsightedness, thoughtlessness, and irresponsibility we have shown in the past 50 years. We're selfish, greedy, and most of our corporations don't care about anything beyond the next quarter. Armageddon is almost here, and we deserve everything we get.

I just returned from Costa Rica where I saw many beautiful homes of the wealthy and many smaller - but also beautiful - homes of an upper middle class. Maybe 15% fall into that category. Right next door I often saw shacks. Rows of shacks behind that nice house and entire shanty towns. This is what happens when you have large income disparity, and it's the track we are on in the United States. This won't happen overnight, but if we don't change and we don't learn to think responsibly and long-term, we might just end up there 40 or 50 years from now.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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