Chris Tomaras / Straight Talk / November 15, 2008

A huge question in people’s minds is are we going to continue to have a free market enterprise or a nationalized welfare system and how can the average American makes heads or tails out of this massive economic confusion?
Let me start off by saying there is good reason to be concerned.

In order to put some perspective on where we are let me quickly review what has happened and what is happening as we move forward.

What we are dealing with in the economy is a raging out of control forest fire and we’re not sure which areas to douse and how much water to throw on it before we run out of water, the alternative is to let it burn itself out, the risk being that nothing will be left in the end.

I commend President Elect Obama attempting to gather the greatest firemen in the country to try and put out the fire but without enough water what difference will it make.

We have exhausted the subject in prior weeks with everyone agreeing that all those involved in this crisis made critical mistakes to the point of what I personally view as criminal. As a result we are faced with the largest financial crisis since the great depression with thousands of homeowners facing foreclosure and bankruptcy. This has caused record numbers of banks, homebuilders, and related businesses to close their doors. This created a panic with consumers withdrawing money from banks, the financial markets crashing and consumer spending coming to a screeching halt.

Banks stopped loaning money and many businesses are now faced with the inability to function because of a lack of liquidity. Because other countries around the world depend greatly on the US economy with huge financial investments in US products, the financial meltdown has extended around the world.

Treasury Secretary Paulsen, the administartion and the FED pushed the panic button in order to pass the 700b bailout in order to buy up toxic home loans. Shortly after the bill passed it was decided that a better strategy would be to buy shares of stock in banks in order to create immediate liquidity, to get the system back functioning and alleviate the panic and fear in the markets. Also, as we discussed last week, the banks instead of lending the money as was intended, acted opportunistically by buying up other banks.

Looking all the way back to 9/11, Alan Greenspan and the FED sharply lowered interest rates without proper oversight and regulations in place, especially restricting unlimited speculation in the housing market, which has led us to the mess that we are in. I only hope that the billions of dollars the Treasury is using to purchase bank stock has restrictions attached so that its intent to stimulate the economy by making loans is soon carried out. We haven’t seen it so far. The one positive I see is that the US and its allies are acting in unison to control the crisis versus one trying to outmaneuver the other.

The financial crisis is so wide-spread, the only way for the global economy to survive is that all governments work together.

With this in mind, there has been a lot of discussion about the great depression so I’d like to briefly discuss some of the similarities and differences between what we are currently experiencing and what went on back in 1929 and the years to follow.

The first and most obvious similarity is that the stock market in both instances plunged sharply. Remember however, the stock market lost 90 percent of its value in the Great Depression and it took decades to recover. The difference today is the Dow Jones Industrial Average during the year has fallen about 40 percent, but seems to be stabilizing. We’ll see.

Today's economic woes so far aren't nearly as brutal as conditions during the 1930s.

Unemployment hit 25 percent during the Depression. The national jobless rate today is about 8 percent but likely to rise over the next year. No one yet is forecasting a 25 percent jobless rate. Economists still argue over what caused the Great Depression. Most say it resulted from a failure by the government to support the nation's financial system following the stock market crash. The current Fed and Treasury have been doing all sorts of things to prevent the financial crisis from causing the economy to collapse including injecting billions of dollars into financial institutions and guaranteeing the safety of bank deposits and money-market mutual fund accounts.

Peter Temin, an economics historian at the Massachusetts Institute of Technology, said the immediate outlook is bleak, but a repeat of the 1930s isn't on the horizon. "The way you get a Great Depression is not that you have a bad shock, it's that you have a bad shock which then is made worse by inappropriate policies," Temin said. "We've had a bad shock, but we are now having reasonable policies. And so we will have a recession but not a depression.

In contrast to Temin, Gerald Celente, CEO of Trends Research Institute renowned for his accuracy in predicting future world and economic events including the stock market crash in 1987 and the fall of the Soviet union is now forecasting revolution in America, food riots and tax rebellions - all within four years, while cautioning that putting food on the table will be a more pressing concern than buying Christmas gifts by 2012. "

OK, so here we are in a financial crisis where each day we are seeing more and more consumers and businesses in trouble and a government attempting to do what the government didn’t do during the great Depression. Is this the solution.

People ask why the panic and the urgent immediacy of a bailout package following the drop in the stock market and now you know? During the depression two-thirds of the nation's banks failed and millions of people lost their life savings. Today, the Treasury Department and Federal Reserve have committed $1 trillion to stabilizing the credit markets. We're not seeing much impact from that unprecedented action yet, but hopefully we will. That's not to say we’ll return to the days of being able to buy homes and cars with no money down. We probably won't. We are going to pay dearly for all the bad habits we have developed as consumers and for ignoring Wall Street's risky behavior. I don’t agree with the idea of tightening the down-payment restrictions on qualified home buyers and this is why. Human nature causes people to panic, overreact and over compensate at a time where it’s too little too late. The point I want to make is that lenders made thousands of mortgage and car loans with no money down at the top of the market when they were way over-priced. That put these same lenders in a very high risk position of which they are reaping the consequences. Now that prices have dramatically adjusted downward, this is the time when banks should require less money down not more. Their risk is far less and the economy need cash flow. The government wants to stimulate the economy. The best way to do that is to provide affordable loans to qualified buyers, not speculators, with little or no money down. That will bring legitimate, middle class buyers back into the market and stabilize prices faster than anything else they can do.

• By restricting no money down loans to only primary homebuyers, you stop the manipulation and you create a healthy and steady demand. We need to get houses out of the hands of speculators and help the middle class to stimulate the economy and create wealth going forward as homes steadily appreciate. If the banks just lend money to those with pristine credit and thousands or millions of dollars in the bank, the rich will just continue to get richer. If you simply restructure mortgage loans to stop foreclosures, you do nothing to increase the demand for the purchase of homes.

On another note one thing that really disturbs me is that the banks are all standing there with their hands out looking for government assistance but in my opinion are the utmost opportunists thinking only of themselves. Isn’t it interesting how consumers are struggling yet the banks do not think twice in a period of historically low interest rates about charging them 30% on their credit cards. If the government is so anxious to help consumers why doesn’t it stop the abuse and loan sharking by these same banks that are looking for a handout. If they did nothing else but cap credit card interest rates to reasonable levels, they would help stimulate the economy.

The last thing I would like to comment about is the auto industry. I do not think we should bail out the automakers. If it were up to me I would let them go down, let them restructure their industry, renegotiate their employment contracts and start over just like any other business or consumer that gets into trouble. Like any of us who have struggled during our lives, we have had to suffer the consequences of our poor decisions.

I think 3 critical mistakes have been made by the govt.

1) As soon as the government said they were going to bailout homeowners and businesses it opened the flood gates. Now everyone has lined up with their hands out and homeowners have no incentive to even attempt to make their mortgage payments if the value of their home is below what they paid
2) Purchasing stock in the banks to stimulate the economy without specific requirements in place saying they must use the money to make loans was stupid.
3) The automakers while employing millions of people have created an entitlement system dictated by the unions. They’ve made a lot of mistakes having nothing to do with the economic crisis. They need to clean house and start over. Giving the auto industry 25B is throwing good money after bad and I can promise you that’s just the beginning.

And that’s this week’s Straight Talk.