The ingrown toenail that KILLED the US Economy!

March 14, 2007 12:13 am

Take a look at some of the comments floating around in cyberspace regarding our economy. It is rather disheartening. I read an article in which people are skipping right past recession and now talking depression. HUH?

In reponse to the hysteria, I wrote:

They said that the subprime market is going to cause an outright depression. This is like saying that an ingrown toenail is going to cause a shutdown of the entire coronary system. While there may be an infection that is spawned, it can be treated. Before it becomes life threatening, you (or your doctors) can and will take preventative action (unless you are a total idiot). That brings us right to the point of who we are looking at to help us avert a major catastrophe caused by mindless runs on the banks in an effort to ensure that our money is…well…safe.

The unfortunate fact that most people seem to forget is that unlike decades ago, the banks are a part of the entire financial market, not the entire market. More funds have been distributed into brokerages, hedge funds, mutuals, annuities and other non bank instruments. The fact that a few greedy lenders have done a poor job at qualifying their clients and that there has been a significant housing bubble brewing does cause a bit of concern.

If the subprime lenders go out, remember there still is a healthy cash flow that will be returned as people are forced to pay something for the place that they live in. I mean, really, does anyone actually think that all of the people who borrowed money are going to stop paying and chance eviction? If so, the properties are the collateral and even in a fire sale situation, they can be sold. So think about the worst case:

All loans are in default, cash flow has stopped, eviction precedings are implemented… First there will be a government intervention, then if it gets to it, some other smart company in the business (Bank fo America, CITI ?) will scoop up the discounted assets and possibly ingest the subprime companies ( LEND ) and the prices that we see on these stocks today after the free fall will be laughable.

Someone has to get sense knocked into them. This is getting ridiculous. The worst fears have now been factored in. Okay, they have been punished, let’s not go overboard with hysterics.

Andrew Horowitz, CFP

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