Friday, December 12, 2008

How To Solve The Foreclosure Crisis

Barron's finally is offering some decent idea's on how to solve the foreclosure crisis that in reality has caused our banking system to be basically insolvent. While I don't agree that it can be done for only $100 billion, I do believe this is the start of a constructive conversation about the real issue plaguing our economy - the massive debt and leverage tied to mortgage securities.

What I find interesting and kind of appalling is the fact that all those mortgages held by Fannie and Freddie are not being worked out. Freddie is more willing to take a $250,000 loss and foreclose a property than actually work it out with a principal and interest reduction - this is costing the taxpayers money because they are on the hook for 100% of the loss.

On a separate note. The Oil crash has been a huge stimulus to America and the longer it stays down the bigger that stimulus will be (much bigger than the government could do this quickly), however as the crisis storm clouds begin to clear and the dollar becomes less needed as a risk haven we could see the dollar fall again and we could see a lot of inflation due to the printing of money by the Federal Reserve - this has the affect of hurting the dollar and this will in turn bring the price of oil (and gold) back up. I'm not saying it will hit $143 again, I have no idea what it will do in the short term, but there are risks and I don't think you should get to used to paying $1.60 per gallon for gas........though I certainly hope it stays that way for a long time.

Scott Dauenhauer CFP, MSFP, AIF