Rod Dreher is attempting to understand the significance of the mortgage guarantees and the incipient Lehman bankruptcy:
Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry’s reshaping is staggering: two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear.
I have no idea what this means. Ye who do — Pyrrho, I’m looking at you — please explain what we have to look forward to.
This means that most, if not all, private equity in America will be destroyed, on average. If you own your house without a mortgage, you’ll be fine, you just won’t be as paper-wealthy as before. If you have a mortgage that is more than 50 percent of the current “value” of your house, you will probably find yourself underwater and will become a likely candidate for foreclosure. I was having drinks with Passport last night and the numbers he mentioned are truly incredible; even with the small decline in housing prices thus far, around 10 percent of mortgages are already underwater.
The logical conclusion is that all of the gains that came from an increase in housing “wealth” over the last 10-20 years will be eliminated. Those businesses that depended on leveraging that “wealth” will also fail. When the Fed finally gives up trying to literally paper over the gap by printing money – a bizarre idea of the disease somehow providing the cure – it will begin to raise interest rates which should eventually get to 20 percent or more. This will be good for those few who are productive and/or liquid, and very difficult for those who need to borrow. Basically, it will either be akin to the 70’s or the 30’s, and the latter is probably more likely now since the Fed and the Bush administration have significantly exacerbated what was already an obvious problem five years ago.
Games, books, and other stay-at-home products which have a low $/hr rate should do relatively well, travel, restaurant and luxury businesses will go under, as they are already doing in the UK. Crime and religion will see significant growth, skirts will get longer, and sadly, this likely means the end of the booty short. [A moment of silence, please….] There will be more war, more government restrictions on liberty, and eventually a Hispanic-led secessionist movement in the American southwest as immigration is first restricted and the expulsions finally begin. The crisis will simmer until it boils over in 10-15 years when the babyboomers can no longer work and they react in their customary political and totally self-obsessed manner. In the end, the proposed solution will be the North American Union and a transnational currency to replace the defunct dollar.
Basically, it’s now time to quit spending lots of money, to seek out secondary and tertiary streams of income and to pay close attention to the financial strength of your bank. Wealth preservation, not growth, is now the key. Here’s a vivid chart from Lombard Street Research which shows that the post-FNMA guarantee US public debt situation is so bad, it’s already approaching the famously dysfunctional Italian levels. And remember, it’s only going to get worse with each new guarantee, bailout, entitlement program, and interest rate increase.