Is a 100% Credit Freeze in Our Future?

I got this email from a long-time AFM reader earlier this afternoon (modified slightly to protect anonymity):

Through a reliable source, I was told that there is a strong potential for a credit freeze come January 2009. According to this source, absolutely NO loans will be granted…for anything (mortgages, vehicles or otherwise). Although I would appreciate you not listing the bank's name [which I deleted], I thought this may be an interesting 'what if' scenerio for you to write about. I don't have any other details, but thought you'd get a kick out of the topic and possibly want to dig a little deeper into the idea of a 100% credit freeze.

I followed up with this reader to see if I might be able to interview the source anonymously and this was the reader's response:

As for the guy I spoke with, he won't talk to you - nothing personal. It was a social situation when we spoke, but he wasn't exactly open to comment. I tried (on your behalf, of course). He just said that if anyone needs a loan, they needed to get it within the next 90 days - or they won't get one at all. I assume he was speaking of things going on with his bank, but you never know.

Interesting. Possible? Maybe so. But, I can't imagine it lasting for any length of time. But, you never know…

What do you guys think? Anyone with any authority out there want to offer up an opinion?

Oh, and for what it's worth, I trust the reader who sent me this information.

 

The REAL ‘Victim’ In All This Mess

Sorry to keep harping on the subject of the housing/mortgage/credit/bailout crisis but I keep reading stuff that just makes cringe. The latest comes from an article I read this morning in the Wall Street Journal about protests at the annual convention for the Mortgage Bankers Association that was held this week in San Francisco.

Here is the part of the article I want to focus on:

"The main point, and the main issue for everyone, is there should be a stop to foreclosures and evictions, and the government should be assisting the victims of the crisis and not the people who created it," said Richard Becker, spokesman for the Party for Socialism and Liberation. The group picketed outside the convention center on Sunday and Monday.

Mortgage bankers should be punished if it's found that they knowingly put people into mortgage loans that people couldn't afford, Mr. Becker said. "Jail them, don't bail them" was a popular rally cry outside the convention center.

Side note: The Party for Socialism and Liberation? Do those two words belong in the same title? I found their website and they actually have a presidential candidate. But, I digress.

I'm tired of people throwing around the word "victim" to include anyone experiencing the consequences for bad decisions. According to Merriam-Webster.com, the definition of victim is:

2: one that is acted on and usu. adversely affected by a force or agent the schools are victims of the social system: as a (1): one that is injured, destroyed, or sacrificed under any of various conditions a victim of cancer; a victim of the auto crash; a murder victim (2): one that is subjected to oppression, hardship, or mistreatment a frequent victim of political attacks b: one that is tricked or duped a con man's victim

Those who purchased homes they couldn't afford are not victims of anything other than their own poor decisions. The REAL victims of this crisis are all of us who CHOSE to do things the right way and live within our means and buy houses we could afford and those of us who are STILL saving up for a house.

Finally, I'd like to challenge Mr. Brecker's comment that mortgage bankers should be jailed if they knowingly put people in loans they couldn't afford. What about those who took on mortgage loans they KNEW they couldn't afford? Can we jail them too?

 

The REAL ‘Victim’ In All This Mess

Sorry to keep harping on the subject of the housing/mortgage/credit/bailout crisis but I keep reading stuff that just makes cringe. The latest comes from an article I read this morning in the Wall Street Journal about protests at the annual convention for the Mortgage Bankers Association that was held this week in San Francisco.

Here is the part of the article I want to focus on:

"The main point, and the main issue for everyone, is there should be a stop to foreclosures and evictions, and the government should be assisting the victims of the crisis and not the people who created it," said Richard Becker, spokesman for the Party for Socialism and Liberation. The group picketed outside the convention center on Sunday and Monday.

Mortgage bankers should be punished if it's found that they knowingly put people into mortgage loans that people couldn't afford, Mr. Becker said. "Jail them, don't bail them" was a popular rally cry outside the convention center.

Side note: The Party for Socialism and Liberation? Do those two words belong in the same title? I found their website and they actually have a presidential candidate. But, I digress.

I'm tired of people throwing around the word "victim" to include anyone experiencing the consequences for bad decisions. According to Merriam-Webster.com, the definition of victim is:

2: one that is acted on and usu. adversely affected by a force or agent the schools are victims of the social system: as a (1): one that is injured, destroyed, or sacrificed under any of various conditions a victim of cancer; a victim of the auto crash; a murder victim (2): one that is subjected to oppression, hardship, or mistreatment a frequent victim of political attacks b: one that is tricked or duped a con man's victim

Those who purchased homes they couldn't afford are not victims of anything other than their own poor decisions. The REAL victims of this crisis are all of us who CHOSE to do things the right way and live within our means and buy houses we could afford and those of us who are STILL saving up for a house.

Finally, I'd like to challenge Mr. Brecker's comment that mortgage bankers should be jailed if they knowingly put people in loans they couldn't afford. What about those who took on mortgage loans they KNEW they couldn't afford? Can we jail them too?

 

Now’s The Time To Buy - Right?

So the market is falling - or has fallen. I don't want to use the word "crash," but dropping from 14,000 in October 2007 down to 8,350 today (markets are still trading as I type) is pretty dramatic no matter how you phrase it.

If you believe history - and Warren Buffett - now is an excellent time to be buying stocks. Yes, things could get worse, and yes everything in uncertain, but remember how the whole premise of investing is "buy low and sell high?" Well, stocks are lower than they've been in years. Therefore, now is a better time to buy than we've seen in years. So if you had no problem loading up your portfolio when the Dow was trading around 11,000, you should have even less of a problem now - unless of course you have no confidence in the markets and you think the whole stock market is going to crash and never recover.

I'm on Team Buffett and see no choice but to assume that eventually, the markets will rise again (given the alternative of stocking up on food staples and hoarding any valuables with which I can barter when our financial systems collapse forever). Of course, "eventually" is the key word. I have no idea if it will be next month, next year, or next decade when the markets recover their losses.

So with regard to my long term (i.e. "retirement") portfolio, I find some comfort in the fact that my bi-monthly 401(k) contributions are picking up more and more shares as the markets decline. I find so much comfort in that fact that I feel the need to buy as much as possible.

In the last couple of weeks I have invested around $1,000 in stock market index funds outside of retirement accounts (international and domestic) by adding $100 or $200 each time the market set a new "low." That money would have otherwise gone into cash savings. I also boosted my 401k contribution from 8% to 10%. But I still feel the urge to do more. So I came up with a plan.

I'm breathlessly considering increasing my Roth 401(k) contributions from 10% to 20%. That would mean that in 2009 I would max out my 401(k) - which would be so exciting! I wasn't planning to do that anytime soon, because it would require the suspension of all non-retirement savings.

But the thing is, all those non-retirement savings will eventually be spent - either on vacations or a car or furniture or a wedding, etc. So while it's prudent to save for those expenditures, I feel like I'd really benefit more from maxing out my 401k because I really won't touch it for decades. And besides, I may not work for many years at a job that offers a 401k - and Roth 401k's may not even exist for very long as congress struggles to balance the budget, especially since they allegedly only benefit rich people (God forbid). So I should take advantage while I can - right?

Should I do it? My emergency fund would currently get me through several months of living if I lose my job, and of course I can always lower or suspend contributions if I get in a tight spot. Plus I'll put any tax refund and bonus checks into my liquid savings in '09, so it's not like it won't grow…

What do you think??

 

Okay…Enough Bad Stuff…Here Are 10 Things That Are Going Right!

I got an email last week with a link to Kiplinger's 10 Things That Are Going Right. Their 10 things along with my thoughts…

1. Oil Loses Its Swagger - prices are down, but I think this is temporary.

2. A Tipping Point for the Auto Industry

3. Interest Rates Are Low and Headed Lower - yeah but will you be able to get credit?

4. Homes Are More Affordable - this is very true!

5. Your Bank Savings Have Never Been Safer -yeah as long as the FDIC can afford to pay!

6. Stocks Are on Sale, and Many Bonds Offer Terrific Yields - can't argue with this one except to say that they could still go lower.

7. The Miracle of Technological Innovation Continues

8. Prosperity Reigns in the Heartland

9. A New Tone and Direction in Washington - no comment…

10. Shoppers Can Expect Great Gift Buys This Holiday Season - true if you can afford to buy gifts.

Anyway, head over to Kiplinger's and read their complete list and their thoughts. It's true that some things are actually going right even with all the turmoil going on around us. I guess it doesn't hurt to focus on the good (even if some of them are a stretch).

 

Remember Mr. Roubini? Now He Says the Worst is Yet to Come!

A couple of months ago I mentioned an interview with Nouriel Roubini, Economist and Professor at New York University. It turns out his assessment on the credit crisis was spot-on. Now he's a busy man traveling all over the world, talking to people about crisis and what's to be expected.

Guess what?

He fears the WORST is still to come! From the article:

What does Roubini think is going to happen next? Rather worryingly, in London last Thursday he predicted that hundreds of hedge funds will go bust and stock markets may soon have to shut—perhaps for as long as a week—in order to stem the panic selling now sweeping the world.

That's right, all the stuff we've already gone through is nothing compared to what we face in the near future. Is he right? Let's hope not!

 

How Each Stock Affects the Dow’s Performance

Here's a quick illustration of how the Dow Jones Industrial Average is calculated.

Below is a table with all thirty stocks in the Dow Jones Industrial Average. The fourth column shows each stock's daily price change. The last column show's each stock's impact on the Dow's performance, which is found by dividing the price change by the divisor in the fifth column.

Now, before we get a bunch of comments telling us what a bad index the Dow is: I already know that! I just wanted to illustrate how the average is calculated, not critique the index itself.