What's Behind the Mortgage Crisis

What's behind the Recent Wall Street Panic?
What are the impications recent girations on wall street, the banking system, and the sub-prime mortgage market for the average American?

Will you lose your house, your bank account, or your stock investments? Hardly. But the recent hiccup could be the indication of more severe problems to come. And by taking precautions now, you can ride out and even profit from any upcoming crisis?

First of all, what's the problem? Well, there are basically three or four problems.

Problem one is that Americans buy more things than they produce. Our monthly balance of trade deficit is usually $60 billion or more, meaning that we are trading $60 billion in paper every month for oil, cars, electronics, etc., that we buy from abroad.

The second problem is that government is spending WAY more than it is taking in in taxes. Like $500 billion a year.

In the Clinton years, the budget deficit was dramatically reduced, but under Bush, the War in Iraq, an unchecked rise in government spending, and a too-aggressive reduction in income and estate taxes has caused the deficit to explode.

The third problem is that the recent dramatic increase in housing prices has caused everyone with a house to think they are financially invulnerable. And many have borrowed against the increase in the value of their houses to buy things. THAT has been great for the economy, but could be a trap that feckless homeowners will live to regret.

The fourth and last problem is that FOREIGNERS and FOREIGN GOVERNMENTS LET US GET AWAY WITH IT! They've been more than happy to trade their products for paper. And because they ALREADY HAVE so many U.S. Dollar-denominated assets, they don't want to spark a run on the dollar and devalue their own portfolios by spurning dollars.

Of course, this state of affairs cannot last forever. What sparked the recent crisis among American and European banks was the foreclosures and resultant losses beginning to crop up in 'sub-prime', or low-quality mortgages.

As with any mania, the housing price mania in the U.S. led to excesses. Almost anyone with a pulse could qualify for a home loan. No more. Foreclosures are WAY up and housing prices are stable to declining.

Is a bigger crisis on the way? Only time will tell. In the meantime, average Americans should rethink their investment and home ownership goals and add a dose of fear and panic to their decision-making.

Gold and other precious metals, investments in natural resource stocks, investing in other currencies, postponing the purchase of a home or accelerating the sale of a home should be looked at with the help of a financial advisor.

Diviversifying out of assets and investments which may fall if the crisis continues or worsens will yield, at minimum, a great return in peace of mind, and at best, a tidy profit.