Ceramic Industry Blog

GUEST BLOG: All Eyes on the Economy

October 8, 2008

The government recently approved a $700 billion package for the financial sector that will enable it to buy distressed mortgages from banks and other lenders, paying them 60% of what is owed. The government will later sell the houses associated with the mortgages. Basically, we arrived at this situation because:
  • Homebuyers purchased homes that they could barely afford, at inflated prices, using ARMs or sub-prime mortgages provided by nameless, faceless lenders.
  • Loan interest rates ratcheted up, blindsiding these fools who purchased at the market top. The buyers were blindsided because they didn’t take the time to read their mortgage agreements, possibly because they were convinced that their houses were going to appreciate at 20% per year forever. On the other side of the table, many of the lenders were ruthless about increasing interest rates, virtually guaranteeing default. Lenders might have avoided much of the problem by being slightly less greedy and working out terms that the buyers could live with, but this did not happen nearly enough.
  • Many homeowners who were making payments on their homes realized that they owed more than their homes were worth. Many of them simply walked away, ruining their credit while getting out of their upside-down situation.
  • Many of the original mortgages were sold to larger institutions, which now own thousands-or even millions-of homes that have mortgage balances higher than their intrinsic value and for which there are no buyers.
Faced with the option of major financial institutions going bankrupt, the government is stepping up to buy these mortgages at a discount, which will increase the U.S. budget deficit to more than $10 trillion. In essence, American taxpayers are bailing out the reckless and the greedy, demonstrating once again that being irresponsible in this country has limited consequences. The flood of fire-sale real estate by the government will likely depress home values further, and people who are making their mortgage payments and living by the rules will be rewarded with disintegrating home prices.

Since we have sent so many of our manufacturing industries to foreign locations, homebuilding is one of the last bastions of American manufacturing. Now that supply is high and demand so low, companies that serve the construction industry are struggling.

If you run one of these companies, think hard about what you produce and how your products might serve alternative, less embattled markets. Many plants have the capability to produce different products with little alteration in their processes. Look at operating costs (particularly energy) and determine how to reduce them. Natural gas prices have thankfully eased somewhat due to reduced demand, but even if we get out of the latest President Bush-led mess, they will surely increase again.

Finally, consider the presidential candidates carefully. Think about how manufacturing has been all but eliminated by “free trade,” and consider voting for someone who thinks that when it comes to free trade, enough is enough. With further erosion in manufacturing, none of us will have any financial future whatsoever.
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