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The Only Thing to Fear

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A retired mortgage broker, Herb says plan for the worst, work for the best

Not since 1929 has this country or, for that matter, the world, seen a meltdown of the economy such as we are facing today. Topping 1200, the Dow-Jones average is below 9000 and dropping precipitously. Oil prices have soared, then fallen back, but was it in time? 401Ks and retirement accounts are in the toilet. Unemployment is soaring, which will be followed by more, if consumers stop consuming.

Many factors went into the results we are looking at today. First, the economy is supported for the most part by consumer confidence. Lose that and it’s over very quickly. President Franklin Roosevelt, speaking during the Great Depression, said, "We have nothing to fear except fear itself." Right now, people are running for cover. Millions of dollars are moving from stocks to government bonds. These bonds don’t earn much, but at least you don’t lose your principal.

Much of the blame for this dilemma lies on the doorstep of the Federal Reserve. Neither the current administration, nor even the previous one, has had much effect on this market. Let’s start with the housing boom.

Home values increase at the rate that interest rates go down. Very low interest rates lead to a wide open market where the sky is the limit. Five years ago, one could buy five acres of unimproved land fronted on county roads for around $30,000. Last year that same five acres was priced more than $100,000. Home prices went into the stratosphere even when lumber mills were closing because of low prices. Values then, are based mostly on the ability to pay payments.

Compounding that principle was Congress, pressuring the lending industry to make it possible for anyone who wanted to own their own home, to have one. There is only one way to make that happen. Lower lending standards. If you raise the debt to income ratios and lower the credit requirements, that can happen. The problem with that is there were real good reasons for the standards that used to be in place. Fannie and Freddie had tough lending standards that worked well for years, until the Senate and House finance committees forced looser standards on them.

Another part of the equation was the rapidly ascending marketplace. Under artificially low interest rates, rates not seen since the 50s, home prices went up, up, up. Finally, the bubble burst. The old adage that everything that goes up must come down applies to more than just aircraft.

We are now facing several realities. One, those who are still clinging to home prices that were valid two years ago can forget it. Easy come, easy go, except for those who bought at the top of the market. These people now owe more than their homes are worth. Current values are easily 30 to 35 percent lower than at the peak. In the coming months and perhaps even years, they may sink much lower. For those who have been in their homes for several years, purchased before the boom started, they lost money only on paper. In the long run, real estate is still the best place to invest, but I must emphasize the term "long run." Recovery may take a long time.

Some similarities with 1929 must be examined. Back then, over leveraging was the root cause for the stock market collapse, along with coming right after a boom market called "The Roaring Twenties." Starting to sound familiar? There are differences though. For instance, the picture that most people have of the Great Depression, if indeed they have a picture at all, is that of foreclosed farms, hobos camped under railroad underpasses and the like. In reality, most people owned their homes outright back then. Where 80 percent of our population lives in or near large cities now, it wasn’t so almost 80 years ago. Most lived on five or ten to twenty acres, had livestock, a garden and knew how to preserve food without freezers like we enjoy now. They canned, cured, and dried their meat that they raised on subsistence farms that were mostly self-supporting.

Today, this isn’t the case. Very few family farms still exist, having sold out to the large corporate conglomerates that can farm more efficiently. Scattered around are families that still live on the homesteads their grandparents founded in the early 1900s. Where mass starvation didn’t occur then, it can now. Look around. Former UN Secretary general, Kofi Annan recently remarked, "Every day, 10,000 people die from starvation or malnutrition." Whether these figures are accurate or not, it does point out that it could indeed happen here if we fall into a lengthy depression.

There. I’ve used that word. Most people, when referring to the previous depression, look to 1929. Actually it took three more years—until 1932—before the depth of the disaster occurred, and it lasted until about 1939, when our industries started to gear up to supply the British at the beginning of World War II. That was prior to our having sent our heavy industry offshore. We don’t have a steel industry anymore, and if the big three auto makers go down, and that could happen, we won’t have that industry either. Where world war rescued us after ten years of horror, it can’t now.

The old adage goes something like this: "Hope for the best, but prepare for the worst." Come spring, plant a garden. Buy a cow. Work to ensure that your family will have food on the table. And learn a lesson from the ‘big boys;’ try to do it without spending more money than you actually have.

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Herb Huseland Herb Huseland Herb Huseland is known as "Bayview Herb" by fans of the Spokesman-Review's "Huckleberries Online," (www.spokesmanreview.com/blogs/hbo) and of Herb's own "Bay Views" blog (www.bayviews.blogspot.com). He is also a periodic columnist for the Spokesman Review

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