Thursday, January 01, 2009

Comment: How long tell economic recovery?

With much of the world in recession, there's been a lot of analysis in the media on when things will "bottom out" and start to pick up again.

One could argue that the present crisis was started by the mortgage meltdown in the United States. Thus, it is often puzzling to see economists talk about recovery without mentioning the problem with mortgage resets.

Mortgage resets for three-year adjustable rate mortgages will begin in 2009. In layman's terms, this means that people who have such mortgages will begin paying sharply higher payments on their property. Many are likely to default as happened when sub-prime mortgage payments were jacked up.

When homeowners default, the lending institution takes over and often tries to sell as quickly and cheaply as possible. This floods the market with cheap homes and, following the rule of supply and demand, drives down home values. In turn, many investors and even some folk looking for a real home may be turned off not wanting to see their investments decline in value.

Of course, the low prices could also attract new buyers especially if interest rates on mortgages come down further. But we have to think that this might be balanced in the mid-term at least by the gloomy jobs picture.

So, unless something is done to address the mortgage resets, it's hard to imagine anyone confidently predicting the recession ending quickly. Indeed resets will continue until 2011.

Another problem that I have addressed often, is that too much money is hoarded by the super rich in America and many other countries. This money is not effectively recycled into the economy and will continue to cause economic cataclysms until the government steps in and restores traditional tiered tax rates. Mark my word on this on!

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