Small Business Solutions

Am I right on this?

I’ll try to make it as simple as I possibly can. My 12 year old son asked me about current financial turmoil and this is what I told him.

Let me began by saying that it was Mr. Greenspan who in 2004 urged for more “creative” financing options from the mortgage industry in order to increase “home ownership” for the minorities. In retrospect, I believe its sole purpose was to stimulate the economy after 9/11. Astonishingly it worked, the reverse red-lining inviting the unsuspecting hard working low to middle income bracket minorities to buy houses with (ARM) Adjustable Rate Mortgage, No money down, over 100% in financing; amongst various other mortgage options. Starting in 2005 the appraisers and mortgage brokers appraised the houses at above market value and financed them at over 100% with no money down at low % ARM. Fast forward two years and we saw over inflated house prices and a mad dash to sell the houses before the adjustable ARM jumps to 9% or even 12% in some cases. What goes up must come down. Right; the increase in unsold housing inventory was compounded by non-payment of mortgage payments by sub-prime borrowers.

Along-with the increase in the house prices, the demand and prices for household goods, furniture, appliances, etc. went up as well; which was aided by the institutional traders on the market who priced oil at almost $150 a barrel!!! Gas was at almost $4 a gallon nationally for most of 2008. It has been almost a year now and housing bubble has collapsed, business and families are out of work, retirement savings, etc. to say the least. The Hedge funds established offshore to avoid tax liabilities sold the equities of now weaker economy and still kept investing in oil. Everything tanked, stock market crashed, people couldn’t borrow since the credit market dried up due to non-payment of mortgage payments by sub prime borrowers forced banks to stop lending. Out of work families could not afford to keep up with the almost out of control inflation till July 2008, which effected the consumer spending, which in turn hurt the bottom line of small to mid sized businesses who employ the backbone of working America. These businesses either folded up or laid even more employees off just to survive. Now we are in November 2008 and the inflation has been replaced by deflation due to the price of Oil, job losses, etc. It is ironic that first it was inflation that inflated and destroyed the economy and now its deflation. The deflation for the month of October 2008 has been intensely sharp causing the prices to go down at a much faster rate, which again hurts the profits for businesses that again lay off even more employees to survive. Get it?

But wait; there may be hope on the horizon. Goodness and compassion are two of the many founding principles of the greatest nation on Earth and negotiation is a virtue; which is almost absent in Corporate America. Why could not the CEO’s of these Banks and financial institutions have approached the struggling homeowners and worked out a deal to save them from foreclosures and taxpayers from trillions in debt?

Here is what I would have done: Approach the struggling homeowner, negotiate on what they can afford and not what the banks expect, stretch the 30 year mortgage to 35 years easing the ongoing financial pinch. Where there is a will there is a way.  

Now let’s make a full circle to Mr. Greenspan’s speech in 2004 about increasing the home ownership. Today we ARE at the same home ownership rate or worse before 2004 and Trillions more in debt.

I asked my son what he learned from all this? He said; “Dad, I’m sleepy, go help them”.

I wanted this in a raw form; hope you do not mind.