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Caveat Emptor


It's just not right!


In a speech to a credit union group on February 24, 2004, Fed Chairman Alan Greenspan was questioned as to whether fixed-rate mortgages were the most cost-effective means of financing a home purchase. He said "American homeowners clearly like the certainty of fixed mortgage payments, but pay several thousands of dollars a year for the benefits".

Greenspan said homeowners "might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade"

Greenspan noted that if homeowners are "willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."

The Federal Reserve began raising interest rates in June of 2004 and Chairman Greenspan's sanguine statements about the risks and rewards of adjustable rate mortgages did little to prevent the rapid growth in ARMs as a percentage of all mortgages: in 2001 the percent of ARMs to total new mortgages was 15%; recently the figure now stands at 50%.

The exposure in ARMs is very simple, although almost all home-owners try to ignore the obvious risk: that interest-rates rise significantly to the point where mortgage payments become difficult. Home-owners with too much mortgage and credit card debt could be at risk of actually losing their assets and going bankrupt.

The trend in bankruptcies is astounding, especially between business bankruptcies and personal bankruptcies. Business bankruptcies since 1994 have dropped significantly from around 15,000 per quarter to around 7,000 today. Personal bankruptcies over the same period have risen from 210,000 per quarter to a nearly all-time high of 380,000 (they reached 430,000 in 2003).

Now that consumer debt is at an all-time high and the personal bankruptcy trend is the mirror of business bankruptcies, isn't it interesting that Congress just passed and the President just signed tougher personal bankruptcy laws that will protect companies when they go to foreclose on assets and demand future payments?

I know the argument that the new laws help prevent fraud and close loop-holes for abusers, but I have to read something more insidious in this.

I am a capitalist, but I also believe for capitalism to work it must be tempered with forethought and balance. For example, let's say you go to your fresh favorite bagel shop in the morning and are next in line. The person ahead of you is having some type of function and orders 60 bagels to take home. And they run out of bagels. From a pure capitalist point of view, this is fine. First come, first serve. But why couldn't that person just call ahead and order the bagels so the shop could prepare enough for everyone?

What I am saying is that for capitalism to work there must be subjectivity and balance and that this is as much attitude as anything.

The situation concerning bankruptcy law does not illustrate balance to me. It is almost as if the administration and our Congress, which pay close attention to what corporate America wants, are anticipating the implications of current policy and are positioning certain factions to "grab what they can" when (if) things begin to fall apart.

And now MBNA, a large credit card company, this morning announces poor earnings and guides down for 2005. The reason is that because of intense competition, large interest payers (those most behind) are actively trying to manage their payments by canceling high charging cards for lower ones.

The squeeze is on and corporate America is going to take what they can.

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