Man of the Year

“The nation is prosperous on the whole – but
how much prosperity is there in a hole?”

—Will Rogers

Mortgage Redux?

We like to kid – and as always, we remain positive in our outlook on potential opportunities. That said, what else is a $12 trillion national debt other than a massive hole? And, ah “Helicopter Ben.” This year he may once again be forced to man the choppers to dump more newly printed money in another attempt to save the economy and financial system. We think the odds he’ll do so are increasing. After all, Congress again raised the government debt ceiling on Christmas Eve by $290 billion – to $12.4 trillion.[1] The increase was required to avoid a default on U.S. Government debt and promises – and to deal with the record $1.4 trillion deficit it had accumulated in 2009.[2] What concerns us is in recent years we’ve never seen a debt ceiling Congress has not wanted to max out. Yes, Republicans criticized the latest legislation – yet under the recent Bush administration they regularly voted for 8 debt ceiling increases adding up to $5.4 trillion.[3] The recent increase allows the government to issue enough bonds to fund itself through mid-February – and Congress will again address the subject on January 20th.[4] Democrats had originally desired to pass an unparalleled increase of nearly $2 trillion but the plan lost momentum as moderate Senate Democrats opposed it.[5] We’d not be surprised to see another increase – and soon.

And as nice as it would be to have the worst of the mortgage crisis behind us – that may not be the case. As the chart below shows us we now may be in the “eye” of what could turn out to be a mortgage re-set hurricane. The vast majority of sub-prime mortgage re-sets (of interest rates) – peaked in 2007/2008. However, as we enter 2010 more large-scale re-sets loom – with Option-Arm mortgages leading the way – gaining momentum throughout the year and forecast to peak in 2011/2012.

What concerns us is the possibility that as mortgage re-sets again accelerate – so too may foreclosures if homeowners cannot keep up with increased payments. This could be exacerbated if the unemployment situation does not improve – or worse yet accelerates. As we can see from the following chart – foreclosure rates have trended up rather steadily over the past 4 years. What will be the total effect of the lax lending standards on loans made through 2007? We shall soon see.

Man of the Year

We’ve long felt that the Austrian School of economics espouses the most common sense thought. Primarily, that a currency must be backed by gold to maintain its integrity (and to protect the savings of citizens); markets – not central banks or the government should determine interest rates; going further into debt does not cure debt nor does it create a healthier economy; and that printing money does not equal prosperity. Ben Bernanke, a Kensyian – disagrees. While we’re concerned his efforts will just make the situation worse – we don’t think he’d listen to us at all. We believe he will print – and print. And we think the next few years will be quite telling for him. He was voted Time Magazine’s Man of the Year for 2009 – and kudos to him. Former winners on the list include Gandhi, Martin Luther King Jr., and Pope John Paul II. Also on the list are Hitler, Stalin (a double winner), and Khrushchev. For posterity’s sake (and all of our sakes) – we wish him luck.

And while we don’t agree with his policies – we believe they provide opportunities. As always, that’s what we’re focusing on.

Sincerely,

Stephan R. Ernharth, JD, AIFA
Vice President
Ernharth Group
www.ernharth.com

Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.

1.Business Week; “Congress Raises Debt Ceiling to $12.4 Trillion”; December 24, 2009
2.Ibid.
3.Ibid.
4.Ibid.
5.Ibid.