Here is affirmation of what I spoke of in my previous entry on 08/21/07. And a lot of people are against this idea because they think it would unfair that sub-primers can lock into a sub-prime rate. But if the average of their current rate and the reset rate, for example if now their current rate is 3% and will reset to 9%, then the average would be a 6% rate on their loan. To me it is a question of what would be the bigger loss to place a cap on the arm or face massive foreclosures. At least the banks still hold on to the properties which still have some worth and may increase in time and they are still collecting money on a monthly basis. and not only will that it give the banks some credibility they also hold on to the property which is equity for the banks and will rise in time. Patience is a virtue. Now if the homeowner cannot afford the 6% rate then that is a different story.

Something has got to give.

Well picking up from where I left off the last time there are a few news stories that have happened including this one , concerning the closing of a bank. It did not make it to the media. I guess they did the right thing by not informing the public. If they had the market may have fallen mercilessly. But you can’t keep these things hidden for long or manipulated them away. Eventually it will show up in consumption. Then you have the price of gold as well as other commodities increasing to record highs and the speculation is mounting that the fed will do another rate cut based on recent economic reporting.

There is usually lag time in the economy when it comes to things like interest rate cuts kicking in and inflation setting in, in a way that cannot be hidden, excluded or manipulated. I suppose they will be trying to beat the clock though and have everything straighten out before that kick in period starts. Things like the pace of commercial paper investment increasing and getting paper rolled over etc have to be taken care of and cleared up before those fed rate cuts start kicking in and inflation rears its ugly head and things start going southward. Let’s be hopeful that they can beat the clock because if it does not it is not going to be pretty. Christmas will tell the story.

Then the Euro is creeping upwards with the potential of being the new reserve currency if things do not turn around in the US in a timely fashion. And then this story concerning China that I ran across states that China’s reserve foreign currency holdings is in the trillions of dollars with their holdings of US currency 70% of that amount and they are on the prowl looking to get rid of some of that through investment. It is funny how they will not let foreigners set up shop in their country . What an imbalance and it goes on.

But something has got to give, in the US economy. I was listening to a report on Bloomberg television of the decline in mortgage lending because the brokers are being more cautious. Not to mention Bloomberg television also interviewed someone which stated that those foreign investors who once invested in the commercial paper are scarce these days so money to lend could be in short supply. That is understandable but once Pandora’s Box has been open and the contents released it is hard to put the contents back. What I mean is the free for all lending, helped drive consumption which in turn helped drive the US economic expansion. And if the free for all lending stops it may put a dent in consumption. How much of a dent and how much will it hurt? Time will tell I guess. This is why the Fed interest rate cuts will not help because if they put the brakes on lending, interest rate cuts means nothing in helping consumption the major driver of the US economy. Putting the brakes on lending, whether cautionary or due to lack of funds available is not going to do anything but slow consumption.

So something has got to give. The cycle as I see it goes like this: low wages> no credit>no money to spend on goods >corporations don’t make money >layoffs>no money. Credit is the fuel that starts this cycle sadly. Just like parents tell their kids too much candy can make you sick the same could be applied to too much credit. I think we are living on borrowed time as well as borrowed money. If something does not give the US economy is going to pop and loudly. And the giving is going to have to come from corporate America. They do not want to hear that but if corporations do not make adjustments to their business practices (securities credit rating etc.) and how they deal with consumers (excessive fees, etc.) it may eventually push the economy to the limit and over the edge.

I know I am straying away from my usual messages concerning the political atmosphere and lack of diplomacy between the US and those who we have differences with but I think the economic situation in this country trumps everything. The basis of US superpower status is the US dollar. And the internal economic pressures (scarcity of funds to lend and stringent lending practices) as well as external economic pressures (dollar holdings around the world , inability to find foreign investors of commercial paper outstanding) will have an immense effect on this country and its superpower status. So now that the political shoe has fallen off, will the next be the economic shoe?