Our economics team has performed an analysis of the current events surrounding the crisis in the credit markets and has concluded the following:
1. The powers that be—Federal Reserve are not going to allow a deposit taking institution to fail, i.e., Countrywide Financial, Etrade, other large money center banks, JP Morgan, etc.
If the steps taken by the Fed over the last two weeks are analyzed for their effect and who are the beneficiaries, the obvious is clear. The financial sector which comprises 20% of the S&P 500 Index is the life blood of the economy. And the sector will be saved at all costs. Free market economics are not at play in this sector; otherwise Countrywide would have died a quick death last week.
Last week we reported on the changes in the bankruptcy laws two years ago before the home equity spending spree was called off by Wall St. The laws were changed to almost prevent a consumer from a “fresh start” chapter 7 filing. Who benefits from this change in the laws? The credit card companies benefit now that a debtor must repay a portion of their credit card debt rather than charging off the entire amount.
So why were the laws changed just before the biggest housing boom in history?
Because, the housing bubble was manufactured for the purpose of tapping out the consumer and transferring wealth. The bubble was designed to increase the supply of housing and the supply of money via the subprime mortgage market enabling a flood of demand for housing and an increase in property values creating the home equity spending spree.
Now that home equity is tapped out, the consumer is again returning to the credit card to finance the spending spree, but this time the consumer will not be able to go to the bankruptcy court and get relief. The creditors have that door blocked.
What effect will this have on the economy?
With the consumer tapped out in the home equity and credit card spending spree, consumer consumption will show a marked decrease. First in the low end, i.e., Wal-mart and work its way up the ladder until the medium income person is affected.
The consumer economy differs from the business economy now the laws have been changed to protect business profits via the bankruptcy code, and the foreclosure laws. In Georgia, a person can be foreclosed on in as little as 90 days from start to finish.