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Where Wall Street Meets Main Street

AIR DATE: Thursday, September 18th 2008

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How is the recent economic upheaval impacting you?

This has been a hard week for Wall Street. The Dow has fallen by more than 440 points today alone, the government rescued AIG, the nation?s largest insurer, and some fear Washington Mutual could be the next big bank to fail.

In addition to Wall Street?s ups and downs, housing prices are dropping in Oregon, our unemployment numbers are going up, and a 45-cent increase in the minimum wage is expected next year. But how do all these numbers connect, specifically in the Pacific Northwest?

How is the recent economic upheaval impacting you? Have you changed anything about the way you invest or save money? What questions and concerns do you have when you look at the big financial picture?

GUESTS:

• Craig Brenton: Senior vice president at D.A. Davidson & Co.
• Gerry Mildner: Director of the Center for Real Estate at Portland State University
• Bill Virgin: Seattle Post-Intelligencer business reporter and columnist

Photo credit: velo_city / Flickr / Creative Commons

Tagged as: housing · recession · unemployment

From Portland, OR

My wife and I are looking into buying a house so the drop in house prices seemed helpful until we realized that it would also be more difficult to get a loan, particularly for home buying. There are also psychological effects surrounding job security. I have been revising my resume and putting feelers out just in case my job is not as safe as it was even one year ago. I blame unfettered adherance to free market mechanisms and a lack of any constraints on various components of financial institutions. Long ago (1940's I believe) there was a line between savings and loans institutions and investment banks. Then came hyper-deregulation (do whatever you can to make more money message). Just a thought, I'm not an analyst.

Of course the GOP talks nonpartisan rhetoric now that their ideology has got us all in a bind. It would seem that party is quick to take full responsibility for what little good they have been integral in, but wants to dodge any ownership of major ideological screw-ups. When will it end (hopefully in Nov.)?

Profess — Thu Sept. 18th 12:05p.m.

Both parties were complicit. Much of the deregulation (like the repeal of Glass-Steagal in 1999) that laid the groundwork for this debacle happened in the 90s.

skeptictank — Thu Sept. 18th 12:24p.m.

Conservative Republicans controlled both houses of the Congress in the 1990s and they rammed the repeal of Glass-Steagal down Clintons throat.

Conservative Republicans are at fault and should be held to account.

Tom D Ford — Thu Sept. 18th 12:44p.m.

We sold our house at the peak, in August 2006, and then moved into a rental property to wait for the real estate market to collapse. We are still waiting for the bottom to hit, at which time we will buy a house.

We occassionally go house hunting in case there is a good deal to be had. But most sellers haven't gotten the message yet that the boom is over. Also, anyone who bought their house in 2005-2007 paid too much and they can't sell their house for less than they bought it. Unfortunately, they are not going to get what they paid for their house in the current market. And many people took out HELOCs based on their rising equity and now they are trying to get buyers to not only pay what they paid for their house, but to pay for their HELOC, too. No way I'm falling for that.

So I'm waiting. I have our money in CDs. I have avoided the stock market for the past year. So while a lot of investors have lost money, we have made a modest amount of money on the money we made from selling our house at the peak.

Luke T. — Thu Sept. 18th 12:09p.m.

There are 4BR, 3Bath homes in Oceanside CA (just north of San Diego) that sold for $475K at the peak in 2006 that are now selling for $180K as foreclosures. The old line from Portland Real Estate agents was that Portland was the cheapest place on the West coast. Now it's very tough to make that argument.

skeptictank — Thu Sept. 18th 12:15p.m.

You seem to be a wise investor and to manage your finances with clear forsight. I'm taking notes. Maybe my wife and I should wait even longer to buy a house. You think the market in Portland will drop even more significantly?

Profess — Thu Sept. 18th 12:19p.m.

I think prices are going to continue to drop for at least another year. Fall and winter are coming. Houses don't move well during that time of year. There is such a tremendous glut on the market that many home sellers are accepting offers well below the sticker price.

A lot of the glut is caused by people who over-reached, but a good deal of it is caused by real estate developers who continued full speed ahead building new houses well into the collapse of the market. That works to a buyer's advantage.

Here's how to decide when to buy a house. Sit down and figure out what size house payment you can comfortably afford. Don't look at what people are asking. Look at what you can afford.

Then use any of the thousands of mortgage calculators on the internet to find out what size loan that works out to. Don't forget to factor property taxes and insurance into your monthly payment. That will shrink the size of the mortgage you can afford.

Use the calculator and current interest rates for a FIXED 30 year loan.

Presto, that's how much house you can afford. And that is what you should offer on a house regardless of its sticker price. The seller will either accept it or they won't.

Luke T. — Thu Sept. 18th 12:46p.m.

We've been experiencing credit contraction for the last year. Now that seems to be accelerating. Due to fractional reserve banking, for every dollar a bank loses it means that there will be about $10 less lent out. Estimates now show at least $1Trillion lost thus far which would be a contraction in credit of about $10Trillion - in a $13Trillion economy. That's going to have an effect.

skeptictank — Thu Sept. 18th 12:11p.m.

The guest is talking about money market funds. The Reserve Primary money market fund broke the buck the other day. The first time in history that has happened.

Don't confuse "money market fund" with your "money market account" at your bank.

But money market funds can theoretically lose money. And the other day, the Reserve Primary fund did.

Luke T. — Thu Sept. 18th 12:12p.m.

Actually, it's not the first time in history - it happened with another fund back in the Spring.

skeptictank — Thu Sept. 18th 12:16p.m.

Today?s financial ripples are not caused by the housing bubble bursting, and the root cause is not the blatant greed of the denizens of Wall Street, You, et-al. This problem is not the result of either political party, and not the failure of this administration, or even the last one!
No, you need to look a bit deeper to see that the basic structure of the current US economy is not sustainable. This should be a ?DUH? moment; simply put a ?Service? based economy is not sustainable long term. The myth of the ?Post Industrial? economy needs to be fundamentally discarded.
Having taken steps years ago to insulate my finances as much as possible from exactly what is happening today. I am not so much struck by the train wreck but by the reaction of the so called experts to this predicted situation. I on the other hand can watch Wall Street crumble to dust and not be directly impacted as I have not had one dime invested on the street in years!

Desolation — Thu Sept. 18th 12:14p.m.

The repeal of the Glass Steagal act back in 1999 was definitely a bi-partisan effort. Glass-Steagal was enacted during the depression to put a wall between the investment part of banks and the commercial part of the bank. Around the same time CDSs (Credit Default Swaps) were de-regulated and it was off to the races (to bet).

skeptictank — Thu Sept. 18th 12:18p.m.

We have enough money to make a 30 percent down payment on a house. Every once in a while, when we see a house we are considering making an offer on, I get pre-approved for a loan. So far, my bank has had no trouble approving us.

Luke T. — Thu Sept. 18th 12:16p.m.

Of course the question is how much further will prices fall? I suspect they've only just started falling in the Portland area.

The other thing to consider: if the economy starts to get really bad you'd probably rather have that money around to help you weather the economic storm (30% down is about $90K in this market - that's a nice emergency fund).

But the reason you're having no problem getting approval is because you have 30% to put down. Most people don't have $90K sitting around. In fact, I doubt there are many potential buyers at this point who have $30K which would be a 10% downpayment.

skeptictank — Thu Sept. 18th 12:20p.m.

I agree that we are just starting to see things fall in Portland. The wave that has rippled around the country is just now starting to hit us.

Luke T. — Thu Sept. 18th 12:21p.m.

Are you all investing in stocks as well as real estate? How do you see the two as connected in terms of your personal finances?

Julie Sabatier — Thu Sept. 18th 12:24p.m.

I am out of the stock market. Some people believe there are bargains to be had. But right now, it is a money loser.

Anyone who has a 401k with matching funds from their employer should continue to stay on that track. What you get from your employer more than offsets what you are losing.

For those who are all about "dollar cost averaging", I'd rather get out now and get back in after the bottom hits.

Of course, knowing when the bottom hits is a guess. But I'd rather miss the bottom by a month or two than ride it all the way down expecting to recover my losses in the long term.

Better to get out, invest in short term CDs or some other safe investment, then get back in after the bottom hits. That will provide much better gains than dollar cost averaging strategy in the long term.

Luke T. — Thu Sept. 18th 12:29p.m.

Portland's economy has historically been more fragile than places like Seattle. We generally get hit with higher unemployment here as the economy falls (look at the early 2000's we had some of the highest unemployment rates in the country). However, this time around that's going to be more of a problem since more people got into homes that could really not afford even during the best of times. Some 30% of the loans written in Portland during 2006 were interest only loans (WaMu did a huge amount of these). As those loans start to reset in 2009-2010 we'll see a lot more defaults here.

skeptictank — Thu Sept. 18th 12:28p.m.

Even if you can afford to buy now, you're betting that you will still have a good paying job in the future to support your payment, and I'd be pretty cautious in light of what Conservative Republicans have done to our economy. If this keeps crashing a lot of decent hardworking folks are going to lose their jobs and it won't be their fault.

I'd wait a bit to see how this shakes out.

Tom D Ford — Thu Sept. 18th 12:58p.m.

Craig Brenton mentioned the idea that GE doesn't really have a change in market perception but they are heavily vested in deriviatives which could very well cause them problems in the near term.

bkieft — Thu Sept. 18th 12:25p.m.

The FDIC is probably going to run out of reserves. It is already below its mandated minimum of reserves. There's a good chance it will have to be bailed out by the taxpayers. The same thing happened to the FSLIC during the S&L crises in the 80s. The FSLIC went insolvent.

I doubt things would ever get so bad that the FDIC can't honor its committments. But I do see a very real possibility that the American taxpayer is going to have to prop it up.

Washington Mutual would put a giant dent in the FDIC. Hopefully they will find some buyers before they go under.

Luke T. — Thu Sept. 18th 12:25p.m.

Washington Mutual's problem now is the huge amount of Pay Option ARM loans that they wrote from 2003 to 2007. Those are some of the most dangerous loans out there and they are not subprime - these were loans made to people who had higher credit scores, but couldn't actually afford the house with a traditional loan. Those loans are now defaulting at a very high rate.

skeptictank — Thu Sept. 18th 12:30p.m.

Yeah, the Pick-A-Pay loan is a trap. 80 percent of people who take out a Pick-A-Pay loan make the minimum payment. The minimum payment is a negative amortization payment. After three years, they owe more than they originally borrowed.

Luke T. — Thu Sept. 18th 12:34p.m.

What is going on with my Oregon Muni bond fund (Eaton Vance Oregon Munis)? There was a dramatic drop ($9.58 Sept 12 to $9.12 on Sept 17). I know there have been issues regarding the insurance on Muni bonds a few months ago, but why such a swing in just a few days?

CAP97140 — Thu Sept. 18th 12:33p.m.

Muni bond funds invest not just in munis, but also in equities. In other words, the stock market. So even muni funds are losing money. The stock market has plunged.

Luke T. — Thu Sept. 18th 12:36p.m.

Perhaps the most glossed over fact in this entire financial upheaval has to do with Social Security. Even your guest blithely mentioned SS in his example of a soon-to-be retiree planning for retirement. Where would Social Security be had Bush & his "free market" proselytizers had their way and privatized Social Security? Can you imagine the disaster we'd be facing right now?
Furthermore, it seems that Greenspan, Bernanke, Phil Gramm and other Milton Friedman acolytes failed Economic History 101. They never really understood the underlying causes of the Great Depression and never appreciated the extraordinary restructuring of banks and financial markets that was necessary to drag the world economy out of the Depression. Consequently, they have led the charge to systematically destroy the regulatory structure that was needed to save Capitalism from itself.
The question is: Can we rebuild the regulatory oversight and adequately modify it in time to deal with this current debacle and head off a new worldwide Great Depression?

phigsmith — Thu Sept. 18th 12:34p.m.

All of these problems were caused by Conservative Republicans De-regulating.

After WW2 the Germans outlawed Nazism, now the entire World ought to outlaw Conservatism.

Tom D Ford — Thu Sept. 18th 12:37p.m.

Falling home prices are not the problem, they're the answer.

Portland home prices are well over the traditional 3X income metric: meaning that the median home price in Portland is still well above 3X median income. Median household income in Portland is about $60K. $60K X 3 is $180K. The current median home price is around $280K. We've got a ways to go.

skeptictank — Thu Sept. 18th 12:40p.m.

What if I'm a WaMu customer and I'm going overseas on vacation (to Europe) in the next couple weeks? Should I be worried about being able to use my debit card if they get sold or taken over while I'm out of the country?

annabanana — Thu Sept. 18th 12:40p.m.

You need a backup plan of some sort. Open up an account at a credit union, for example.

skeptictank — Thu Sept. 18th 12:53p.m.

What if there isn't enough time between now and the time I depart to get a debit card, though?

annabanana — Thu Sept. 18th 12:59p.m.

Yes, banking services are important. That said, we have become a borrowing - leveraged society. My grandparents bought cars and their home for cash. They put money away to grow their future. People now borrow money to buy EVERYTHING. What has happened to investment? Businesses should not be borrowing money to grow. They should raise investment equity. This conversation is just blah, blah, blah. The conversation is an attempt to obscure the fact that most individuals, and companies are overextended and living beyond their means. To be sure... I own real estate as well. I paid cash. Its time to change our perception about wealth and the cost of debt.

notnats — Thu Sept. 18th 12:43p.m.

Yes, you've nailed it. We can blame the banks (and certainly they deserve some blame) and the government, but in fact the fault lies in ourselves. People now want every thing now. They're not willing to wait and save up for things anymore. As you say, there was a time when you saved up for a car and it might not even be a used car. Personal debt is now at unprecedented levels (close to 2X income). Now the credit machine is (thankfully) broken and Americans will have to learn to save again. In the long run that will be a good thing. In the short term there's going to be a lot of pain.

skeptictank — Thu Sept. 18th 12:49p.m.

For those people concerned about the safety of the money they have in savings and checking accounts at WaMu (or any other FDIC-insured institution), an important distinction ought to be made between bank failure and bank acquisition. The FDIC insurance is only necessary if the bank fails. If WaMu were acquired, your accounts would function just as they always have. Most of us have probaby experienced this type of change at other times in our lives when smaller banks have been acquired.

Most of the discussion regarding WaMu right now has to due with a potential sale/acquisition rather than failure.


-Scott

sreich13 — Thu Sept. 18th 12:50p.m.

Thanks, that makes me feel a bit less worried.

annabanana — Thu Sept. 18th 1:07p.m.

i am a single mom struggling to make ends meet. i refinanced my house 3 years ago with what i now am more familiar with as a "subprime loan" - for which my rates just increased $300 more a month.
every month i find myself on the verge of foreclosure. - struggling with my own home loan debt i am now faced, as a tax payer, for the recovery of AIG, Fanny May and Freddie Mac for the tune of $67,000 (average cost per US citizen for $200 billion bailout)?
where's MY bailout package? congress has given no help to the "little guy" (we're just a bunch of "irresponsible whiners") but our government can aid MEGAcorporations that are "too big to fail"?
what happened to government "for the people"?!
i am truly disgusted with my government as it presently stands - wobbly financial knees and all.

kalliste — Thu Sept. 18th 12:52p.m.

The caller said the government pushed lenders to lend money to low income people. That's true, but the government also allowed lenders to adjust the interest charged based on the risk.

The lenders played games with numbers. Someone with bad credit has no business taking out a $300,000 loan. There is no interest rate high enough to cover the risk of some wannabe borrowers. So what the lenders did was offer these two and three year option loans and based the risk on their ability to make the low payments for three years. The assumption was that after the three years, these high risk borrowers would somehow be able to re-finance. It would be someone else's problem.

Luke T. — Thu Sept. 18th 12:54p.m.

I have been in the real estate appraisal business for 23 years and have seen unregulated brokers lie, manipulate and switch interest rates on real estate loans and hound us for values that would be completely unsupported. I have also noticed that a large majority of people refinance just to live. This compounded by the pressure to meet a specific value for real estate sales agents as well as the mortgage brokers have made my decision to leave this industry easy. RE agents and Mortgage Brokers have no problem finding appraisers that will make value and overlook deficiencies and major repair items needed on a house. I have seen the average appraisal fees drop and more of the unethical practices of others raise and I will have no part of this, hence, there is less work out there for us ethical appraisers. This is not a new problem and I hope that there will be a better policing of these semi-professionals.

sue1958 — Thu Sept. 18th 1:02p.m.

I have heard many references to a financial institution badly affected by loss of Money Market investment in Lehman Bros. What institution is this? Why is it not named, or have I just missed hearing the name? Thank you for your coverage this morning on both Wall Street and Washington Mutual. I have two mortgage accounts with WM, and have been very satisfied with them as my bank. I am very sorry they are now in trouble. Please continue to keep us (Northwesterners) informed about this financial mess which affects us all.

Shirley Peak — Thu Sept. 18th 1:26p.m.

There are a great number of money market funds which invested in Lehman Brothers securites. The Reserve Primary money market fund I mentioned earlier is one of them. They are all suffering losses as a result of Lehman Brothers' collapse.

Luke T. — Thu Sept. 18th 1:32p.m.

When I was in college, studying psychology, I became extremely interested in the theory of "learned helplessness." From wikipedia: "Learned helplessness is a psychological condition in which a human being or an animal has learned to act or behave helpless in a particular situation, even when it has the power to change its unpleasant or even harmful circumstance."

Lately it's been popping up rather frequently when working with my clients, typically small business owners. I own a business that provides identity and marketing counsel and development, and the philosophy I've come to follow is called "organic branding." Organic branding is, now that I've thought about this some more, is a practice that works to reverse mental blocks like learned helplessness. And the frightening part is that BECAUSE my practice depends on a relative removal of the attitudes and fears that inhibit sustainable, consistent growth, I am seeing this on practically a daily basis.

I find myself thinking a lot about how our current culture is being crippled by a collective learned helplessness and how it really does seem like there's no way out for the "little guy", as another responder mentioned. And while my business is delightfully successful at this time, I can't help but feel bitter toward all the lenders, leaders, and advisors who created a climate of false achievement for the everyday person.

This false achievement has lead to hyper-consumerism (and as a consequence, rampant debt), manipulation, and an epidemic of personal insecurities (living up to ideals that make no human/organic sense).

I for one am not glum. And I think that what will start to happen is people will begin to educate themselves and then responsibly educate others about how we've been as a culture psychologically manipulated to react with "helplessness" rather than "activism"--because if you read a little about "learned helplessness" theory, you will find that in all of the studies, there was always an option to change the negative situation. The task is to maintain awareness of what's happening to us, who's doing it, and how we can change that.

I'd love to hear some thoughts on this.

organics anonymous — Thu Sept. 18th 1:28p.m.

Heh. Deer in the headlights syndrome.

Sometimes when a person gets in a bind, they don't know what the solution is and so curling up in a ball sounds like a rational response. I've been there.

As for people educating themselves, some will. But that takes work, and too many people avoid that kind of work.

Memories fade. This current crisis is not dissimilar to the S&L crisis of the 1980s. There are a lot of parallels. People forget.

20 years from now, we'll be talking about another real estate crash.

The solution to avoiding the consumer trap is very simple. You see a house you want, don't let your emotions carry you away. The question is not "Is it pretty?" or "Do I like it?" or "Do I want it?"

The ONLY question is, "Can I afford it?"

If you find yourself signing a document where you are going to be making a low low payment when all the mortgage calculators scream at you what the real cost is, then alarm bells should be going off all over your brain.

If a mortgage calculator program tells you a monthly payment for a $300,000 loan is $1800 a month at current interest rates, and you are signing a piece of paper agreeing to pay $1000 a month, alarms should be going off.

And do you really need that 60 inch plasma TV on credit?

You would be surprised how quickly you can save up the money for a TV when you don't have any credit card bills.

Luke T. — Thu Sept. 18th 1:46p.m.

There was a multi-part series of articles done by a pair of writers from the Philadelphia Enquirer back in the 1970s which discussed wealth redistribution in the U.S. It talked about how good paying U.S. jobs began being outsourced. Meantime, the heads of corporations were seeing their earnings increase exponentially compared to the earnings of workers. Sorry, I don't remember the title of the article, that was 30 years ago, but the trend has continued until today.

The question I asked back then was this. If all our good jobs are outsourced, how are we going to buy these cheap foreign goods we used to make ourselves? How will we afford homes and education for our children? How will we do better than our parents did? How can we pursue the American Dream if most of us become economic slaves?

The authors of the article stated clearly that the model of outsourcing, excessively high executive pay, and deregulation were unsustainable. We also know that trickle-down Reganomics does not work for majority of us.

Glug, glug, glug, baby....

trurl9 — Thu Sept. 18th 6:30p.m.

Comments are now closed.