Working Through the Turbulence. . .
Vol: 72 Issue: 18 Tuesday, September 18, 2007
US Treasury Secretary Henry Paulson flew to London for an emergency meeting with his counterparts in England and France to discuss the growing financial crisis plaguing Western economies.
The crisis was primarily triggered as a result of the collapse of sub-prime mortgage market.
First, let’s define a ‘subprime” mortgage. In a nutshell, the ‘subprime’ market refers to borrowers with lousy credit. The term refers to the credit status of the borrower, not the interest rate on the loan itself.
However, subprime borrowers generally pay a higher interest rate than those with good credit.
Subprime lending doesn’t apply just to mortgages. There are subprime car loans, where borrowers with bad credit history can get 100% financing on new cars.
Even worse are subprime credit cards, which charge exorbitant interest rates on balances carried by those with poor credit.
Here’s how that works; In the main, the risk is offset with a higher interest rate, ranging as high as 24% annually.
In the case of subprime credit cards, a subprime customer may be charged higher late fees, higher over limit fees, yearly fees, or up front fees for the card.
Subprime credit card customers, unlike prime credit card customers, are generally not given a “grace period” on late payments.
These late fees are then charged to the account, which may drive the customer over their credit limit, resulting in over limit fees.
Thus the fees compound, resulting in higher returns for the lenders. And digging the hole that much deeper for the borrower.
Subprime lending has been dubbed a “predatory” loan practice, since lenders deliberately extend credit to borrowers under terms they know the borrowers can’t meet, leading to default, seizure of collateral and foreclosure.
The problem comes where there is ‘too much of a good thing’, so to speak. About 21 percent of all mort gage originations from 2004 through 2006 were subprime, up from 9 percent from 1996 through 2004.
Some examples of subprime mortgages are interest-only mortgages, where borrowers only pay the interest, leaving the principle untouched, or short-term”fixed rate” loans that quickly convert to higher variable rates.
The problem comes when the higher rates kick in. The difference between a fixed rate of 4% and a higher variable rate of 10% works out to an increase of about 85% in monthly payments.
That is to say, if your mortgage payment starts out at $1000.00 a month on the fixed rate, when the variable kicks in, the payment instantly jumps to $1850.00.
When borrowers default, lenders seize the collateral property, which, in a boom, appreciates enough to allow the lenders to flip it quickly and recover their investments at a profit.
But nothing can go up forever. Now that housing prices are beginning to collapse, lenders are finding themselves holding properties worth less than their loan value.
It starts to have a snowball effect as more and more borrowers default and lenders begin to cut their losses by selling seized properties at a discount, which further depresses housing prices, which makes the situation worse.
In his European meetings, Secretary Paulson did his best to put a positive spin on the crisis, claiming that the credit crunch was the result of bad lending practices rather than any problems in the real economy.
But whether it is bad lending practices or underlying problems with the economy, he acknowledged that the US economy will take a hit from the meltdown.
Former Fed Chairman Alan Greenspan didn’t help much when he forecast the possibility of the euro eclipsing the US dollar as the global reserve currency of choice.
OL Member Fred Shellnut has already posted the Greenspan news story in our Member’s Contributed Articles Section. He was right on the money, (pardon the pun) with the comment; “If Greenspan is saying publicly, it is already happening.”
Greenspan said that the dollar is still slightly ahead in its use as a reserve currency, but added that “it doesn’t have all that much of an advantage” anymore.
In terms of being used as a payment for cross-border transactions, the euro is trailing the dollar only slightly with 39 percent to 43 percent.
According to Bible prophecy, economic and political leadership in the last days will rest, not with the United States, but with Europe. Daniel 9:27 identifies the antichrist as a ‘prince’ of a revived Roman Empire.
Revelation 13:16-18 says the antichrist will exert total control over a global economy so centralized that ‘no man could buy or sell’ except those who are part of his system and have taken the Mark.
But the Mark of the Beast is a lot more than just a high tech credit card. It is also a system of worship. “And they worshipped the dragon which gave power unto the beast: and they worshipped the beast, saying, Who is like unto the beast? who is able to make war with him?” (Revelation 13:4)
We aren’t there yet, obviously. (Although the worship of money is already an indelible part of modern society.) But we are getting closer all the time.
Think about it for a moment. When most of us were young, the US economy was the ONLY economy that mattered. The 1929 Stock Market Crash set off a world-wide economic depression that ultimately ended in world war.
The post-war economic boom was led by the United States. Europe, as a viable economic entity, did not exist, and what remained of the European economy was in shambles. Europe was an economic basket case requiring the US-led Marshall Plan to rebuild it — a process that took more than a half-century.
Yet the Apostle John foretold this exact scenario, from exile, sitting in a cave on the Isle of Patmos, almost two thousand years ago. Only twenty years ago, the concept of America’s economy being eclipsed by Europe was laughable.
But this morning, the headline reads: “Greenspan Says Euro Could Replace US Dollar as Reserve Currency.”
A lucky guess? I don’t think so. I don’t have that much faith in luck.