Just How Bad Is The Economy?! If 401K/SEP-IRA Accounts Are Any Gauge Then REALLY BAD!

I have had a retirement account in one form or another (401K, SEP-IRA etc) for some time now.

While my accounts have had their share of ups and downs, the ride was mostly a good one, with my accounts showing gains in the near 50% range over its lifetime (not accounting for inflation).

Lately, however, it seems as though there is no limit as to how far the bottom is going to drop out of our markets with these recent tumultuous times.  My most recent consolidated retirement account statement shows me just how bad this pendulum has now SWUNG THE OTHER WAY.  This past month – October 1 to 31 2008 – has given me my single most worst investment value loss EVER – a one month 30% drop in value! This comes after already losing 20-25% value in the prior 10 months!  This puts my current investment value at literally near or just below cash invested (again not adjusting for inflation).

This is pathetic.  At this moment in time I would have been better off putting my money into a pillowcase and burying it in a fireproof box under my house.

So the big question – HOW THE HELL DID WE GET HERE?!
Stupid politicians will tell stupid people any number of vague BS lies – bank deregulation, greed, blah blah blah.
Not being stupid myself, I want more precise and verifiable answers:
We know sub-prime mortgages hold part of the answer, so to this I ask:

  • Why did so many of these mortgages go sour all at once?! Many will say it is mainly due to the "Housing Bubble" and I have no doubt that was PART of the problem if someone were FORCED to sell their home. Yet, many are NOT selling and still they were obviously paying the mortgage fine for some time. Was it rising interest rates, and if so why were the interest rates rising? Were these all Adjustable Rate Mortgages or variants or ARMs?  Was it also the rising energy costs adding to the already burdened low-income budgets? After all, gasoline/diesel/heating oil prices nearly DOUBLED at this time!
  • How deeply involved was the Government Sponsored Enterprises of Federal National Mortgage Association (FNMA or "Fannie Mae") and Federal Home Loan Mortgage Corporation (FHLMC or  "Freddie Mac")?  These institutions are exempt from state and local taxes and receive an estimated
    $6.5 billion-a-year federal subsidy because they can borrow money more
    cheaply than other investors.Eager to put more low-income and minority families into their own
    homes, HUD (Fed’s Housing and Urban Development department)  required that these two government-chartered mortgage
    finance firms purchase far more "affordable" Sub-Prime loans made to low-income
    borrowers.  Fannie Mae is chartered by Congress with a mission to "provide liquidity and
    stability to the U.S. housing and mortgage markets" (and Freddie Mac was created to offer like competition to Fannie Mae) yet these GSEs were some of the earliest institutions to fail!  Fannie Mae has apparently has been making political contributions to U.S. Senators (i.e. Obama) & Congressmen as well – a complete conflict of interest in my opinion – and is now 100% run by government via the Federal Housing Finance Agency (FHFA)!

  • How is it that sub-prime (risky borrower) mortgage lenders were (a) able to make such risky loans a part of ANY business model and (b) how were they able to sell such risky loans on the secondary market? Either HUD/FNMA/FHLMC was making it a safe bet to investors or investors were failing at one of their main responsibilities in knowing every minute detail of their investments. Or maybe even both.

So who is to blame?
[from factcheck.org] There’s plenty of blame to go around, and it doesn’t fasten only on one party or even mainly on what Washington did or didn’t do. As The Economist magazine noted recently, the problem is one of "layered irresponsibility … with hard-working homeowners and billionaire villains each playing a role." Here’s a partial list of those alleged to be at fault:

    * The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap.
    * Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.
    * Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
    * The Clinton administration, which pushed for less stringent credit and down-payment requirements for working- and middle-class families.
    * Mortgage brokers, who offered less-credit-worthy home buyers sub-prime, adjustable rate loans with low initial payments, but exploding interest rates.
    * Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.
    * Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral. Included here are Moody’s, S&P and Fitch who failed to uncover Fannie Mae’s and Freddie Mac’s inherent risk in continuing to rank them A1 until the day Warren Buffet announced the two entities approached him for financial help (Buffet divested himself some time earlier of these stocks due to his concerns with their accounting practices).
    * [Congress and] the Bush Administration, which failed to quickly push through existing legislation (from both the Bush Administration and congressional members) to provide needed government oversight of the increasingly dicey mortgage-backed securities market.
    * An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.
    * Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up.

The U.S. economy is enormously complicated. Screwing it up takes a great deal of cooperation. Claiming that a single piece of legislation was responsible for (or could have averted) the crisis is just political grandstanding. … These sorts of partisan caricatures can only make the task more difficult.

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