How did we get into this economic mess? Gambling.

In Vegas you can bet on pretty much any sporting event. Even some you've never even heard of. Turns out our economy is the same way. But it hasn't always been that way. I recently watched this 60 Minutes special on Credit Default Swaps and how they contributed to our current economic downturn. Enlightening to say the least. Check out the written transcript here if you don't want to watch the video. Even for a financial novice like myself it makes perfect sense. And it's extremely worrisome.

What are credit default swaps? Steve Kroft of 60 Minutes states,

"Essentially they are side bets on the performance of the U.S. mortgage markets and the solvency on some of the biggest financial institutions in the world. It's a form of legalized gambling that allows you to wager on financial outcomes without ever having to actually buy the stocks and bonds and mortgages."

Kroft goes on to say,

"Think of it for a moment as a football game. Every week, the New York Giants take the field with hopes of getting back to the Super Bowl. If they do, they will get more money and glory for the team and its owners. They have a direct investment in the game. But the people in the stands may also have a financial stake in the ouctome, in the form of a bet with a friend or a bookie."

This type of betting and gambling used to take place in what was called "Bucket Shops" which were outlawed around 1907 after the stock market fell 50% from it's peak the previous year. In 2000 Congress exempted this "Bucket Shop" law and the credit default swap markets went soaring from roughly $100 billion to more than $50 trillion dollars. Yes. Trillion. According to the report,

"You could bet on anything from the solvency of communities to the fate of General Motors...A lot of the money was made financing what seemed to be a never-ending housing boom, selling mortgage securities they thought were safe and credit default swaps that would never have to be paid off."

And then the housing market took a turn for the worse and there was not enough money to pay off the debts which is essentially what ruined Bear Stearns, Lehmann Brothers and AIG. The scariest part of all this is that these credit default swaps are completely unregulated so we have no way of knowing how much money is still floating out there.

Hedge funds operate in a very similar manner and I posted my thoughts about this a while back and how I feel it can be conflict of interest when a person who is influential over a particular market or industry can bet for or against itsself and reap the rewards. This just doesn't make sense to me. But again, I'm no financial guru. What I took away from this report is that we simply allowed anyone to bet (Trillions of dollars) against our own housing market which at the time was similar to betting against the race horse who is favored to win. Then when the housing market started suffering people demanded their "winnings" and there simply wasn't enough cash to go around and the gears quickly grinded to a hault.

So...I contend that while the housing market has seen better days, it's certainly not what got us into this mess. A law was created roughly 100 years ago in order to prevent a stock market crash. Here we are eight years after the law was overturned and look at where we're at. It's funny how history repeats itself and we'll just never learn from our mistake.

I know you have opinions on the matter so bring it. Watchoo got?

Tips From Jeff

I sent the following email out today to my friends and clients. It was after I sent this email that I noticed the stock market fell yet again to below 9,000 points for the first time since 2003. It is during times like these that more millionaires are made than during times of prosperity. I think this is because it forces us to become more introspective and take a good look at our spending behaviors and locate areas that need improvement. It also allows people to identify areas of need that may have been overlooked when everyone was rolling in the dough.

So keep your heads up. "This too shall pass."

Dear friends,

Much has been said recently about the state of our country’s economic climate so I wanted to share a bit of advice during these difficult times and hopefully clear up a few things, even if only slightly.

Tip #1 – “Spend less money than you make”

As simplistic as this might sound it works. It works in any economic climate both good and bad. If you make $5,000/month and you’re spending $7,000/month then you will soon be broke. One positive thing that is coming out of all of the financial turmoil is that it is forcing many of us to take stock (no pun intended) of our financial situation and tighten our belts when it comes to superfluous spending. If we train ourselves how to operate on a budget now we will be able to enjoy the good times without reservation and guilt when it arrives. If you don’t have a personal budget there isn’t a better time than right now to get started on one.

Tip #2 – “Now is the best time to buy”

Not only does this statement pertain to real estate but certainly the stock market as well. “Buy low, sell high” makes sense to me and there are bargains to be had. If you’re trying to time the bottom of the market then please let me know when it gets here. The most educated financial gurus in the world will tell you the only way to know you are at the bottom of any market is when it is has already passed you by.

Tip (myth) #3 – “But there isn’t any financing available!”

Wrong! This is perhaps one of the biggest myths floating around the media outlets. If you are currently renting and have a credit score of over 700 and can comfortably put 10% to 20% down on a property you are the best candidate to take advantage of our current real estate market. There isn’t a bank in this country that won’t give you a loan on a home right now. Anyone that tells you different has been misinformed. A huge developer trying to get a loan to build a 150 unit high-rise condominium in Dallas is a different story.

Tip #4 – “If you have questions about the stock or real estate markets ask a professional”

Are you curious about what your home is worth in today’s market? Are you unsure of what to do if you have money in the stock market? Should you be buying stock or moving your money around? Most people today are talking about these issues with their co-workers, neighbors or friends and should probably be talking to a professional. Call your financial advisor and request a meeting with him or her. If you don’t have one but are thinking of hiring one give me a call. I’ll be happy to refer you to some top notch professionals. As far as real estate goes if you’re hearing things about the real estate market and want clarification just pick up the phone and call me. Don’t be afraid to ask the hard questions. That’s what I’m here for. And, unlike our favorite politicians, I won’t make up statistics just to sound smart.

Sincerely,


Jeff Duffey, Realtor
Coldwell Banker Residential Brokerage
Park Cities Office
Top 5% in Production Nationwide - '06 & '07
214.521.0044 Office
214.507.2878 Cell
jeff@duffeyhomes.com
www.DuffeyHomes.com