Bankruptcy Filings Surge

U.S. Bankruptcy Filings Surged 37% in February Over Prior Year

"The spike in filings comes as 3.6 million Americans have lost their jobs since the recession began in December 2007 and foreclosures last year rose to an annual record."

Everyone should expect that trend to continue. At least for a few years. The largest amount of resets for ARM loans and Option ARM loans are in front of us, and will not diminish significantly until after Spring of 2011.

Many of these people will find it extremely difficult to pay the higher adjusted rate. The availability of refinancing to another ARM is dramatically reduced due to guideline changes. If the banks do not get the higher monthly payments, it means their losses will be greater, for they already factored in the higher payments as future revenue. So even if the government sets a lower interest rate, the banks will need more government money to stay afloat.

Since 2001, the entire US economy was based on real estate transactions, and all the subsequent business activity which emanated from the rise in property values. From 2001 - 2006, the US conducted the largest capital investment ever into an industry, $11 Trillion, and that industry was nothing more than all of us trading houses with one another.

We can't sell that to overseas markets. Hell, we can't even sell it to ourselves. Who in their right mind would pay 2006 housing prices today? Even if we were to rip out all the granite countertops, SubZero refrigerators and marble floors, how much would Europe, Japan, China India or any one else give us for them? Just realizing this should shine the light brightly on what a huge folly it was.

All that investment with nothing, and in this case, a lot less than nothing, to show for it.

Every other business sector during the housing boom benefited, due to one simple fact - as real estate values rose, that profit was taken by selling or refinancing to a higher amount, and that excess was put into the market place for upgrades, bigger vehicles, vacations, etc.

The rapid escalation was compounded by a few historical changes in lending;

1) People with very poor credit histories were being given loans that exceeded the value of the property by as much as 25%. Debt to income ratios, forever at the 35% or less level, were raised sometimes to as high 60%. Some people were even allowed to have three, four or more properties at one time with these new guidelines.

2) Credit card companies were giving new homeowners cards with $10,000, $50,000 and $100,000 limits. This practice escalated in 2004 when the banks figured out that a lot of people were buying houses, putting in granite counter tops and new appliances and selling the house for profit as the market rose. Why not give them a separate line of credit through a card which would be used at Home Depot, then paid off at the closing when they sold the house?

Over the last 12 months or so, that credit card debt is being securitized, and exchanged with the Fed under the TARP, for good US Treasuries so the banks can borrow against them. You see, no one is willing to let them borrow against very risky credit card debt, except the Fed.

In the short term, unemployment will continue to rise. The reductions in employees at large financial, insurance and real estate based companies can only continue as property values fall.
As those people pile into unemployment lines, all the businesses they formerly spent money with will feel the pinch. Property values will continue to fall as the number of buyers declines due to less income, no income, tougher loan guidelines and general fear of more debt.

The only way to combat this is massive employment initiatives that create jobs with wages equal to all those being lost. That is a tough order. As it is right now, for every ten jobs with an average wage of $50K being lost, the government might be able to replace them with two or three $25K jobs.

For the economy at large, that still represents a 85% reduction in capital flow through the system from wage earners.

If we are to save our financial system and economy, no more precious monies should be given banks that made bad decisions. That money is desperately needed to invest in creating jobs of the future. Every penny given in bailouts is actually robbing innovation and employment of tomorrow. The banks will not hire new employees with government money, they can only use it to pay off the bad bets they've made. Trillions of dollars has already been given the banks, and they are still falling fast towards bankruptcy.

The sooner we all recognize this, the sooner we can start recovery.