Jobs, Foreclosure, Stock Market And More Thoughts About Our Wacky World

I spent the past two days in Atlanta, sitting next to some of the brightest minds in the world of real estate, credit, debt, and persona finance. One of our esteemed colleagues, George McCarthy, a senior program officer at the Ford Foundation and economist, predicted the utter collapse of our financial system back in October, 2007.

Think back on those heady days – the stock market was nearly at 14,000 and George (known as “Mack”) was predicting Armageddon at this same meeting. What made him so pessimistic? The numbers didn’t make sense, he told us over dinner two nights ago at the Federal Reserve Bank of Atlanta. So much so that after giving his talk two years ago, he took all of his money out of the stock market and put it into a money market.

“When did you put it back in?” I asked him before our meeting started yesterday morning.

“In April,” he said. “Mostly in international investments.”

Mack did something I think most people don’t do: He followed his own advice. After telling us the sky was falling (even though we couldn’t see it at the time), he went and took his toys in and put them somewhere safe.

I think one of the problems most folks have when it comes to money is figuring out their strategy and then sticking to it. If you think the sky is falling, it’s appropriate to sell your investments and stick the money in a bank account. Or, CDs. If you think that having the stock market close up 203 points today, at 10,005, is the beginning of a long run to come, then it’s appropriate to take your cash and buy a diversified portfolio of mutual funds – or stocks.

When the stock market was at 8,300, Warren Buffet said that anyone who bought in at 8,300 would be happy over the long run. I think there’s something to that, even if – as I believe – we’re going to see the stock market take another big nosedive.

I asked Mack what he thought. He said he thinks we’re in for a rough ride over the next two years, but agrees that perhaps the very worst is over. But maybe not, if Congress and the President don’t figure out how to get the budget deficit in line. He sees the possibility of inflation down the line, but thinks taxes probably won’t rise all that much. (I hope he’s right on that one.)

The problem with finding an oracle is that he or she is human, too. Two years ago, Mack predicted the Euro would take over the dollar as the world’s favorite currency. That hasn’t happened yet, but the dollar’s value is sinking and gold is at an all-time high.

One place where Mack and I see eye-to-eye is the housing crisis. Like me, Mack believes the government has the housing industry on life support. The government is backing nearly 90 percent of all loans (through Fannie Mae, Freddie Mac, and FHA), has extended and expanded the $8,000 tax credit beyond first-time buyers, and then is spending $1.2 trillion to buy U.S. housing-backed securities.

Today’s announcement that anyone who is on the verge of foreclosure and who doesn’t qualify for a loan modification and whose loan is owned by Fannie Mae can simply do a deed in lieu of foreclosure and hand over the house and then rent it back is another indication that all isn’t right with the housing market – and things won’t be right for some time to come. (See my story on Fannie Mae Deed For Lease Program Rules and Fannie Mae Rental Program Will Allow Homeowners To Avoid Foreclosure For A Year for more details.)

It all boils down to jobs and income. Right now, nearly 20 percent of Americans are unemployed or under-employed. Another 20 percent have taken some sort of significant pay cut this year. That’s 40 percent of Americans in trouble. Does anyone really think we’ve got a Merry Christmas in store?

Eventually, all this will pass. But there’s more medicine to take.

When do you think we’ll be out of this mess?