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August 15, 2007

The Subprime Mortgage Mania Mess

Kevin E. Dayhoff

After several weeks of Wall Street volatility, it appears that the market has hopefully finally exhaled and calmed down.

The last several weeks have been unsettling as the market has experienced a roller coaster ride of jitters and anxiety. Throwing salt in the wound, political wannabes, and the mainstream media, have recently been fixated on the stock market and the economy - and have only added to the confusion.

Why should we care?

Not only does the fate of the stock market impact the health of the nation, but, like never before, as goes the stock market, so goes the financial health of everyday families. Perhaps, not since the founding of this nation has the average American been so vertically integrated in the happenings on Wall Street, either directly or indirectly.

In March 2001, Gary Younge wrote in The Guardian that the percentage of people "owning stock and equities had risen by 31% in four years." This trend continues.

He said around 80 million Americans owned stocks or mutual funds - "more than watch the Oscars, surf the Internet or voted in the 1998 congressional elections, and double the number in 1983."

And well beyond the matter of the stock market's impact on a family's year-to-year personal finances is the even bigger picture of retirement accounts and pensions.

Scott A. Hodge and Curtis S. Dubay wrote in February 2005: "On average, (for example) public employee pension funds have 60 percent of their assets invested in the stock market." Some pension funds and retirement accounts have as much as 78 percent or more invested in Wall Street.

And yet, there continues to be a huge disconnect between reality and the bill of goods we are being sold by liberal politicians and the media on the financial health of the nation.

William Kristol recently wrote in the Weekly Standard that after "the bursting of the dot-com bubble, followed by the attacks of September 11, 2001, we've had more than five years of steady growth, low unemployment and a stock market recovery." This, for the most part, is a result of the Bush Administration tax cuts of 2001 and 2003.

Jack Kemp recently wrote "that the past 25 years have been the best stock market for investors in U.S. history. (t)he compounded rate of return from the last quarter of 1982 until this summer, circa 2007, has been 11.8 percent."

Mr. Kemp goes on to emphasis that this is the result of policy decisions which correctly emphasized "that lower tax rates on capital and labor, sound monetary policies, with open market initiatives and liberalized trade, leads to stronger economic growth and rising values in equities."

David Malpass, the chief economist at Bear Sterns recently wrote in the Wall Street Journal that "the July 31 consumer confidence survey by the Conference Board jumped to 112, the highest in the six-year expansion."

"The low jobless claims and unemployment rate - clear signs of a strong labor environment - raise confidence and likely future wages. Concerns about high inventories of unsold homes are exaggerated. At 537,000, per the Commerce Department, the June inventory equals 7.4 months of 2007's average sales. This is only a bit above the 6.7 months average inventory from 1980-1995."

As for the causes of the latest "sky is falling" scenarios being put forth by the hyperventilating media over increased defaults in subprime mortgages, Mr. Malpass notes: "Payments on some $500 billion of adjustable rate mortgages are scheduled to go up in 2007. If the mortgage rate is adjusted upward by an average two percentage points, that's $10 billion in added payments. To put this in perspective, wages for non-supervisory workers increased by $296 billion over the last 12 months."

According to Ben Stein, "Foreclosures are now about 1 percent of loans. The lenders will sell the houses and recover at least fifty per cent of the value. That means the total loss may be about one half of one percent of the mortgages made and probably less, and a lot of it is insured. This is an absolutely trivial number in the context of a $14 trillion economy with net wealth in the realm of $60 trillion."

As for the stock market, much of its recent behavior is the result of appropriate market corrections, getting back to fundamentals, and awkward adjustments to a renormalization of the credit markets. It is also the market reacting to an increasing unstable political climate, in which the saber rattling of Democrats threatening to raise taxes and increase regulatory barriers to business and economic development are getting past being an annoyance and causing alarm.

The recent pre-occupation of the media and politicians with misrepresenting matters of the economy and the stock market - and the challenges of the subprime mortgage crisis - are simply for the purpose of causing uncertainty and anxiety, for shortsighted political gain.

Not helping matters is the longest presidential campaign in history. So far the campaign emphasis appears to be that what is bad for the nation is great for a Democratic Party anxious to convince voters that the nation, the economy, the environment and your personal security and well-being are all going to hell and the only way to save ourselves is to elect a Democrat president.

It has been said that you can't get to heaven based on the sins of others. Perhaps that memo needs to be sent to the political leaders vying for our vote in 2008. Enough of the synthetic manufactured problems borne of expedient politics, the promotion of class warfare and prophesies of doom and gloom that are not supported by the facts.

At some point in time, what is needed is a leader to emerge of the caliber of Presidents Ronald Reagan, John F. Kennedy, Franklin D. Roosevelt, or Teddy Roosevelt. Instead of the politics of personal promotion at the cost of the voters' collective psyche and the well-being of the nation, we need a candidate who will confront the reality of the challenges we face with positive solutions.

Kevin Dayhoff writes from Westminster: E-mail him at:

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