Economic Studies

The International Financial Crisis

The End of Credit Card Consumerism

A new frugality could remake

The U.S. Economy—and American Life

By: Kimberly Palmer

US News

When it comes to longevity, few royals can top America's King Consumer. For more than four decades, our shopaholic nation has shown an insatiable desire to spend until our credit cards melt. And throughout this era, consumer spending has, well, consumed a greater and greater share of our total economy. Only twice since 1965, despite half a dozen recessions, have Americans spent less in a year than the previous one. Indeed, it often seems that we have defined ourselves by our ability to buy supersized everything, from McMansions to tricked-out SUVs to 60-inch flat-screen televisions—all enabled by decades of cheap credit.

       On the surface, it may seem that there's nothing wrong with all that conspicuous consumption, especially for the biggest, most productive economy on the planet. After all, our undying love of stuff has helped fuel a global economic boom. Yet today, America finds itself at a once-or-twice-a-century economic tipping point. A sharp slowdown, record-high gas prices, high consumer debt levels, a plunging real estate market, and the growing green movement all seem to be conspiring to dethrone King Consumer and transform the economy and the American way of life for years to come. "The process of bringing our wants and our needs into realignment," says Merrill Lynch economist David Rosenberg, "is going to involve years of savings and frugality." Or, to put more it more simply, "there is an anti-bling thing going on," says Marian Salzman, chief marketing officer of Porter Novelli.

Party's over. Many consumers, of course, don't have much choice but to scale back. Total credit card debt has increased by over 50 percent since 2000. The average American with a credit file is responsible for $16,635 in debt, excluding mortgages, according to Experian, and the personal savings rate has hovered close to zero for the past several years. High gas and food prices are causing real incomes to fall. Even worse, rising inflation will probably cause the Federal Reserve to start jacking up interest rates once the credit crisis on Wall Street has passed, tightening credit even further. "We're shedding jobs, it's much harder to borrow, and what used to be capital gains are now capital losses," says Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "There's no source of funding for spending." Because many of us won't be able to as easily use our homes as ATMs, Hoyt expects to see an upward trend in saving and slower growth in consumer spending, compared with the binge of the past decade.

       It was our appetite for housing, after all, that served as the catalyst for the multidecade consumer boom. Consider this: Consumer spending has risen to just over 70 percent of the U.S. economy from a bit more than 60 percent in 1965. The pace really picked up in the 1970s, when the first baby boomers started buying and furnishing their own homes. But now, Rosenberg says, the median boomer is in his early 50s and looking to unload his fleet of leased SUVs.

To some degree, then, demographics are destiny. Longer term, an aging population will need to spend less and save more for retirement. As that process plays out, consumer spending may become less important in the big economic picture. Moody's Economy.com forecasts that the combination of demographic and financial factors will cause just such a seismic economic shift. Reversing a four-decade ascent, consumer spending could actually start falling as a percentage of U.S. gross domestic product, slipping to 68 percent over the next seven years.

       Shopped out. And this new frugality might actually be OK with many of us. Consumers were "so glutted on everything that they had acquired and all the time that was robbed from them...that they almost saw this [downturn] as a great opportunity to stop," says Faith Popcorn, chief executive of her eponymous consultancy. In a recent survey, she found that 90 percent of respondents said they were considering options for "the simpler life," and 84 percent said they were inclined to buy "less stuff."

       Another survey found that people rank being in control of their finances and living a green lifestyle higher as signs of success than having money or a luxury car, and view having a paid-off mortgage as more of a status symbol than having a beautiful home. "We have to convince ourselves that the lifestyle we can afford right now is a desirable one," says Holly Heline Jarrell, a global director at the communications firm Manning Selvage & Lee, which sponsored the survey.

Mortgages in the US

The mortgage industry in the US is both huge and highly developed, offering numerous mortgage products with a range of repayment options...

      Waterfield Mortgage

      Conseco Finance

      Century Mortgage Corporation

      Ditech

      Chase Home Finance

      Eastern Mortgage Services

      EMC Mortgage Corporation

      eHomeCredit

      GMAC Mortgage

      eMortgage Solution

      Guaranteed Mortgage Company

      Freemont Investment & Loan

      Prime Mortgage Inc

      Full Spectrum Lending Inc

      Washington Mutual

      Great Eastern Investments

      Wells Fargo

      Home Finance of America

      Apex

      America Finance Center

      Approved Bad Credit Loans

      Apartment Lending Corporation

      The United States of America has the most active mortgage market in the world, and mortgage services are provided by a number of entities, including individual and organizational mortgage providers.

      Other types of mortgage brokers work in both individual and as organizational capacities. With all the players involved and with intense competition spurring constant innovation, there are numerous types of mortgage products available in the US.
 

      There are two basic types of mortgages in the United States: 

      fixed-rate mortgages, and

   Variable-rate mortgages.  

      Fixed-rate mortgages offer an interest rate that stays the same throughout the tenure of the mortgage.  

      Variable-rate mortgages, which are also known as adjustable-rate mortgages, or floating-rate mortgages, offer rates that can be changed, adjusted or that fluctuate.  

      Normally, fixed-rate mortgages have terms of either 15 or 30 years, which is the length of time the mortgage borrower has to pay off the mortgage.  

      In the case of floating-rate mortgages, terms are normally only one year in duration. It is important to note is that interest rates for fixed-rate mortgages with 30-year terms are higher than those with 15-year terms.

      In the US, people can get mortgages from government sponsored entities or GSEs, including: 

·               Fannie Mae,

·              Ginni Mae and

·              Freddie Mac.

      These organizations operate under federal charter and are overseen by the federal American government.
 

Well-reputed mortgage companies in the US include:  

·               Capital Mac

·            Ameriquest Mortgage Company

·            Mortgage Secure Massachusetts

·            America's Mortgage Corporation

·            MCA Mortgage Division 000

·            ABN Amro Mortgage Group Inc

·            Valu Mortgages

·            Americas Money Center

Crunch time

Whose Making, the Financial Policies in USA?

       I think it would be fair to say the turbulence we've seen in the financial markets over the last 12 to 20 weeks is truly unprecedented in all of our lifetimes such a profound loss of confidence and distrust as we've seen grip in the financial markets since August. 

       This was brought on, I think, by the decision of Hank Paulson to let Lehman Brothers go bankrupt.  

       I suspect he greatly regrets that decision because it led to a series of shocks, rising inter bank lending rates, commercial paper markets shutting down, credit spreads widening, it went way beyond what he imagined when he  let Lehman Brothers go into bankruptcy!  

       But the reality the crisis, it's been very severe, and now we can see, as a consequence of very dramatic government actions in America, a possible way out.  

Now at the corner of this crisis is the American residential real estate market.

       America had, over the last seven or eight years, a great property boom. 

       Between 2002 and 2006 real estate prices increased by 70per cent.  

       In the hot markets like California and Florida they doubled and tripled and this helped to spawn a  phenomena called sub prime lending.

·                This was mortgage lending for:

·                Low income people,

·                Disadvantaged people,

·                Unemployed people

And it simply spun out of control because bankers believed that with rising

  real estate prices you can't make a bad loan.

       Bankers were also incentives to make these loans because two and three years ago 70 per cent of the loans they made were securitized. 

       They were turned into collateralized general obligations and sold to banks in Germany and Switzerland, country towns in New South Wales, banks in China, they were sold all over the world. So the banks did not retain the credit risk for these very, very high risk loans.

·         This also has a cultural dimension to it:

·                America, as a country, has an obsession with home ownership.

·                We have many public policies designed to encourage home ownership.

·                We have unlimited tax allowances on mortgage payments.

·                When people sell their home they have a $500,000 tax free allowance for    capital gains.

·               We created two government mortgage banks in the last 60 years to promote home ownership.

       Their balance sheet today is over $5 trillion and we have something called non recourse mortgages, you don't have that in Australia or practically in any country in the British Commonwealth or in Europe.

         But with a non recourse mortgage it's easy to default.  

      In USA have a phenomena called 'jingle mail'. You put your house key in the envelope, you mail it back to the bank and you say goodbye and our banks don't have the power or the authority to pursue your other income and other assets.  

       The result is you can default easily and freely with no immediate penalty.

v  And right now 16 per cent of the American people have negative equity in their homes and if they live in California, Florida or Nevada that negative equity might be equal to 30 per cent or 40 per cent of the value of the mortgage, so the temptation to default is very, very large………………….

• By :
• Mr.Medhat Saad El-din
•       General Manager
• The Egyptian Center for Studies of Export & Import