Thursday, September 27, 2007

Financial Aphasia: What happens when Mortgages, Credit and the Economy lose Meaning

The first time I spoke about the subject of sub-prime mortgages and the potential for this seemingly endless fallout came during a live television show in February of 2006. Granted, the demographic for that medium market audience was not the same as those watching the more affluent Bloomberg network or even the rowdy bunch who tune in to CNBC. Yet it was the very audience that needed to hear what must have seemed at the time like a “sky is falling” report.

As I revisited these thoughts over the next eighteen months, one simple fact always seemed to remain constant: we, not the investor class but the average person, continues to suffer from financial aphasia. Closely related to semantic aphasia, a mental disorder that does not allow the individual to understand the meaning of the words being spoken even as they understand what the words are, the financial form of this malady leaves the listener doing one thing while believing something wholly different. It has been best described as a little like hearing a love song - only without knowing why those words were used or what the singer meant by them.

Financial aphasia, by my definition, offers a look at the mounting storm surge that the housing market has become and the fact that, with so many people speaking about it, affected by it, and promising to reform the system, the words have lost their meaning. We hear them but we no longer understand them.

Ben Bernanke, the Federal Reserve Chairman wrote a letter recently to Senator Charles Schumer that offered some form of agreement with the outspoken lawmaker's fear. “ I share your concern about the potential impact of scheduled payment resets on homeowners with variable-rate sub-prime mortgages,” he wrote suggesting a little further along that perhaps “developing a broader range of mortgage products” might help those who are in the deepest trouble. Really?

Didn't the problem begin with mortgage products, Mr. Bernanke? The end result of the unceasing ingenuity and creativity of Wall Street to cater to risk seeking investors who saw the mortgage market as the new potential rainmaker is at the heart of this problem. More mortgage products Mr. Bernanke, are not the solution.

Even if the Fed has no direct impact on mortgage rates as many assume they do, shouldn't this traumatic event have been apparent at some point before now on their economic radar? As they sift through reams of data, is it possible that they suffer from financial aphasia?

That letter made Wall Street happy with anticipation. The possibility that Bernanke has refocused his attention on the economy, one in which he pronounced was doing just fine a month or so ago, sent stocks soaring - again. Despite what Wall Street wants and even lobbies so strongly for, and at the risk of repeating myself, an interest rate cut would not be in this economy's best interest.

Many of the newsworthy suggestions on how approach .....NEXT............

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