“I have been saying for about two years we’re looking at a 1929 kind of event. I think that we are really in trouble in this country. And what you have seen in the last four months is just the beginning of it.”

-Patrick Byrne, Chairman and CEO of Overstock.com, December 2007

“If home prices decline by 30 percent, as one noted economist has said could happen, “We’re all going long apples and boxes to sell them in,” Syron said, invoking an image from the Great Depression.”

– Richard Syron, Freddie Mac CEO in today’s Washington Post

“The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis.”

– Alan Greenspan

The United States doesn’t -make- anything any more. For the last 5 years, our economy has been driven by increases in asset prices, namely housing. People cashed out equity and spent like crazy, driving the economy forward.

All good things must come to an end, and we’re seeing just the first inning of the housing bubble unwind in a game that’s going extra innings. As prices drop, equity vanishes, and mortgage owners owe more than the property is worth.

Next in line are consumer grade loans – auto defaults are already up, as are student loans, because when the choice is between a roof over your head or a student loan payment, you go with roof every time.

Housing equity can’t be used to pay down those loans any more, so they go red. The next wave after that is credit card defaults, because once you’ve maxed out, you’ve got nothing left and have no way to pay. Discretionary income? No such animal in a recession. Everyone’s paying just to stay afloat and with the basics.

All this plays out over the next 3 years. Mortgages are unwinding now, but subprime goes nuclear in March 2008 with the largest wave of rate resets yet, $65 billion worth, and stays at that level for 6 months. Defaults typically occur in 30 days of a rate reset; some borrowers don’t even make a payment.

Expect secondary loan (car, student loan, etc.) default rates to hit the wall shortly after the mortgage ones, and credit cards even sooner as the source of last resort financing, because the people who are in trouble are living lifestyles beyond their means.

Scared yet?

While I’m not a certified financial planner or anything, I’m going to give this piece of advice. If your money is in a place that is not insured, move it to an insured place. Insurance means FDIC coverage for up to $100,000 of cash per account. Money market funds are discovering they’re tainted with bad mortgage debt. Municipal bonds are finding out their guarantors overextended.

Anyone who promises a fix for this situation that isn’t “we have to ride this out” either has something to sell you or is running for office. Don’t believe them. This financial crisis took years to make and it will take years to unmake.

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