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After receiving quite a few questions about our current recession and other concerns about the U.S. Economy I thought it would be good to share a bit about the history of economic cycles in the U.S.
The only thing that remains the same is that things always change. We have had numerous recessions over the last century and we have had numerous times of economic prosperity. It comes, it goes, and repeats again.
The U.S. stock markets generally provide a good indicator of how the economy is performing. Below I have a spreadsheet that I found that shows the history of past Bear Markets or recessions. It is very encouraging to notice that of the 24 bear markets during the last century, none of them have lasted more than 3 years with the average length being only 15 months.
Another important thing to remember is that on average, 1 year after the bear market is completed, the market (DJIA) is up 44%. In fact there was only 1 time out of 24 that a year later it wasn’t better than it was when the recession ended.
The bottom line of all this is that recessions are a normal part of the cycle. We have high times and low times. The U.S. is just in a bit of a low time right now. History is not a perfect indicator of the future, but it is about the best predictor we have. Using the data from the previous recessions, it is pretty reassuring that everything is going to be okay. In fact, I would be willing to bet that shortly after this recession ends we will have a huge economic boom. That just seems to be the next phase of the cycle.
Does anyone else have any other hope-filled news about the current economic troubles?
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Well, September was a good month for me, but I am excited that we are finally getting some Autumn weather. Did I mention I love the Fall. Actually, I love all the seasons. I guess I just like change. People make fun of my wife and I because we re-arrange our living room so much. We just can’t help ourselves - it is just too fun!!
Anyway, since I am currently sitting on the beach (don’t get jealous, I am praying that you get great vacations too!) I will leave you with some of the more popular articles from September - in case you missed them.
- 10 free dates your wife will love
- 15 ways to make money quick
- 5 ways to get a deal on Ebay
- 10 free household budget spreadsheets
- Getting out of Debt Series
- Amazingly simple home remedies
and here are a few older ones that are worth sharing…
- How to make a budget
- Why God’s way takes longer
- Would Jesus have an emergency fund?
- 12 ways to turn a bad day into a better one
- Budgeting is like baking cookies
- Save money on car depreciation
- Primerica Pros and Cons
- How to watch HD TV on your computer for under $70
- Your financial life on one page
Oh and if you haven’t signed up yet - please consider joining us on the 10 Day Give!!
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Money Magazine is writing a faith and finances article
Apparently Money Magazine is looking for “people of faith” to see how they manage their finances. I was interviewed by SmartMoney magazine for something similar a few months back. There seems to be an interest in how faith affects our finances - I wonder why? 
If you are interested in getting involved, read this from Money Mag below…
How does your religion affect your finances? Money Magazine is seeking families willing to discuss the dollars-and-cents expenses involved in practicing their faith - the cost of everything from religious schools and dietary restrictions to tithing and faith-based investment limitations. If interested, please email your name, contact information and family photo, along with a brief summary of your salary, savings and religion-related expenses, to gmannes@moneymail.com.
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A reader recently asked me to share my thoughts and opinions on the current economy and the mortgage crisis. I took a couple economics classes in college, but that is about all I have going for me as an “economist.” Thankfully I found a great article on Between Two Worlds from someone who has a better educated opinion on the whole topic.
His name is David Kotter, and he is the Executive Director of The Council on Biblical Manhood. He has worked as a finance manager, has taught economics, has an MBA, and is a Christian. He seems like the perfect guy to ask for clarification about what is going on with the mortgage / banking / economy crisis. These are the questions he was asked and his responses a couple days ago…
What is happening in the present banking crisis?
Last night the federal government committed to lend $85 billion to the insurer American International Group (AIG), on top of the $200 billion of capital promised to keep Fannie Mae and Freddie Mac solvent in July and $30 billion for Bear Stearns in March. In other words, more than $1,000 for every man woman and child in the country has been directed in various ways to resolve the present banking crisis. At this point, you might be wondering why this happened and what benefit you can expect to receive from your thousand-dollar share.
Why is this happening?
There are plenty of root causes for the present crisis, depending on whom you ask and where you look. Some point to the several years of artificially low interest rates from the Federal Reserve Bank. These led to an explosion of home building and enabled families to stretch into larger houses. Others blame lenders for creatively introducing no-documentation and interest-only loans as a temptation to over-extended buyers. There is certainly individual responsibility involved whenever anyone signs the imposing mortgage document packet. In any case, many people borrowed money to purchase houses and this increase in demand increased the price of houses.
At the most basic level, a $100,000 mortgage loan on a house (at 6%) is a promise to pay back about $215,000 over the next 30 years in 360 convenient payments. This promise is obviously valuable to a commercial bank, and can be sold to other banks or even consolidated and sold to large investors as a Mortgage-Backed Security (MBS). If the promise is not kept, the lender gets the house to offset the decreased value of the promise.
Problems arose last year when many people failed to keep their mortgage promises. This year a staggering 25% of all subprime loans are delinquent or in foreclosure. In essence, the valuable promises that were being bought and sold are now worth much less. Further, the houses backing the promises are often worth much less because so many are being sold at distressed prices.
Therefore someone has lost a lot of money (a.k.a. a crisis). The mortgage promises are no longer worth what banks paid for them and the underlying real estate is often worth less than the loans. Precisely, the real problem was that the risk of default was underpriced, or not completely taking into account by insurers and purchasers of mortgage-backed securities. Now that the default rate turned out to be much higher than credit scoring agencies predicted, the key question is who will ultimately bear the cost of these multibillion-dollar losses.
Certainly the shareholders of investment banks like Merrill Lynch, Bear Stearns, and Lehman Brothers have realized tremendous losses. This has forced these companies into bankruptcy or distressed sales to other firms. The shareholders of Fannie Mae and Freddie Mac lost almost all of their equity when these government sponsored enterprises were forced into conservatorship by the government. AIG, which sold insurance against the risk of default of mortgage backed securities, gave up 80% of the firm to the US government in exchange for a two-year loan at 11% interest.
This is where your thousand dollar contribution enters the picture: it represents your share of the government bailout to partially offset these losses and keep most of these firms afloat. If they all fail, the borrowing and lending that efficiently directs capital in a modern economy will grind to a halt. If none of them fail, the Federal Reserve will introduce a “moral hazard” that will reward risky behavior and encourage more in the future. This is a good reason to intercede for “those in authority, that we may live peaceful and quiet lives in all godliness and holiness” (1 Timothy 2:1).
By the way, you won’t receive a personal invoice for the thousand dollars; it will just be added to the national debt. Ironically, for many people this is larger than the stimulus payment sent out earlier this year, and there is no guarantee that the taxpayers won’t be asked contribute yet more as the crisis unfolds.
What effect will this have on the wider economy?
Undoubtedly this crisis is having widespread effects on the economy, although economists disagree as to the extent at this point. AIG is one of the 30 stocks in the Dow industrials, so the evaporation of the equity in this company was a major contributor to the 500 point drop in the market on Monday. Investors are now suspicious of other banks, leading them to sell those stocks as well. Banks are increasingly reluctant to make mortgage loans and this makes it more difficult for individuals to purchase a house. A huge inventory of houses on the market in many areas is resulting in neighborhood blight and further depresses prices. Individuals whose houses are declining in value are curtailing other large purchases, and this further weakens the economy. High gasoline prices and a weaker dollar only contribute to the malaise.
On the other end, we must keep this in a wider perspective. Though some laugh when they hear “the fundamentals of the economy remains strong,” this is actually true. For example, the unemployment rate has risen to 6.1% (which is a challenge if you have personally lost a job), but this rate is still lower than the peak in 2003 and is better than many European countries today. Further, despite the rampant media discussion of a recession, the economy has been growing for the last two quarters. This bubble, like the “dot com” bubble and even the tulip mania bubble of 1637, will eventually be resolved as banks and investors accurately report their losses and adjust accordingly.
What effect will this have on individuals?
For believers, this is just one more reason to “not love the world or the things in the world” which is “passing away along with its desires” (1 John 2:15, 16). In Louisville we have been without electricity since Sunday, and it makes me increasingly grateful that our God is independent and powerful enough to accomplish his good will every moment. Lighting candles each night reminds me that I am not!
Although it will be harder to obtain aggressive mortgages, Christians who are practicing prudent financial stewardship (modest houses, large down payments, monthly payments easily within their means, diligent participation in the work force) should not have much problem. Everyone will want to verify that their savings account is government insured, but believers with a generous “wartime mindset” should have no trouble keeping their bank accounts under $100,000 FDIC limit. Above all, don’t be anxious about your life, what you will eat or what you will drink, nor what you will wear. Remember that journalists, markets, and lemmings tend to move in herds. The media never reports on thousands of planes that land safely, but solely focuses on one that doesn’t. In that light, if you are saving for retirement more than 10 years from now, this actually would be a good time to invest in the stock market. But don’t let your IRA be a substitute god or distract you from treasuring Jesus Christ (Matthew 6:24-34).
Is it right to pray for the economy?
I think it is appropriate to pray for the economy. After all, God said to Jeremiah, “Seek the welfare of the city where I have sent you into exile, and pray to the Lord on its behalf, for in its welfare you will find your welfare” (Jeremiah 29:7). When the economy is strong, people are able to work and support their families, believers have greater opportunities for generosity, and many benefit from this common grace.
We can pray for integrity and wisdom for government officials who are faced with the incredibly complex task of regulating investment securities and banks in a way that is transparent and serves all of the varied stakeholders. We can pray that those who are willing to work will be able to find gainful employment. We can pray that greed would be restrained at all levels, from the leaders on Wall Street to individual families tempted to live beyond their means. We can pray for ourselves that we will participate in the national economy that keeps in mind the time is short and the present form of this world is passing away (1 Corinthians 7: 29-31).
I really enjoyed this article and thought is was very helpful. As a long-term investor and someone who works hard to maintain long-term thinking, I completely agree with his analysis of how this all will affect the economy on a wider scale. The best investors know that the best time to buy is when everyone is selling. Normally everyone is only selling when there is a lot of fear present. It is difficult to boldly go in the opposite direction of the crowds, but there is often a lot of reward as well.
While I don’t have confidence that America is going to be the super-power that they are today in 200 years, I do feel confident that we as a nation are going to bounce back from this like we have all the other times.
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The largest polished round diamond?
Apparently a 478 carat diamond was just recently unearthed in Africa. The experts are saying that once polished, it could become the world’s largest polished round diamond.
According to Foxnews…
A huge gemstone that could become the world’s largest polished round diamond has been found at the Letseng Mine, owned by Gem Diamonds, in Lesotho, southern Africa. The diamond weighs 478 carats and is the twentieth largest ever found. Gem Diamonds says that initial examination suggests that it has a flawless centre and could produce a 150-carat round-cut white diamond worth tens of millions of pounds. “Preliminary examination of this remarkable diamond indicates that it will yield a record-breaking polished stone of the very best colour and clarity,” the company’s Chief Executive Clifford Elphick said in a statement.
This makes me think back to a post I wrote a while ago about the increasing quality of man-made diamonds. In it, I talked about how diamonds are now being “grown” and since they are being made the same way that diamonds are made in nature (just on a much quicker timeline) even a lot of diamond experts can’t tell them apart from the “real” ones.
I can’t help but wonder if we won’t be seeing more record-breaking diamonds appearing in the future? And if the experts can’t distinguish the genuine from the “grown” ones - it just seems like there could be some interesting things ahead for the diamond industry.
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Bible Scriptures about Money Podcast
First,
I just officially got approval from NASB for a project I have been working on… the Bible scriptures podcast… These are basically most of the verses that are in the Bible verses about money page in audio form. To be honest, I just wanted to be able to listen to specific scriptures sorted by topics myself, so that is why I (and my lovely wife) created these. After we created a few I figured that if it was helping me, maybe others would want them as well. So, they are not professionally done at all, but if you want to check them out - you can here.
The 10 Day Give
I am really excited about the challenge. If you haven’t heard about it - find out more here - and sign up!
The 80’s revisited
We just had a youth conference at our church last weekend and I got recruited to play guitar on a song that epitomizes the 80’s - “You spin me right round” by Dead or Alive. So I got a Member’s Only jacket, grew a fat mustache, learned some cheesy dances and got to it. You can see me and the rest of the band in all our glory below…
A week until Vacation!
A week from today I will be on the beach! I have always had an affection for beaches and I am looking forward to chilling out and sitting in the sand for hours at a time. I will send a postcard
Here are a few articles I have been reading the last week…
- A giveaway for a book called “Sound Mind Investing”
- How to find a good mechanic
- Warren Buffett’s 10 ways to get rich
- Testing your house for Radon Gas
- Budgeting for teens
- Edible Landscaping 101
- 50 Frugal things you aren’t doing
- 10 things to do with $1000
- Budget so you can actually have FUN
A little thanks to few of my buddies that have sent me a lot of traffic the last month…
- The Simple Dollar
- Blogging Away Debt
- My Money Blog
- Being Frugal
- Get Rich Slowly
- Frugal Dad
- Borrow From No One
- Gather Little by Little
- Sense to Save
- Free Money Finance
- Kingdom First Mom
- Bible Knowledge
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What is a FauxPloma?
I just read an interesting article on FoxNews about the FauxPloma industry. Basically, a Fauxploma is a fake diploma as the name suggests. Evidently “Diploma Mills” seem to be increasing in number as more people are looking for a quicker way to become a college grad - on paper anyway. Apparently it is a billion dollar industry.
According to Fox…
Degree mills are unaccredited organizations that charge a fee for a degree with little to no educational work required. These fraudulent institutions typically give credit for life experiences and often have no physical facilities. To be sure, not all unaccredited institutions are diploma mills–some may be striving toward accreditation, and others may simply be training schools.
The scary thing to me is that it doesn’t seem to be a black and white issue. Some of these institutions are in the shady gray area. They might think they are doing students a favor by giving away hundreds of credit hours in exchange for “life experience,” but ultimately it is a short-cut to a degree.
A nationally recognized University in my town now offers degree programs that can be completed in only a fraction of the time for night students. From my what I hear, the classes actually require a whole lot less work than the traditional classes. I think it is great that they are trying to accommodate them, but at what cost? If student A graduates with the traditional degree and student B gets a non-traditional degree, works half as hard, and walks away with the same degree, it is only a matter of time before the word will get out.
Employers are going to realize that the degrees can be earned easier than they could in the past and begin to slightly value them less. I could see how it could be frustrating to students who put in a lot of time, energy, and money into a degree that is slowly deflating in influence.
I wrote a few days ago about my thoughts on whether a college degree was still worth the money and I think this adds a bit more food for thought.
This article was featured in the Carnival of personal Finance
What do you think? Have you seen how degrees have been watered down in your situation?
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I finally gave into the peer pressure and have started a Twitter account…
So, if you are into the whole Twitter thing you can follow me here…
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My CD player in my car broke last week. Bummer. I, like you, have heard the never-ending HD radio commercials. I didn’t really care about getting an HD radio that much, but since I am getting one anyway, why not at least look into it.
It turns out that Crutchfield.com (probably the best place in the world to buy a car stereo by the way) has a Dual Car stereo that plays MP3 CDs, has an aux input, and is HD radio ready for $49.99 after a $50 mail-in rebate.
Here is a pic of it for your viewing pleasure…
HD Radio Stations
I also wasn’t sure how many HD radio stations there were in my town, so I did a little digging and you can find out how many HD stations there are near you by clicking here.
So, anyway, I only bring this up because it seems to be a pretty good deal. I wouldn’t have bought an HD radio if mine hadn’t gone out, but now I am a little excited to get it! I will let you know how I like it…
And here are some other articles I have been reading this last week…
- The end of the American empire
- Is organic food worth it?
- How to make homemade non-toxic oven cleaner
- What is the true cost of what you are buying?
- 10 Ways to save money on the golf course
- Is giving really that important?
- Billionaires Acknowledge National Debt Is A Problem - Will Anyone Listen?
- Should you pay for your kid’s college?
- Are you responsible for your financial failings?
- Paying credit card bills before mortgage payment
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I have been wanting to start forums for a while, but have just finally gotten around to it. You can access the Christian Financial Forums by clicking on the link.
You can get your questions answered in the forums
Part of the reason is that while I love getting personal and specific financial questions from everyone, sometimes there is a lot to be gained by hearing multiple opinions. Proverbs says that there is safety in the multitude of counselors. The forums will provide a great opportunity for that. You can ask a quick question and get responses from any of the members.
Forums are great for sharing your ideas
If you have ideas or thoughts that you want to bounce off of others - the forums are a great place to do it!
Forums can help you find answers to your questions
Since they just started, there really isn’t much there yet, but over time as more conversations take place, the forums will contain a lot of answers to your financial questions.
Win FREE STUFF by posting in the Forums
Starting tomorrow, the weekly giveaway will be given to someone who comments in the forums. So rather than just leaving a comment on the giveaway post, you just need to leave a comment in the forums. Since I am trying to use the forums for discussion purposes, please post something that adds to the discussion - or start your own discussion.
Forum FAQ’s
How long does it take to sign up?
Maybe 15 seconds. All you need to sign up is a Username, Password, and Email address.
Will you or anyone else spam me?
No. I hate spam as much as you.
What do I do when I get in there?
Once you hit the homepage, you can browse through the different categories. Click on a category and then you can click on a topic/discussion that interests you. You can then read what has been posted and comment if you like or start a new discussion.
How do I start a discussion or ask a question?
Once you have selected a forum category you can click on the “New Topic” button. It looks like this…
Is there an easy way to find out when someone responds or posts something new?
Yes. Select the topic you are interested in hearing about updates and at the bottom left hand corner of your screen you should see this…
If you click “Subscribe topic” it will then send you an email whenever someone posts to that discussion.
Other stuff about the forums
- I have put up some topics for discussion and polls to spur some discussion. Since they are just starting out, you can be an integral part of getting them going just by commenting!
- I think I am going to also offer prizes to the most active participants in the forums. I don’t have it all figured out yet, but stay tuned.
- Why not head over to the Christian Financial forums now and introduce yourself?
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