My Predictions from 3-years ago

In September 2005, I made the following prediction regarding the mortgage lending practice and its consequences. Let's see if I got it right.

-------------- Written on September 17, 2005 ------------------------

Who is behind these risky loans? They are Fannie Mae and Freddie Mac. They are owned by the federal government buying up these risky loans. So, these lenders have little risks because they sell these loans to the federal government. When the bubble bust, the government will be responsible for all these bad loans, much like what happened to the Saving and Loan collapsed in the 80's. So, the bank has little to lose except collecting fees. We will be paying for this mess.

But why would the government is willing taking such risks? Because this President is unable to create jobs or stimulate the economy. Think about it! The only segment of the economy that did well since he became President is the housing market. So, his job is to keep it going as long as possible.

Evidence? The Treasury Department has stopped issuing long-term bond since 2001, thus lessen the supply. On the other hand, the government is buying all kinds of loans, thus increasing the demand. As a result, increase the bond price and lower the long-term mortgate rate. Give Bush credit, so far, it has worked, but the economic theory will catch up with him sooner or later and the time bomb is ticking.

With 200 billion dollars for Iraq and he just promised another 200 billion for Katrina, the bond market is getting worried (see link below). If you let someone, who already owed others lots of money, borrows your money, would you charge higher or lower interest rate. So the pressure on higher long-term rate is very high. Greenspan has raised short-term rates 7 times, but Bush's trick was able to keep the long-term rate low. It is like an earthquake fault building pressure. Sooner or later it will break. The higher the pressure, the bigger the earthquake.

Katrina is hurting the economy. Anything else can really break this open with much higher rate very quickly. Housing and bond markets
are at risk. If you are considering buy bond, don't. Not now.

There is always a silver lining among all the bad news. For all the adults, we are not going to pay for this. Bush said he will not raise tax to pay for deficit. These troubles will be paid by all the kids. Thank you kids for taking care of the trouble we leave for you!

P.S.: Here are some reference material if you are interested.

Fannie Mae, Freddie Mac warned by Greenspan
http://www.burlingtonfreepress.com/apps/pbcs.dll/article?AID=/20050916/BUSINESS/509160321/1003/NEWS05

The "long bond" is back. What does it mean for investors?
https://flagship5.vanguard.com/VGApp/hnw/VanguardViewsArticlePublic?ArticleJSP=/freshness/News_and_Views/news_ALL_30yearbond_09062005_ALL.jsp

Treasury Bond Prices Fall Due to Worries http://news.yahoo.com/news?tmpl=story&u=/ap/20050916/ap_on_bi_ge/bonds_41

-----------------------------------------------------------------------------------------------------------

What we saw in the sub-prime problem in recent weeks, I was mostly right, especially regarding Fannie Mae and Feddie Mac. I was wrong, however, was the magnitude of the problem. I did not know at the time that Congress (led by Phil Gramm) had deregulated and let investment banker to get into these risky loans and could spread it throughout investment banks like Lehman Brothers and insurance companies like AIG.

I was wrong also believing George W. Bush would actually keep his promise to help his fellow Americans harmed by Hurricane Katrina. I guess not.

Beside these two points, I was pretty much right on.