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Nalls addresses WKnox Democrats

How bad is the current financial/economic crisis?

“I think it’s no exaggeration to say we’re in the worst credit crunch/economic crisis since about 1931,” said Donald E. Nalls, CFP, Patriot Investment Management, Knoxville, pictured right, during his address to Fifth District Democratic Club Tuesday, Nov. 18, at Cedar Bluff Branch Library.

“And folks that know me know that I’m not by any means an alarmist. … October 2008 was the second worst month on record since 1931.”

The Chinese “have been basically subsidizing American over-consumption for a goodly number of years,” Nalls said. “… Americans don’t like to believe that kind of stuff.

“The truth is, we require about $1 trillion a year of other people’s capital to keep our economy going,” Nalls added.

What mistakes helped fan the flames? “We’ve had all these years of irresponsible deficit spending, across the board,” Nalls said. “It came out of a flawed economic policy, in my view, called supply-side economics.

“… A lot of Republicans provide government services for Americans without forcing us to make hard choices on spending.”

With the current global economy about $50 trillion, “And the U-S portion of that is about $14 trillion … the credit-default swaps that are causing us so much trouble … we can’t actually estimate how much they really are worth … probably about $62 trillion,” Nalls added. “That’s 12 trillion more than the entire global economy. … More credit-default swaps than there are economies to absorb them. That’s part of the issue here.”

As for banking abuses, largely due to deregulation according to Nalls, “When you think about it, banks have little-bitty cash and lots of people that borrow money, they’re highly leveraged,” he said.

When regulated, “The banks had to have $1 of deposits for every $4 of loans,” Nalls said. “After that went away, Lehman Brothers, for example, had $33 of loans for every $1 of deposits. Some were up to 40 or 50. So they were highly leveraged, and that assumed interest rates stayed low and that housing prices in particular went up.”

A “frequent critic” of Alan Greenspan, former Federal Reserve Board chairman,” Nalls said, “For about four years he kept the rate of loaning money below the rate of inflation. That’s an emergency measure. Very rarely should the rate that the Federal [Reserve] charges be less than the inflation rate.

“By definition that’s free money, so all that money … is floating around in the economy,” he added. “All that money, when the tech bubble blew, flowed into real estate. … Every year you have these massive increases in housing prices.”

Because loans were securitized, “A guy was selling used cars for somebody, well, he opens up a little storefront place and he sells mortgages. … and takes a five or six or seven-percent cut of that. … and he passes that on to Fannie Mae or Freddie Mac and they securitize it … and we sell it to all kinds of unsuspecting investors all over the world,” Nalls said.

As a result, “That’s part of the problem, because right now the guys who own the mortgages, we can’t identify who they are a lot of times,” Nalls added.

Nalls also said too many homeowners, upon refinancing their mortgage, “They’d use their house as an A-T-M machine. And many of them bought depreciating assets.”

Nalls stated one “research report” where “I think I’m right in saying this: there’s 10 million houses in this country now where the value of the house is less than the loan value.

“Perhaps, it might have been better for [Treasury] Secretary [Henry] Paulson and Mr. [Ben] Bernanke, the Fed chief, to move in and stabilize Lehman[Brothers],” Nalls added. “That might have been, in retrospect, a very cheap outcome for us. But you can’t talk people into sensible things when everything’s going up.”

Nalls said President-elect Barack Obama’s economic problems are going to be compounded by “77 million baby boomers hurdling into retirement. And we all know that older Americans are net consumers of medical benefits and government benefits.

“And he has a negative balance sheet.”


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