Terry Backhaus, Sulphur Rotarian and investment adviser, has looked into his crystal ball, and he says it shows a mild recession, among other things. Don’t panic.
Terry Backhaus, Sulphur Rotarian and investment adviser, has looked into his crystal ball, and he says it shows a mild recession, among other things.
“For the last six months, we’ve opened up the paper, we’ve turned on the TV, we’ve gone on to the internet, and what did we see?” Backhaus asked at the weekly Sulphur Rotary luncheon. “The meltdown of Bear Sterns. We saw the Fannie Mae and Freddie Mac bailout. We saw the federal government making a loan to AIG International, a private insurance company. We saw the buyout of Merril Lynch, the bull of Wall Street, getting bought out and going to Bank of America. We saw the Indy-Mac Bank going bankrupt. We saw the Leahman Brothers bankruptcy. We saw the SEC and the Treasury putting in special rules to prevent short selling, which is when investors bet on a particular stock or security going down.”
Backhaus indicated that a similar situation happened in the 1980’s with the Savings and Loan crisis. The government created an entity called the Resolution Trust Corporation (RTC), and it was through that corporation that the financial markets and mistakes made during that crisis were resolved.
“The government set up the RTC, and they took over the failed banks, repossessed the bad real estate, and they just worked through it,” Backhaus said.
Why won’t the same thing work this time?
“What has happened is with the explosive growth of mortgages and other financial instruments, we have gone from plain jane mortgages to we’ve gone to First and Second Derivatives of these basic mortgage instruments,” Backhaus said.
Those financial instruments are extremely complex and would require intimate knowledge of banking and lending practices to make sense of them. To sum it up, each of the derivatives are split up into pieces, called traunches. These traunches can be focused in one of a few different area, such as capital gains (“Buy low, sell high,” Backhaus said) and tax benefits, among other things.
These things are traded all over the world, Backhaus said. This means that it’s not Wall Street nor voter apathy which is driving the bailout, but the fact that international investors are holding United States financial debt.
“These are the people that are saying, ‘Hey, U.S., get your act together, or else,” he said.
Because of the implied promises from Fannie Mae and Freddie Mac and all the investment firms and banks that are having problems right now, the national debt to foreign holders is beginning to get to an “alarming level,” Backhaus indicated.
“This is really, to me, the first real wake up call for that.”
“What does my crystal ball say? What I am telling my clients is that, yes, this crisis is real; we will probably see a mild recession in the upcoming quarters, and we were due for one. They come about every six years, and it’s been six years since the last one. Again, I would preface with the word mild. I’m not talking about the sky falling in or people jumping out of windows or anything like that.”
Presidential politics are not likely to have an effect on this problem, despite what both parties say.
“From my personal perspective, I am more concerned about the makeup and dynamics about the U.S. Senate and U.S. House than I am about who’s in the White House. The president does matter, but not that much,” he said.
What the next president will have to deal with, either Republican or Democrat, is the fact that additional regulation will be called for in this area.
Backhaus said that the markets would be slow to bounce back from this recession, but that it will come back.
“It’s just the size and the complexity of the problem, and the fact that the government had to get into the middle of it.”
Southwest Daily News