$700 Billion Dollar Bail Out – This week we have seen possibly the biggest financial upheaval in the American economy since the great depression; and some say this is worse but in different ways. We’ll talk about not only what this means to the American people, but also show what opportunity it creates for those like you and me who chose to think like a millionaire and make this an opportunity to create more wealth and more freedom.
First let’s shed some light on this weeks unprecidented events at the Federal level. Yesterday John McCaim called a meeting with the white house resulting in a meeting with President Bush, McCain, and Obama in attemtps to bring agreement on a plan to go before congress immediately allowing the treasury department to buy huge amounts of bad debt in the form of delinquent mortgages that are now owned by banks.
In simple terms, millions of Americans took out home loans during the last few years and are now unable to pay them back. Here’s how the normal process works. You want to buy a house, you go to the bank and get a loan, the bank loans you $300,000 and you sign a contract agreeing to pay them back 6% interest for 30 years.
That bank turns around and sells that contract to Fannie Mae or Freddie Mac, for $300,000. So the bank you got the loan from, now has the $300,000 back in their hand so they can offer another loan to your neighbor or anyone else who comes along. Each time the bank loans a person money, they turn around and sell that contract to Fannie or Freddie to get their money back. This is how banks keep having mor emoney to laon.
Fannie Mae and Freedie Mac for most of the last century were private institutions regulated heavily (or so we thought) by the federal government. So, where does Freddie and Fannie get their money? They turn to investors, teachers retirment plans, mutual funds, etc. Investors invest in retirment plans, mutual funds, etc in order to recieve a 6% or so return on their money.
So, investors pay into investment vehicles, like a retirment plan or a mutual fund. Fannie and Freddie receive those large sumes of money, Fannie and Freddie take that money and buy the loan contracts from your bank. When you pay your house payment to your bank it goes to your bank, then to Freddie and Fannie and eventually into the hands of the investors who put up the money in the first place.
When home owners start defaulting and cannot pay back the house payments, Freddie and Fannie are still on the hook to pay their investors back, meanwhile they start going broke, because no money is coming in, but they still have to pay back to their investors.
So, they were on the brink of disaster last month and that’s why the Federal government took them over in an unprecidented effort to save the financial collapse that would have resulted; especially when considering that over half of all homes in America are backed by Freedie and Fannie. So now, Freddie and Fannie are goverment owned and controlled. The Feds (you and me as taxpayers) are now guaranteeing the return to the investors.
This week we saw a similar effort in the works to rescue the banks who are facing bankruptcy because of the millions of home buyers not able to pay back mortgages. Unlike the Freddie and Fannie scenario, the federal government is not going to take over the entire national banking system, but they did propose to buy the bad contracts from the banks, in an amount that may reach $700 Billion in bad debt.
How does this help? Inititally it will put cash back into the hands of the banks so they can continue to lend money to investors seeking loans. Short term it stops the crisis. The real question is, what will happen during the followiing 12 months and next two years now that the Federal government just bought the bad debt. After all the our federal governemnt is already 11.7 trillion in debt, and now we want to bail out private banks with a plan to buy all their bad debt.
Since the Feds would be buying the bad debt at a large discount, they hope that eventuially those contracts will be paid back and in the end the Feds could make a profit. If history repeats itself, we find that the savings and loan debaucle of 1986-1991 resulted in the Resolution Trust being set up to do essentially the same thing. In that case the Feds bought bad debt to bail out the banks and then sold those notes to investors at discounts. This may be a repeat of history. the big question looming in the air is, will it work again? No one knows for sure.
What does this mean for you and me? Uncertainty for sure. These are unprecidented times and the amount of banks failing is increasing. A Billinaire close to the issue who was quoted in USA Today predict that up to 1000 local banks could fail during the next 18 months, resulting in a handful of conglomerates running the national banking system.
Yestersay’s meeting between President Bush, McCain, and Obama was hoped to reach a concensus; they did not. But in principle they have reached a common understanding to implement this massive bail out immediately. But before it is final it must go before congress and be approved.
Wil this mean banks will be more willing to lend you money to buy a home or refinance a home? Probably not. The banks are scared, and do not want to take on any more bad debt. The lending standards are still very strict, thus resulting in continued tight times for anyone wanting to buy a home. This offers no help to those home owners struggling to make the payments; they still may get foreclosed on or go bankrupt.
What does this mean to you and me? Home prices will remain depressed for the next 18 months and likely continue to decline another year for sure, resulting in more defaulting home loans. Lack of money moving in the economy will put pressure on consumer goods to increase in price so manufacturers and retailers can cope with reduces sales. So in summary a still worsening economy with risk of future inflation.
Why am I telling you all this bad news? Because for people like you who want to be a millionaire, to be financially free and be able to make millions and millions of dollars in any economy, there is always a way for those who know how to succeed. Everyday when I see the news of failing banks and economic crisis, I actually get excited. To me, change is fun and exciting. Most people would not understand this, but when you learn to think like a millionaire, you realize you cannot fail. I know 100% that I will make tons of money this year in a good economy. And when I read the doom and gloom in the paper I know that most of the competition will get scared and freeze, allowing me to make my millions more easily because I have no fear.
When you acquire the mind of a millionaire you will succeed no matter what the situation is. And when everyone else is scared and becoming more conservative, it takes out all your competition. That’s why the rich keep getting richer and the poor keep getting poorer. And in good economic times the rich get richer, and in bad economic times the rich get even richer yet.
So, how do you learn more? I walked away from my corporate career as a CEO in order to help the world become finacnially savvy. I want to make millionaires. I have an ongoing mentoring program to help you think like a millionaire, act like a millionaire and become a millionaire. I don’t make my money off people like you signing up for my programs. I make moeny, but let me clarify, still 98% of all my money is earned in other ways. I require you to pay a little for the process because when you pay something, it becomes more important to you and that helps you succeed.
If you want some free moeny reports about how you can start thinking like a millionaire go to www.FormulaForMillionaires.com
Paul McCormick, Author of Secrets of the Millionaire Inside
