On January 2, 2008 I posted, "Predictions for 2008" where I predicted that Broker Byrant would still be getting 40% of his posts featured here on AR and that sometime during 2008 that the Dow Jones Industrial Average would close at or below 10,000. 

I appear to be on track for both of these predictions!  I'm just teasing about Broker Bryant, but I'm as serious as a heart attack about the Dow closing below 10,000.  When I made this prediction the Dow had most recently closed at 13365.87. 

As I'm writing this, the Dow is at 11387.79 or a drop of 14.79% from when I made the prediction.  From it's record high closing of 14,164.53 that was set on October 9, 2007 the DJIA is now off 19.60%.

While it has been debated back and forth whether we are in a recession or not, I don't think that you can find very many people anymore who would doubt it.  With energy and food prices skyrocketing and the housing markets still in a slump, to me, it's pretty obvious that we're not in a good place right now.

If you look at previous recessions that we've gone through the "Average" drop in the DJIA is around 25%, which would put us at about a 10,600 close.  I don't think that this is going to be an "Average" recession!

For one thing, we're faced with the prospect of not only being in a recessionary period, we're faced with the prospect of being in a "Staflationary" period.  Which to toot my own horn for a second, I predicted here on AR way back on July 25th of 2007 when I posted "Stagflation, Does Anybody Remember The Word?". 

Another reason that I don't think that this will be an "Average Recession" is because of the magnitude of the problems that we are facing, particularly in the financial and housing sectors!  What a lot of people don't realize is what a house of cards our banking and economic systems have become.

Why We Have To Play The Blame Game

Which brings us to my second point.  Why we need to play the blame game.  The reason that we need to play the blame game is because, whether you like it or not, the blame game is indeed being played.  The banking lobby is busy spinning the sub-prime mortgage meltdown in such a way that the public and Congress is under the impression that it's the fault of the dirty mortgage brokers who were out there scamming little ole ladies.

Congress has gone right to work doing the banking industries bidding and has started writing laws that are not going to accomplish anything other than to make it more expensive for mortgage brokers to function. 

In doing so, they're missing out on the opportunity to take some concrete steps that would put a floor under housing prices and in turn lessen the severity of the recession and possible depression that our economy is now in.

The only way that we are going to avoid this becoming a serious recession or even depression (at this point) is by taking an honest look in the mirror and being forthright in our assessment of what went wrong.  This involved placing blame where it should be.

In regards to the housing crises, the blame is squarely on the shoulders of the big Wall Street Investment houses who were playing it fast and loose with various investment vehicles that were made up of mortgage backed securities.  That's it. 

It wasn't the brokers out there jacking little ole ladies by putting them on payment option arms.  While this sort of thing did happen, it was such a small percentage of the entire situation as to not be a factor in where we are now. 

Now It's Time For The Blame Game To Be Over

Now that we've realized what went wrong (at least with the housing sector) it's time to move on and to do something REAL to fix the problem!

What can Congress do?  For one they can directly address the foreclosure problem.  Not by giving rich people tax breaks as they are looking at doing right now.  But rather by addressing the foreclosure problem street by street, house by house, person by person!

Congress needs to establish a fund to buy these distressed mortgages and then to negotiate the terms of these mortgages to a point where the borrowers can afford to keep their homes.  By doing so, they will reduce the fuel that is causing the housing markets to burn.

In turn this will allow the markets to regain faith in mortgage backed securities, which will cause home mortgage rates to fall, which will cause more buyers to enter the market, which will put a floor under housing values.  When the public becomes confident that their largest investment isn't losing money, then they will return to being consumers, which will lessen the downward pressures on our economy.

The other step that Congress needs to take is to establish a fund that would make mortgage insurance available for high LTV loans of good quality.  If you look at the historical performance of loans that were high LTV loans, but that met Fannie Mae and/or Freddie Mac's underwriting guild lines, then you'll see that these loans aren't the reason that the mortgage insurance companies are in trouble and not writing new mortgage insurance policies.

The reason that they are in trouble is due to their exposure to the sub-prime market that they invested in. 

By making mortgage insurance available again, you'll allow lenders to start making these high LTV loans again which combined with the number of foreclosures being reduced will also fuel housings ability to provide a cushion to the economy's other woes.

It's Not Just Housing

Which brings us to the point of addressing these other woes.  Be it our government's runaway spending habits or lack of an effective energy policy, housing isn't the only contributing factor to my pessimism.  But, these are topics worthy of their own discussion and if you, my readers, would like, I'd be happy to discuss these topics in a follow up blog.

In the mean time, think about what I've said here.  If you can, poke holes in my theories.  If you can't, call or better yet, write your Congressman and tell them that you want these issues to be addressed directly.

R.B. "Bob" Mitchell

ValueList Real Estate Services, Inc.

Bob Mitchell is president of ValueList Real Estate Services,  St. Louis' largest discount/full-service real estate and mortgage company.  If you would like to find out more about Bob, ValueList or our flat-fee listing program, please feel free to visit our web site at valuelistre.com