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The www.FedPrimeRate.com Personal Finance Blog and Magazine

Friday, January 18, 2008

Debt Reduction -- Why It Is So Important To Do Now

Our Grand Debt and Cost of Living Reduction Adventure was inspired by a variety of factors. While some were personal, such as having more time to enjoy our children, others were strictly financial. My financial reasons were based on looking at the big economic picture. I've been watching global economics for about 4 years now. (Yes, I realize that I have strange hobbies.) And, the big picture tells me that getting out of debt and getting spending under control is very important right now.

By now, most are familiar with the mortgage and lending meltdown and its closely associated foreclosure crisis. Foreclosures are occurring at rates that haven't been seen since the Great Depression. Many of the foreclosures have to do with loose lending practices, and practices that some define as predatory, which resulted in people getting mortgages who wouldn't have been approved under more standard lending practices, due to the risk of default. Another aspect of the foreclosure crisis has had to do with teaser rates and adjustable rate mortgages. As the rates increased and the monthly mortgage obligation climbed, people struggled to make their payments.

Easy loans fueled a housing bubble, with prices going up, up, up. Many home prices reached incredible levels, and homeowners borrowed against these inflated values, pushing themselves further into debt. While lenders were engaging in riskier loans, they were also selling those debts to investors in various forms of mortgage or debt backed financial instruments.

As more people default on their loans, those investors are losing their money, and getting scared of that particular investment market. The wave of foreclosures has slapped house prices back into the realm of reality, reducing the value of homes throughout the nation. In fact, the affect of our mortgage and lending crisis has touched housing and credit markets throughout the world, not only through international investment, but also by setting off small housing bubbles elsewhere.

Homeowners, holding mortgages based on inflated values, are all too frequently finding themselves with a mortgage that is greater than the current value of the property. Lenders are writing down billions in debt and struggling, some unsuccessfully, to stay afloat. With more ARMs due to reset in coming months, the situation is likely to get worse before it gets better, and the big banks and other lenders are scrambling to find a way to shore up the foundation of the industry, before the next wave crashes, shaking that foundation loose and threatening the current banking system to its core.

There are two potential waves in view. Credit card debt is at an all time high. Unfortunately, delinquencies are starting to creep up to heights that haven't been seen in quite a while. Credit card companies are starting to experience significant losses. And now, according to recent news, it seems as though the auto loan industry is entering into a similar phase. The situations with credit card and auto loan debt have an interesting factor in common with the mortgage situation -- those debts were also packaged as investments and sold to investors throughout the world.

But, wait, there's more. The value of the dollar is falling, and fast. The euro is just one currency that has experienced record heights in value when measured against the shrinking worth of the dollar. The increase in fuel prices is affecting the price of everything. Food and other goods have to be transported throughout the nation, fuel is essential to the running of the factory farms we rely on to feed us. Much of the country is feeling the pinch of increased home heating costs. Inflation further eats away at the purchasing power of the dollar, and no matter how hard the government tries to hide it -- and they do that by manipulating the numbers in order to avoid cost of living increases for such things as Social Security -- at this point, even they have been forced to admit that the rate of inflation is climbing.

Those factors, in combination with the other fiscal problems they bring with them -- such as a slowing job market -- lead me to firmly believe that debt reduction now is essential to financial security and health. Carrying unnecessary debt in the face of all of the fiscal problems before us is just dangerous. Therefore, for us, reducing debt now and setting up a way of life that decreases our cost of living dramatically, such as being self-sufficient in our energy by using solar and wind, is of paramount importance, as that will help to ensure that we are able to better ride out the difficult economic conditions seem to be just over the horizon and fast approaching.

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