In order to really understand the value of the U.S. Dollar, one must have a basic grasp of interest rate theory in relation to currencies.  Each currency in the world has an interest attached to it that is set by its Central Bank.  The manipulation of this interest rate increases and decreases the supply of a currency in the economy and therefore will either stimulate or tighten economic activity.  During the 2000’s, Fed Chairman Alan Greenspan kept U.S. interest rates at very low levels versus other industrialized nations around the world such as England, Australia, and the EuroZone.  These low interest rates in the U.S. led investors to flee from the U.S. Dollar in search of higher yielding currencies, which resulted in a very bearish U.S. Dollar run.  In this picture of the Euro, you can see the dramatic fall of the U.S. Dollar throughout the 2000’s.

In 2008, when the Global Credit Crisis really exploded in September of ’08, the currency market went crazy.  There was a mad rush into the U.S. Dollars as unprecedented fear caused investors to demand the safety of their capital above everything else.  From September of 2008 to March of 2009, the U.S. Dollar experienced a dramatic rise in value versus the Euro, Pound, and nearly very currency in the developed world.  The reason is because in times of complete uncertainty, the U.S. Dollar is the safest place to park capital.  Investors want assurance that their investment is safe, so they opt to place capital in low yielding but very safe investment vehicles such as U.S. Treasuries.

In March of 2009, the recession bottomed out.  Economic growth resumed in the developed world and it looked as though the worst was behind us, so investors began taking their money out of the safe, but very low-yielding U.S. Dollar and placing it in riskier currencies that were offering higher risk.  Thus, began another round of Dollar weakness.  Let’s take a look at another Euro chart.

The U.S. Dollar was very weak throughout the 2^nd and 3^rd quarters of 2009.  Then, in November of 2009, the Greek Debt Crisis erupted and send financial markets into a tailspin yet again.  Investor sentiment weakened around the world, and there was another mad rush into the safety of the U.S. Dollar.  The Dollar rallied significantly against the Euro from November of 2009 until June of 2010.

Once the European Central Bank finally stepped in to pledge bailout funds for Greece and other struggling EuroZone countries, investors again began to sell the U.S. Dollar in search of higher yield and the Dollar began to fall versus every currency pair.

This phenomenon of the U.S. Dollar doing well only during times of economic distress could be a long-term sign of bad things to come.  Currently, the only reason investors want to hold the U.S. Dollar is for safety.  There is no interest in it as an investment.  What will happen if the U.S. loses its place as a harbor of safety?  Investors already want nothing to do with the Dollar during good times.  What if they don’t during bad times either?  That could spell disaster for the U.S. Dollar.  A forex demo account can teach you how to take advantage of the volatility in the  FX Market.

But then another surprise hit financial markets.  In November of 2009, it became evident that Greece and several other EuroZone countries were in serious danger of defaulting on large amounts of sovereign debt.  The run on the Euro was merciless as investors began to question the very existence of the Euro.  There was talk of the Euro going to parity with the U.S. Dollar after it had reached the $1.5000 level in November, and there were even talks that the EuroZone may break up.

Finally, in late May of 2010, after months of speculation and political debate, the European Central Bank stepped in a created a bailout fund for struggling EuroZone countries.  It was now certain that no EuroZone countries would default, at least in the near-term.  This move by the ECB served to reassure investors, and the Euro finally found support at $1.1875 before beginning a magnificent rally in June and July back up to the $1.3300 area.  During the rally in June and July it appeared the EuroZone had survived the worst of the Debt Crisis.

During June and July, Greece, Spain, and Portugal each returned to capital markets and all three countries had very successful bond auctions.  In fact, they were each able to auction off full amounts at interest rates that were quite attractive.  This served to further support investor sentiment.  However, the true underlying crisis in the EuroZone is far from over.

First let’s examine how these countries came to near sovereign default.  When the EuroZone initially formed, one of the major incentives for small, economically weak countries such as Greece to join, was that they would be able to borrow money at near German interest rates.  This was very attractive because at the time Greece was being forced to pay a much higher interest rate in capital markets.

Now, as a EuroZone member Greece would be able to borrow lots of money at low interest rates, and this is exactly what they did.  The idea behind cheap money for weak countries was that these weak countries would be able to borrow money and develop strong economic and public infrastructure, which would make Europe much stronger overall, and as a whole they would be able to challenge the United States as a world power.  But things went bad…awfully bad.

Greece did borrow money, as did Spain and Portugal.  But they didn’t use it as they should have.  Infrastructure was never developed the way it should have been, and now these countries are sitting on mountains of debt they can’t pay off.  Thus, one of the requirements to qualify for bailout funds was these countries had to cut back on public spending significantly, which is causing quite an uproar among citizens.  These aggressive budget cuts have alarmed many economists, as they fear these austerity measures may weigh heavily on EuroZone growth in the 2^nd half of 2010, and in a worst case scenario even tip the EuroZone back into a quarter of GDP contraction.  Forex software used by FX traders has helped many financial speculators profit from the rise and fall of the Euro in the last year.

And this is the current state of the U.S. economic recovery—“unusually uncertain.”  During the last two years the United States and the Federal Reserve have done everything in their power to stimulate an anemic U.S. economy, but nothing has been able to really get the recovery to what is referred to as a “self-sustaining” phase.  At the self-sustaining phase, a Central Bank is able to remove economic stimulus.  In early 2010, the recovery seemed to be doing relatively well in the United States and speculation began to rise that the Fed would hike rates and remove stimulus as soon as the 3^rd quarter of 2010.

Then, Greece happened.  The sovereign default scare in the EuroZone punished investor sentiment around the world and caused a wave of fear to enter financial markets as the very existence of the Euro and EuroZone came into question.  Finally, in late May the European Central Bank stepped up to the plate and created a bailout fund for any EuroZone countries in danger of default.  This move by the ECB did reassure market participants as it became clear there would be no sovereign defaults in the short term, but by that point, the damage in the United States had been done, and economic recovery was beginning to stall.

After a string of positive economic data throughout the first half of 2010 for the United States, economic data started to strongly disappoint to the downside in June and July.  Consumer demand began to drop, employment started to fall again, credit markets remained tight, and retail sales fell.  Bad report after bad report began to emerge out of the United States.  It suddenly became clear in late June that the U.S. recovery was hitting a wall of resistance.

Then, as poor economic data continued to come out through July, it quickly became evident the U.S. recovery was in dire circumstances.  The Federal Reserve had released a historically unprecedented amount of economic stimulus in the last two years, and still it was not enough.  The economy was beginning to show signs of a possible contraction in the housing sector, which, in a worst case scenario, could lead the entire economy back into recession.

Thus, Fed Chairman came out in late July and stated that the Federal Reserve was ready to act in decisive action by unloading another round of quantitative easing into the economy.  The markets got scared.  The U.S. Dollar continued its precipitous fall, and equity markets began to falter as investors and forex brokers attempted to weigh the seriousness of the slow-down.  Now, in August of 2010, the economic outlook is “unusually uncertain.”  This is definitely scary ground to be on two years after the largest economic catastrophe since the Great Depression.

The average rate on a 15-year fixed rate mortgage also dropped to 4.21%, which is the lowest 15-year fixed rate since the late 1980’s.

The economic situation in Greece and other European nations has caused the euro to drop significantly over the past several months. The result of which is falling stock markets around the world.

Whenever stock markets fall, investors often pour their money into the relative safety of bonds, causing mortgage interest rates to fall as a result.

It’s not just Europe investors are concerned about; the United States has also taken on tremendous debt and investors are concerned that both U.S. debt and the precarious economic situation in Europe could cause the economic recovery in the U.S. to stall.

That said, if Europe works out it’s financial troubles, economic recovery here in the U.S. could continue on an upward trend, driving mortgage rates higher, so if you’re considering refinancing, now may be a good time to take the leap.

The significance of the ‘Top Kill’ technique is that it’s never been attempted in waters as deep as this before, but considering all other options have either failed or been deemed improbable in the deep waters, it’s one of the few options BP has left to get this well sealed as quickly as possible (although I doubt ‘quick’ is a term anyone is using after more than a month of 210,000 gallons per day of raw crude spewing into the Gulf).

The top kill technique itself has actually been very successful at stopping oil leaks in the past, but hasn’t been attempted underwater and there is concern that the sheer depth (over 1 mile under the ocean) of this leak will cause problems. According to CNBC, BP estimates a 60-70% chance of success.

The top kill technique consists of pumping huge amounts of a manufactured mud and cement mixture into the well at significant enough pressure to counteract the upward pressure of the oil gushing out of the well.

BP started the procedure on Wed. night and it is expected to announce the success or failure of the procedure by mid-day today.

According to a recent article on MarketWatch, James O’Sullivan, an economist with MF Global, apparently feels that we’re seeing real economic recovery and that the outlook for the future of U.S. markets is positive.

Along the same lines, companies are beginning to hire again and, according to some research I did on housing prices recently over at Zillow.com, even the real estate market in many areas seems to have leveled off.

Homeowners able to pay are walking away from mortgages

All that seems to be pointing to a positive outlook for the U.S. economy as a whole, however, I’m also seeing signs of bad things to come. A perfect example is a story on 60-minutes the other day, in which they spoke with a number of homeowners who had decided to walk away from their homes, even though they were able to continue to make payments. For most of these homeowners, the decision to walk away was, of course, a financial one, but the motivations were slightly different from what we’re used to seeing. The people interviewed in the story were all capable of continuing to make payments on their homes, but due to the huge loss in value (as much as 50% in some cases), they chose to simply walk away rather than continue making payments on a property who’s value may never recover to the levels seen when they purchased the properties.

What’s interesting to me about this story is, morals aside, it seems this may be a reasonable financial decision for homeowners to make if they find themselves stuck with a million-dollar loan on a property now valued at $600,000, just to illustrate one example.

My concern is that many of the foreclosures we’ve seen recently have been a result of homeowners being unable to continue to make payments on their loans. This apparently new trend of walking away in spite of their ability to pay could create an entirely new problem for the housing markets and cause the recession to drag on into the foreseeable future.

The credit hit isn’t as bad as you may think

Morals aside, if you were looking at a 50% loss in your home value, and facing the prospect that your home value may never recover to the level it was when you purchased the property, wouldn’t you be tempted to just call it quits?

While these people will certainly feel a strong punch to their credit rating for a few years afterwards, my experience in the mortgage business tells me it’s only temporary and, as little as 2-3 years after walking away from their homes, their credit scores could recover to high-600’s to low 700’s.

So, which is better from a financial standpoint? Continuing to make payments on a mortgage that might forever be greater than the value of the home? Or simply call it quits, suffer 3 years of bad credit, and then move on?

I fear the latter option may become more and more appealing to homeowners currently underwater and if this were to become a popular strategy, the effects on the economy as a whole could be disastrous.

The moral issue

Another question that was brought up in the 60 Minutes report was the moral issue of walking away from your home. The justification one homeowner gave was that his bank wouldn’t feel bad about foreclosing on him, so why should he feel bad about walking away?

So what do you think? Should the moral issue be a concern? Is there a moral issue at all or is it “strictly business” as one interviewee put it?

Last week they featured a story about a hedge fund called Magnatar, who they claim not only saw the mortgage meltdown coming, but were able to figure out a way to profit from it on a pretty incredible scale. It’s worth mentioning that Magnatar denies the claim in this story that they intentionally set out to profit from the subprime mortgage collapse.

According to the story, Act One of the show entitled “Inside Job,” Magnatar sponsored the creation of complicated and, ultimately, toxic financial securities backed by low quality mortgages, which they then bought insurance against so that when those securities became worthless, the insurance would pay out big.

At first glance, this is a fairly typical investment strategy called “hedging,” in which a company purchases one set of securities as a primary investment and then purchases a second set of securities that will pay out if that first set drops in value. In this way, the second set of securities essentially becomes insurance against a drop in value of the first set.

The interesting aspect of this story, and the reason it posits that Magnatar was actually betting on the collapse of the subprime mortgage market is that Magnatar was able to work out deals in which the insurance would actually pay out significantly more if the primary investment failed than the primary investment cost to begin with. Not only that, but the reporters suggest that Magnatar intentionally pushed for low quality assets to be bundled into the primary set of securities, expecting them to fail so that they could collect on the much larger insurance payout.

To better understand the concept of hedging, consider this example. Let’s say you thought Gold prices were going to go up over the next year and so you decide to invest in Gold. However, just in case some event occurs that causes Gold prices to crash, you decide to also invest in the U.S. Dollar, knowing that when Gold prices go down, the value of the U.S. Dollar tends to go up. This way, if Gold prices do go up as you expected, you’ll reap the rewards of your investment in Gold, but if Gold prices fall catastrophically, your investment in the U.S. Dollar will likely increase in value, preventing you from losing all your money.

You can listen to Act 1 of the radio show online at This American Life’s website.

Americans are upset about what they feel was a bailout of irresponsible banks and their senators brought that message to Washington, with Senator Jim Burning (R-Ky) claiming that “A vote for Ben Bernanke is a vote for bailouts.”

While I understand Senator Burning’s comment, I don’t agree with it, or just about any other opposition to confirmation of a second term for Bernanke. By the time Bernanke took over the Fed in 2006, the housing crisis was already far past the point of no return. That may not be known to most Americans, but it’s absolutely clear to any of us who were waist-deep in the real estate and mortgage businesses and saw the foundation being laid for the current state of the economy as far back as 2000. Mortgage lending in the United States came to a screeching halt in 2007; it’s unlikely Bernanke could have done much to avert the crisis, even if he’d recognized and began implementing counter measures his first day in office. That said, Bernanke takes responsibility for not recognizing the extent to which the problem had grown by the time he took office and for not acting sooner.

What many Americans, and of course their soon-to-be-up-for-re-election Senators are upset about is what they perceive as Bernanke’s “bailout” of the very same banks that got us into this mess in the first place. While I absolutely agree that banks shouldn’t be “bailed out” when they take actions that lead to their own demise, I can’t agree that the actions the Fed took in early 2009 could be considered a bailout of those irresponsible banks. Did those banks get something they probably didn’t deserve? Sure. But the bottom line is that the extent of the economic damage would have been far worse had we allowed those banks to fail.

There were a lot of regulation problems that allowed those banks to get as large as they did and to be in a position to drag down the economy in the event they failed, but the stage was set long before Bernanke took office. His so-called “bailout” of wall street was really just the lesser of two evils…either let those banks fail and plunge the economy even deeper into financial meltdown or prevent those banks from failing and lessen the blow.

I’ve heard Bernanke say that he didn’t like the choices that were available to him at the time, but he feels the Fed took the correct action considering it’s options; and I have to agree with him.

All we can hope moving forward is that there are regulations put in place that prevent such a situation from happening in the first place. But as far as Bernanke’s performance goes, I think he made the best choices considering his options at the time and any senator who claims Bernanke didn’t act in the best interest of our economy either is either completely clueless about how the economy works or is pandering to his constituents for re-election.

Source: MSNBC

Remember when you purchased your home? Maybe it was your first home or maybe you were a seasoned pro and the allure of walking through the doors of your new dwelling no longer excited you. Regardless, you undoubtedly knew that your home was an investment and in 5 to 10 years along with some improvements, you could stand to make some money on your purchase.

Unless you’re an economist, an investor, or other financial professional, there’s a good chance that you didn’t know that home prices were rising much too fast. You didn’t know that just around the corner a blowout would happen.

The Recent Economic Meltdown

In 2008 the blowout occurred. The economy had a severe meltdown and home prices dropped rapidly. When the dust cleared, you went to bed in a home that had lost half of its value or more. You were paying a mortgage that, if you paid the entire 30 years, you would most likely still lose money.

To compound the problem, you may be one of the 9.5% of Americans who were unemployed. You were a victim of the bad economy. You were considering sending your house keys to the mortgage lender and walking away.

The Economic Stimulus Plan

On March 4th, President Obama came to the rescue. As part of the stimulus plan, Obama made it possible for people to refinance their home loan at a 4.5% interest rate. This was done in the hopes of keeping people from walking away from their mortgages.

This interest rate has limitations. It has to be a refinance or a first home purpose. This keeps the real estate investors from using this rate to buy homes as investments. With more than a 3 trillion dollar price tag, the Obama administration wants to minimize the cost as much as possible.

Additionally, as part of the stimulus package, Obama was hoping that with lower mortgage payments, consumers would use their extra money to make purchases. This would help stimulate the economy. While that hasn’t happened on a large scale, it has helped to keep people in their homes.

If you are one of those who has lost your job or is considering walking away from your home, talk to your lender. This program, and others, may be able to help you make your home more affordable.