Former Federal Reserve Chairman Alan Greenspan admitted earlier this month that he was caught by surprise by the subprime mortgage collapse and the depths of the credit crunch and the housing bubble.
Greenspan said he never saw it coming.
But Bob Chernow did. Chernow, a Milwaukee businessman, has more than 30 years of experience as a stock broker, a wealth manager and a futurist.
In a keynote speech about the future of the financial services industry during a conference held by the World Future Society in Toronto in July 2006, Chernow predicted the subprime collapse and the mess that would follow.
"In ‘hot’ real estate markets, many buyers avoid mortgage insurance because lenders encourage them to take out second mortgages as down payments. These second loans have higher interest rates and are often adjustable to variable interest rates. These types of loans encourage speculation by artificially allowing buyers to stretch what they have to buy homes they normally could not afford," Chernow told the Toronto conference last year.
"According to the Federal Reserve, 35 to 40 percent of all recent mortgages were interest-only variable loans. This type of mortgage allows buyers to buy homes when prices are inflated. It is interesting that the last time interest-only and balloon mortgages were popular was during the 1920’s. This was a major reason that banks became insolvent during the Depression and was a reason why amortized mortgages were created, as these types of mortgages let buyers pay down principal.
"What is wrong with interest-only mortgages? Well, for one, the homeowner has no economic stake in the property. He can walk away if he cannot pay. He is, in essence, ‘leasing’ the home in the hope that property values will increase. This is the ‘greater fool’ theory of investing. What’s that joke? If you don’t see a greater fool, look in the mirror. Regardless of what the new bankruptcy law dictates, banks will be hard-pressed to collect on much of this debt."
Fast forward to today, with soaring mortgage foreclosures, skyrocketing late payments, home builders and home lenders going out of business and financial institutions tightening their credit standards. The U.S. Department of Commerce reported Thursday that the national median sales price of homes fell 7.5 percent compared with last year, the largest year-over-year decline in 37 years.
If you’ve got a home on the market right now, you’re feeling the pain.
So, what’s next?
I asked our resident futurist, who manages other people’s money, to give us five new predictions. A short while later, he e-mailed his response. Here’s what Chernow sees in his crystal ball:
- "The lack of regulation and oversight in the hedge fund arena will lead to a major blow-up within the year. In great part, this is because hedge fund leverage is dramatically different than regulated brokerage firms."
- "A coalition of Syria-Iran-Turkey and the United States will work to stabilize Iraq. This will occur after the 2008 elections, but preparatory work is already underway (Mr. Chernow, a Vietnam War veteran, delivered a talk in 2003 titled, ‘The Nature of Terrorism & Advice on Combating It in the Future.’)"
- "Demographic shifts in our population will continue the move from the suburbs to the cities. Milwaukee’s population should increase by 10 to 15 percent over the next decade. According to David Pierce Snyder, a leading futurist, one of the fastest-growing industries over the next decade will be the conversion of industrial and commercial properties to residential properties."
- "Over the next decade, there will continue to be a movement to reduce the cost of health care through technology. This will be true, despite the fact that there will be a shortage of 1 million nurses by 2010. Note: I also predict that nurses will get more control over their schedules and training and that doctors and administrators will change their view of the nurse-doctor relationship to a more positive one."
- "The manner in which education is dispersed, as well as the purpose of education, will change dramatically. Technology, practical exercises, computer games, lectures through the Internet, the place of corporations and the involvement of families in the education of their children will all combine to reduce the cost of education. (Chernow is part-owner of The Learning Connection, an early childhood learning company located in Florida & New York)."
Thanks, Bob. I’d like to add one prediction of my own: The 2008 U.S. presidential election will be the filthiest, most disgusting election of all time. Special interest groups on both sides will spend more money than the candidates and will drive the agenda. Half-truths and outright lies will be rampant. To save our democracy, it’s time to rebuild it from the bottom up.
Steve Jagler is executive editor of Small Business Times.
