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Dock David Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and is licensed with FINRA through Treece Financial Services Corp. He provides expert…

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Banks Lose Marbles as Economy Dwindles

Lately the news on the economy has continued to deteriorate. GDP growth has slowed to a snail's pace, new orders have fallen off as manufacturing is on the decline, and we've seen a surge of poor numbers from housing sales, construction, and prices.

One thing this economy isn't lacking - though you'd never guess it by watching prices at the pump - is energy. The amount of previously undiscovered oil that has been located in the past several years within the Western Hemisphere, even within the United States' borders, is simply astounding.

Just last year a new oil find was made in South Texas, and now the region is booming. Many experts are anticipating as many as 3,000 new wells drilled there in the next year.

Other reserves have been located thanks to technology that was previously unavailable. We simply lacked the ability to tap some oil reserves that are now producing hundreds of thousands of barrels of oil per day. Among them is the Bakken formation in the northern plains, which may have increased US reserves tenfold.

And yet, the economy continues to slip, and it shouldn't be surprising. We said in early February that in order to see real economic growth, particularly in the jobs market, and allow the financial recovery that began in March of 2009 to continue, the federal government needed to change several policies that were standing in the way of American business. From Decision Time for Taxes and Job Growth, written in the first week of February, 2011:

While the job market has continued to suffer, it has done so mostly unnecessarily. If Congress and the White House were set on eliminating unemployment, as they often claim, they could accomplish a lot with just two easy steps:

  • Allow corporations to deduct expenses associated with new plants and equipment, rather than depreciating these assets over many years.
  • Encourage corporations to bring back funds held offshore at a low tax rate - say 5% - and also reduce the US corporate income tax to 20%.

These changes in tax policy would do several things. First, they would put our corporate income tax roughly on par with the rest of the world. Second, they would encourage companies to bring back money they are currently sheltering off-shore, which few realize as being a staggering sum of over $1 trillion.

The article went on to site energy production specifically as an area for growth in this country:

Meanwhile, back state-side there has been a big push among drilling companies to purchase gas leases in various parts of Ohio, Michigan, West Virginia, and New York, which seems a likely sign that they will resume exploring for gas and oil on-shore in the United States.

Unfortunately for Americans and citizens of most of the developed world, the US federal government failed to make any of the necessary changes in policy. And while jobs are still available in some sectors, especially engineering, the rest of economy has been placed in a rather precarious position.

Another result, less anticipated but perhaps the most shocking, is the pressure now facing banks to lend money, regardless of borrower credentials. Some homeowners undoubtedly received a notice from a regional bank, which shall remain nameless for the time being, informing them of a new refinancing program.

Apparently, thanks to the incredible foresight displayed by President Obama in the government's new Making Home Affordable Program, some homeowners are now eligible to refinance up to 125% of their home's value (e.g.: if a home is worth $100, borrow $125).

Seem ludicrous? It gets better! In many cases, no appraisal is required to firmly establish a home's value. Nor is a minimum credit score necessary to qualify, nor is verification of employment, income, or assets needed.

Ladies and gentlemen, I welcome you to the United States housing market, circa 2006. Hold on to your hardhats, and don't forget your galoshes.

 

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