I have posted this article on www.articlewheel.com, the issues contained concern me although it is not directly related to theusual content of this site, or my homepage. Feel free to reproduce it in whole or in part. References are from the FT and Wikipedia.

“Accredited Home Loan Lending, a subprime mortgage specialist, said it was seeking fresh capital and waivers on its lending covenants, while the New York Stock Exchange said it planned to delist shares in New Century Financial”. This bland statement of fact comes from one of the lead stories in todays Financial Times.

Current news reporting covering the meltdown of the US suprime mortgage lending does not go far enough. The fact that New Century Financial has over extended itself is not completely surprising given the boom in sub-prime credit in recent years along with stories of mortgage brokers driving Ferraris and living  millionaire lifestyles.  The bigger issue is that bad debt levels across the mortgage sector are unfeasibly high, with the latest figures showing US mortgage market delinquencies at 4.95% in Q4 of 2006 up from 4.67% in the previous quarter.

To put this in perspective, when I used to work in the mortgage sector in the UK we would price mortgages based upon a 1% delinquency rate, compared to say 4 or 5% for personal loans. This means that the US mortgage market as a whole is running at delinquency rates comparable with an insecured credit portfolio. The sub prime sector reached 14.4% delinquent in Q4 up from 13.2% in quarter 3; which is higher than would be profitable for a badly performing credit card portfolio (typically expect 5-7% delinquent).

OK, so the mortgage market is in trouble, they have priced incorrectly and will suffer some losses. Banks make a lot of money and they can eat the loss right? 10 or 15 years ago this would be a reasonable standpoint but in the interim banks have been developing and heavily promoting the sale of secruitised debt. This put simply means that they sell the rights to future cashflows from their mortgage portfolios to other institutions or rich individuals. For the banks this means that they  increase the amount of lending they do and the promise to investors was cast iron financial instruments secured on individual properties. The breadth of institutions that have invested in these instruments is vast and includes Life Assurers, Retailers, Investment banks, Governments (local and federal/sovereign) as well as rich individuals.

Again I hear you thinking that these institutions are large and can afford to lose a few dollars if the mortgage market suffers a few wrinkles, but there is a bigger picture. Interest rates are on an upwards trend around the globe and  that makes it harder for home owners to meet their monthly commitments. If the banks or their debt buyers push for a large scale round of repossessions the market could be flooded with cheap housing stocks, which in turn will depress the price of housing stocks putting many owners who have bought at the peak of the recent market boom into negative equity. The natural reaction at this point is to simply walk away, which will boost delinquency further and could create a downward cycle.

Under these circumstances it is forseeable that all the debt instruments, which only last year were being heralded as the financial success story of the decade, will effectively attain junk status and any companies that are holding them should see a swift correction to their stock price. On any kind of scale this could lead to a melt down in equities similar, if not more severe than the housing stock crisis outlined above.

Defined contribution pension funds that have become the norm are generally invested in equities and bonds but with recent relaxing of the rules some now permit property investments if not directly then in the form of Reits. Any major correction in either equity or housing markets could drastically affect the ability of millions of baby boomers to retire.

Taking our worst case scenario then, your house would be worth less than your mortgage, your investments decimated and nothing will have happened to alleviate your credit card balances. Your income will not have changed if you are lucky but you will be faced with a situation where you must save massively if you ever hope to retire. This mind set is what ultimately will curb US consumerism as we know it, and that ultimately will be the cause of depression across the United States.

It seems that no-one quite agrees on the causes of the great depression in the 1930s, but causes which are listed as contributing include: - lack of consumption caused by saving as opposed to spending, excessive borrowing by commercial entities and consumers exacerbated by deflation meaning that the debt levels spiralled as earnings dropped and borrowers were unable to repay the loans, and pretty soon Construction companies went under en-masse as demand for property fell off.

It is certainly not unforseeable that many of these factors could repeat given the current environment, added to which automated selling systems and the widespread use of complex derivative instruments have been shown to compound the speed with which the equity markets can head south.

There is little that you or I can do to forestall these events. Conventional wisdom says you can do one of two things. Either you trust in government to alleviate the pressure on the housing and debt markets caused by the failings of companies such as Accredited Home Lending and New Century financial, or you cash in all your chips now, wait for the crash and then buy “while there’s blood on the streets”. Either way I wish you luck.

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Recent press articles have focussed on how the big players like Yahoo are losing revenues to the likes of Google and other new comers. My suspicion is that this is to do with remuneration schemes. When Yahoo first started out, I imagine they were a small start up, with very bright individuals getting paid smallish salaries plus stock options. As the company grew these options became very valuable and thus the need to be creative was inbuilt into the first wave or two of employees. Google still has this structure for many of its key employees and thus the urge to be creative and build revenues is more focussed than at Yahoo, which has become large and unwieldy enough to stop any additional remuneration for new ideas being earth shatteringly large.

Whilst the above is conjecture I suspect that anyone reading it from Google or Yahoo would probably be nodding their head as they read. The guys at Google will obviously be trying to avoid falling into the same trap whilst they need to keep innovating, whilst I suspect the Yahoo team are wondering how they can get back to a point where they will pay sufficiently well for new ideas that their employees are encouraged to innovate.

The difficulty is also plain to see in more traditional businesses. I work for a Life Insurance company and prior to this worked in Banking.  In both industries suggestion schemes are the norm, but tend to carry token payments or rewards for new ideas as opposed to any share of the generated profits.

Taking a theoretical example, someone I know well shares an idea with me that is brilliant and could generate millions of dollars worth of profits. My very first instinct is to protect the idea and make sure that my employer does not access it. The reason for this is that I believe my friend can make more money by taking the idea independently to a small player than either of us could benefit by taking the idea to my large employer.

Naturally my employer would be angry to know that this is the way I would react. I hold a fairly senior management position, but suspect that there are people in more senior positions who would react the same way. Note that my employer has written into my contract that any intellectual property developed whilst working for them belongs to them, which is a nice attempt to try and overcome the issue through aggression, however in my theoretical example the idea is not mine and I have done nothing to develop it, but clearly the company could benefit.

If I worked for a company such as Virgin, with a reputation for innovating in numerous industries including banking and insurance I might expect to be rewarded by being given shares in a new entity or by being paid to run the project concerned. In larger more traditional industries however the idea of setting up spin off units is usually frowned upon and considered to water down shareholder value.

My argument would be that the disincentive to innovate found in most large corporations is such that shareholders lose value every day. I have lost count of the number of executives who have told me that they have a secret idea which they hope will make them rich one day. If these executives were rewarded appropriately, surely they would come forward with their ideas and generate additional profits for the company? Certainly some more junior employees will put forward ideas in the hope of advancement up the corporate ladder, but when you are already above midway and earning a tidy sum you are a) more likely to be able to pitch the idea and carry it through to fruition, and b) less likely to put it forward because you understand the worth to the company versus the incremental value to the individual.

There is an analogy here with the sporting world. Many think that the money paid to sports stars in games such as football, basketball and soccer far outweighs the value that they bring to the world as a whole. Sports teams and organisations realised long ago however that without the incentives they were getting less than 100% in certain situations, which meant less crowd enjoyment and lower incomes throughout the league. Higher salaries and bigger incentives have lead to more creative play and stronger commitment from many athletes, which in turn have lead to higher $ values for gates, TV deals and advertising.

Should large business then go down the same road? Should we be developing our own superstars to innovate and generate ideas that will take our businesses forward? Is there a model possible where the guys who generate the most revenues for the firm share in that wealth directly, thus creating higher (not lower) value for their shareholders?

If you wish to comment please drop me a line using brad@ideas2earn.com . Fell free to copy this article if it is useful to you, but I would appreciate link back to my homepage at www.ideas2earn.com

casting. The system will prompt you to enter the groom's name (brad emery).

According to the experts one of the reasons that I am not getting many people sign up is because I do not have an offer for potential members. They can get all the ideas from the website and there is nothing in it for them to sign up. With this in mind I wrote a report entitled "Why you Need to start your own Business". It runs to about 3 pages and I have posted it to some article submission sites aswell to see whether it will drive more traffic.

So the question I have is why no-one signed up today? I guess that either I didnt put the offer prominantly enough on the page, ór I didn't put a time limit on it, or it simply isn't appealing to the people that viewed the page today, whcih incidentally was the best day yet for pure traffic flow.

I also managed to forget my user name for Miva the ad generating site having only signed up yesterday. Actually I think they have some work to do as the confirmation before you can use the site system meant that I just logged out yesterday and then today obviously can't remember the sign in details, and they didn't send a confirmation email with teh details in. I have written to them so hopefully they will be quick to resolve it.

Ah, I'm tired and bitching so will end this here.