Economic Armageddon: The Housing Bubble Bursts

What scares me? Well, white papers like the one written by the Center for Economic Policy and Research’s co-founder Dean Baker: Prospects for the Stock and Housing Markets. In this chilling paper, which reads like an economics horror story, Baker details the impact of the housing bubble’s bursting, along with the subsequent liquidity squeeze and credit crunch.

Executive summary: expect GDP to take a hit, expect TRILLIONS of dollars on paper to vanish, expect a recession, possibly a severe one, and expect everyone in America to be affected negatively. Hedge funds are already taking a beating, CDOs are difficult to value, overseas banks are stopping withdrawals like BNP Paribas, and markets are convulsing like electrocuted fish.

On the financial aid front, which is where all this news becomes relevant, many, many states and municipalities derive education funding from property taxes. As foreclosures, bankruptcies, and economic malaise spread, expect a ripple effect into financial aid and education finance, with states having less money available to fund educational initiatives such as grants and subsidized loans. Ultimately, that means more borrowing, more federal student loans and private student loans.

Doom and gloom? Maybe. But envisioning the worst lets you prepare for it, and then if anything less than the worst happens, you’re pleasantly surprised. Some ideas for weathering the storm, then.

If you own a home, don’t plan on selling it in the next two years unless you absolutely have to.

If you’re thinking about buying a home, hold off until this whole business shakes out. No point in spending hundreds of thousands of dollars extra if you don’t have to.

If you’ve got investments, take a hard look at them and diversify your holdings – definitely away from anything housing or mortgage related.

If you’re a student, crank up the scholarship factory like crazy, right now. As the economic situation worsens, free money will be harder to come by, so act now.

If you’re a student, make darned sure you file your FAFSA every year and qualify for as much federal financial aid as you can.