Tuesday, September 30, 2008

The Financial Crisis Simplified / The Financial Crisis for Dummies

From what I can find out, there are three groups of people to blame for the current financial crisis.

First is the consumer of the last decade or so who believed it when he was told he could afford more than he actually could. Home buyers clearly make up the bulk of the problem here, but the group also includes those who bought boats, big screen televisions and even iPhones with data plans. Who lied to these people? It was their banks, their mortgage brokers, their credit card companies and their friends and neighbors. But these people WERE lied to and therefore do not carry the entirety of the blame although they do now carry a fair share of shame.

That leads us to group number two which is obviously the lenders. This is where the term ‘Predatory Lender’ comes in. This group of people/companies succumbed to their greed and threw caution out the window. They couldn’t or wouldn’t see past the incomes. They sucked the consumer in, committed them, took their share and passed on the buck. Again, there are subgroups here that are more and less culpable. The largest culprits by far are Freddie Mac and Fannie Mae (actually both Government Sponsored Enterprises). These were the big guys at the top that were ultimately buying up all the debt. For example, First Bank of Greed sells a mortgage to consumer Joe Poor. First Bank of Greed then sells the mortgage to another bank and enjoys the profits. That bank then sells the mortgage to Fannie Mae which holds on to it because, one, Joe is still making his payment and two, even if Joe stops making his payment, the US government is backing them up which leads us to group three.

There may be a 4th group. Let's insert them here and call them group 2.5. They're special interest groups who may have pressured lenders into some of their unwise lending policies. More on this group later. ACORN has been blamed, but seems (at least at first glance) to be a force for predatory lending reform. Update: Here's Glenn Beck (I know) with his dirt on ACORN.

Group three is the US government. There’s an idea out there that the government is responsible for taking care of its poor. Different leaders buy in to this idea at different levels and if not persued carefully, can turn in to harmful Social Engineering. Jimmy Carter and Bill Clinton bought into it pretty deeply. One approach is to help the poor to earn more. Educate them, give them opportunities. Another approach is to lower prices into poor people’s ranges (keep inflation low etc). And an obscene variation on that approach is to artificially reduce prices. This is what Jimmy did in 1977 with the signing of the Community Reinvestment Act (CRA) and what Bill did with vigor in 1994 when he broadened the CRA under his National Homeownership Strategy. They told Freddie Mac and Fannie Mae that they were to lower their standards and give mortgages to people who could not afford them. So Freddie, Fannie and Friends played with interest rates (can you say ‘interest only’ and ‘ARM’?) and with borrower requirements and suddenly the American dream came alive for millions more Americans.

There’s another reason for this behavior which I’ll touch only lightly on. That is foreign policy. Keeping the American people in a state of ‘rabid buyer’ is advantageous to the government because it keeps the countries feeding the appetite like Japan and China rich and happy.

Then came the hard times and people stopped making their mortgage payments en mass. This created ‘Toxic Assets’. These are mortgages which are either not being paid or that are at very high risk of not being paid. Suddenly, banks carrying these mortgages and insurance companies insuring these banks found themselves loosing value. Both in the Commercial Paper market and in the stock market. These things happen in chain reactions and the result is that money has stopped changing hands between banks and large corporations which depend on borrowing money to make their pay rolls etc.

So then it was time for the government to make good on its promise to Freddie and Fannie and bail them out, but that didn't turn out to be enough. The reaction became huge and now Bush and cronies want to bail everyone out. Not so fast! The people are catching up on the plan and find that it stinks. No bail-out! Sure, we’ll be feeling the pain, but we realize that we deserve it for putting idiots in office who pulled this plastic over our faces.

Notes:
There were warnings and there are lies and there are cowards. Stay tuned.
2005
*Shelby - strong new regulations - Dems defeated
*Greenspan warned in April

Don't know/can't find what dems are talking about in reference to not being warned by Bush. Why would congress be dependent on Bush for that info?

Calls of 'deregulation is the culprit' are partially accurate, but double-talk coming from democrats given they deregulated and voted down oversight for Freddie and Fannie.

And given that McCain co-sponsored the bill to apply oversight that was voted down by the dems, why isn't he talking about it!?

References:
ReasonOnline: The Roots of the Crisis
IBD Cartoon
IBD Editorials Main
IBD Editorials Full
CNN Coverage I
FoxNews Coverage I (youtube)
FoxNews Coverage II (youtube)
2004 Hearings (youtube)

1 comment:

Shannon said...

You said it right!! I really liked your review.