Tuesday, February 17, 2009

The Economic Collapse

20/20 Had a very good show on last night called “House of Cards” that explained in detail the economic meltdown. I was pretty confused how all this happened until I watched it. I think I will try and relay, to the best of my ability, what happened. Keep in mind that all I am trying to do is put this in terms a lay person can understand. I barely know what I am talking about here.

1) Bad loans were issued by Mortgage companies and people forged their info to get these loans. Loans were issued based on “stated income”. This means that all a person had to do was sign a document saying they made $100,000 a year and in reality they could be just out of prison, and a loan was given.

2) Most of these mortgages had an adjustable rate. They would be at sub prime for the first 2, 3 or 5 years and then go up high as hell. Hence the term “sub prime meltdown”. Mortgage brokers would rationalize this by saying that people would just refinance before the rate hike into another sub prime loan.

3) Since it was now easy as hell for anyone to get a loan, the demand for houses went through the roof. Causing housing prices to skyrocket. This lead to people having a whole bunch of equity built up in their homes. So….They withdrew money from the golden fountain. The problem is that they refinanced using these sub prime loans.

4) Guess what people did with all this money they took out of their home? They spent it. The economy flourished. They bought anything and everything they could get their hands on. Pools, cars, pets, and sandwiches. George Bush got on TV and talked about how good our economy was and how much home ownership was up. Too bad it was all bullshit. But nobody else knew either apprantly.

5) WallStreet bought the hell out of these loans. People were making their payments on time because their interest rates were low which made the loans look like a good investment for everyone. The loans were bundled and sold. They were put in as part of funds and given a AAA rating by the rating companies. This meant that they were the lowest risk funds you could invest in. And everyone bought them.

6) CDO’s were created. This stands for Collateralized Debt Obligation. I suggest you read what these are on your own. Basically Slices of the clumps of horrible loans were bundled together and sold. Again with a AAA rating. Most people had no idea what they were investing in. And EVERYONE invested in these.

7) Shit hits the fan. People who put down fake income start falling behind on their payments. Interest rates go up on the adjustable rate mortgages. Houses start being foreclosed on. This creates a lot of houses on the market. People realize the bad loans are the reason for this and stop issuing them. Demand for houses tanks and supply explodes. People are not able to refinance their shitty loans and they get foreclosed on. This creates even more supply and less demand.

8) The CDO’s price plummet. Which causes all CDO’s to plummet (weather they are part of the housing market or not). Everyone looses faith in the market. If this AAA CDO is failing then why would anything else not fail? Our economy collapses. Where will it end?

9) Who is at fault? The house buyers, for sure, for lying. The Mortgage companies for knowing they were lying and issuing the loan anyway. Wall Street for having to know these loans were bad and selling them anyway. The rating companies for not investigating what they were rating. And anyone who refinanced into a shitty loan. This is how I understand it anyway.

4 Comments:

Anonymous m3 said...

0) In order to "stimulate the economy," the Federal Reserve set interest rates far too low for far too long, prompting everyone to go out and borrow money.

This is solid proof that a central bank is a bad idea, and that journalism isn't all it's cracked up to be.

10:45 PM  
Anonymous BigWillis said...

The Obama idea now is to subsidize those who already cannot afford their homes, into payments no more than 31% of their gross income. Banks get incentives to rework these loans, which may or may not help the homeowner.

So lets get this straight..Bank signs up people that can't afford loans. People default. Economy Tanks. Gov pays banks to refinance people who can't afford mortgages. Brilliant!

5:03 PM  
Blogger Kathy said...

I am so proud of you, Brad. Not many people will try to figure this out.

The only thing i see that you didn't touch on was the realtors who wanted to make a buck and sold those who were not that bright into taking a loan they could not afford and that may "baloon" in the not to distant future. I know people who were in this situation and I just kept telling them, DO NOT APPLY FOR A LOAN THAT IS INTERST ONLY! DO NOT APPLY FOR A LOAN THAT HAS A BALLOON INTEREST RATE. If you want to buy some, buy some that you can afford and that is in your price range. Buy something with a fixed interest rate for 30 years, ... 15 if you can do it. Stay within your means. Not everyone knows or understands how to do this. Many people were just taken advantage of because they just trusted someone. Is very sad.

7:59 PM  
Blogger fooiemcgoo said...

you guys said it.

m3, bigwillis, it is all very unfair, that i agree with. people like me are getting punished for being responible. on the other hand, what is the alternative? do you have one? I think it is a good move, given that it will at least stop the bleeding at the root cause -- defaulting mortgages.


as for the blame:
i think it boils down to people not being able to weigh risk, in two cases. one, the homeowners not having the foresight to see that they might not be able to refinance a ARM due to changes in the value of their property or changes in the way that lenders assess them- very risky. and two, the people who bundled these loans in securities and called them "low risk". or, in other words, GREED. (or stupidity)

also, my word verification was "musack". ironic, since musak is also a goner this year due to all of this hogwash.

6:31 PM  

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