Economic Mess

Here is my fairly uneducated and unresearched, relatively simple explanation for the financial mess our country is in.

1. Government decides it is a good idea to encourage home ownership for the middle class and creates regulations and incentives to support it including Fannie and Freddie.

2. As a result of the incentives, banks begin making loans they should not make. Housing prices continue to climb so the loans don't look so risky.

3. We can all buy a house that is unaffordable for us, pay no money down, and pay a ridiculously low monthly payment. Most of us did it ... admit it.

4. Mortgage brokers and banks 'securitize' the loans by packaging them into investments like bonds. These bonds are rated/regulated by various agencies, but it is difficult to rate the risk of them because no one really knows what type of loans are in them.

5. The securities are rated 'very safe' by regulators because no one understands them, and housing prices always go up anyway, right? Investors trust the regulators and buy up the securities. This investment increases the amount of money available for institutions to lend, and so they do ... often with even more risky loans.

6. Global demand for oil and food, crazy government spending, and a weak dollar cause inflation. Things begin to cost more. Hello $4 gasoline!

7. The Federal Reserve raises interest rates to curb inflation. Economics 101. Higher interest rates give you less incentive to borrow money, and more incentive to save money. So you buy less which lowers demand and thereby lowers prices.

8. Uh-oh. All of those adjustable rate mortgages go up with the Fed's interest rate increase.

9. People can't pay their mortgage on the 'house they couldn't afford' and they tell the bank they can have their home back - foreclosure.

10. The monthly checks being sent to banks for mortgages each week decrease, and the banks instead get a bunch of homes they don't want. They now have less cash coming in, and a pile of homes that may or may not be worth what the people owed on them.

11. The banks need cash in order to give you money when you want to withdrawal it from your checking account so they try to get rid of their homes as soon as possible.

12. The housing market is affected by the huge number of foreclosed houses being sold on the cheap. Housing prices go down. Oh ya - and people generally don't have money to buy a home because everything costs so stinkin' much.

13. Now the bank situation worsens. The homes they own are worth less. People also see that their homes are worth less which leads to more foreclosures.

14. The banks run out of money. Too many homes, not enough money coming in the door. The banks have to sell all their assets (open loans, and homes) unless they are bailed out by the good old government. Coincidentally, banks also don't have money to lend to small or large business in other areas like technology, construction, etc.. The money is gone. This hurts everyone.

15. Those securities that were really just packaged home loans aren't looking so good. Their value plummets. Investment companies are hosed because they own way too many of them and no one wants them now. (Except the government ... haha)

16. The government has no choice but to save the day. Otherwise we would be in a really, really bad situation. They blame Wall Street of course, not themselves. We all cross our fingers and hope it works.

Interesting thought ... it was both excess regulation (the government going way too far to encourage home ownership) and not enough regulation (the government not being smart enough to know these investments were not accurately rated) that caused this problem.

Democrats charge that we did not have enough regulation and that government needs to be more involved. Which is fine, except that it was largely regulations to encourage home ownership that started everything in the first place. It was not long ago that politicians were touting the availability of 0% down, low interest home loans to the poor as a success story. Fannie and Freddie were largely Democratic party (for regulation) ideas.

Interesting thought #2 ... Everybody is mad that executives of failed companies make so much money, and they should be. But be honest, it didn't contribute to this problem. When you're counting in trillions, millions don't matter. To put it in perspective comparing 1 million to 1 trillion, is the same as comparing 1 dollar to 1 million. It is nothing.

OK, that was fun. Now off to work.