Understanding

My wife has grown tired of my rantings and has sent me here to let out the products of my overactive cerebral cortex. She seems to feel I have something worth while to share with the world. Well I have determined she is a bright woman with degrees in this and that so she might be on to something. So Lets get on with it.

I have come to believe that we as a people may actually be in trouble right now. We all are aware of the current crisis in our economy. The sub prime mortgage debacle is apparently the catalyst of our current predicament. What does it all mean? I have never applied to much time in the financial sector of life. Not formally anyway. Like most Americans I have a surface knowledge of macroeconomics, market economies, central banking and such. I do know, however, that you don't need to eat a whole pie to know what it taste like and in history others have tasted before us and leave us a lesson. With that in mind here is a simple explanation of our current economic problems as presented to us.

Sub Prime Mortgage- What is this: Its home loans to people with less than prime credit. Its a risky venture so the interest rates are higher. Many less than perfect and even great credit borrowers got loans under these conditions. Loans were easy and in many cases approved without a real hard look. Good credit borrowers got more money than a prime rate loan would give them and bad credit borrowers could get loans. All this easy money started a buying boom in real estate. First time buyers and would be real estate entrepreneurs drove home prices up. It was why we all were saying things like "that much for that house in that area???" There were some houses so high in some areas that if the tax was adjusted people would have to sell to avoid the payment!

Adjustable Rate Mortgage- What is This: Its the amount of the monthly payment due on home loans. It goes up as time passes. This is the big hurdle that has so many people walking away. As a credit risk in the first place, with limited income, they were overextended at the start. As the rate rises reality sets in and no matter how hard they try people can't keep up with the payment. They walk away. The bank gets a house.

What Happened- everything was fine until this easy loan buying spree slowed and new housing builders saturated the market. Here is the basic law of supply and demand going in neutral and then a fast reverse. Now there are more houses than buyers. In addition as adjustable rate mortgages, or ARMs for short, matured and monthly payments rose more and more people defaulted and just decided to pack up get an apartment and walk away. Prices for homes started to fall. The ability to get new loans was exhausted. Credit lines dried up. People could no longer fake income with loans and credit. Most people found that the house they were paying for was no longer worth the amount they were paying. More of them packed up and walked away. Banks like Bear Sterns and investors were heavily invested in buying mortgages as traditionally they were a good investment. But as more people walked away and prices fell these investors were getting stuck with houses not worth the mortgages they were invested in. They lost a ton of money with no way to recover. This caused banks not to trust each others ability to remain solvent. Every big banking firm needs daily cash. They borrow daily from the FED and each other to get through the day with enough cash on hand to meet the needs of withdrawals and such. The FED rate that we hear about all the time is the interest rate for a loan to a big bank for 24 hours. The lower it goes the easier it is for banks to get a loan. But with questionable assets no rate lowering can help a bank get a loan if other banks get the idea it may lose its money on a bank about to crash. Bear Sterns was known to be very heavily invested in bad mortgages. The other banks lost faith and so did the public. In less than a week its shares fell from $60.00 to $2.00 and getting a loan was not an option. They were cooked. They had a day or two before they could not meet obligations and would have to close, file bankrupt. Thousands and thousands of people would lose everything. People were near panic. Like the great depression everybody wanted to get their money out of the banks and out of investments. Bear was around for 85 years and was solid as they come. If they went down anybody could go down without warning. The FED stepped in and brokered a buyout buy taking the bad mortgages of Bear Sterns on itself and getting JP Morgan to buy Bear for $2.00 a share. The panic was avoided. Partly thanks to faith in the FED and mostly people did not believe a total crash could happen. They rode it out.

What Does This Mean To me- The main problem right now is the amount of money the FED is asking to be printed to cover its Bear load among other things is in addition to other issues such as the money needed to fund the war and cover the debt. This is a bad thing as history has shown. The more money in circulation the less its worth. Put this together with a frightened consumer base and high inflation rates and suddenly the value of the American dollar is really falling. People can't and won't buy things. Before it was one or the other. Now with no way to buy the driving force of our economy is gone. Jobs will be cut. Money will not be worth enough to meet expenses, people will have to work harder and longer than ever before but without available places to do that. The opulent lifestyle of big screens and SUV will end for most. Living on credit assisted income is over. The next few years will be hard indeed. There is no doubt about our situation we are in a depression. This time we have no World War II to save us. The rest of the world is producing and living fine without us. How low it will go is hard to say but the majority of Americans will suffer greatly. If you feel your in a good place and have yet to get hit badly with the falling economic levels think again economics is a slow moving but certain beast. It will get to you.

How Did This Happen- Real easy. As is almost always the case, history has something to show us about where we are today. The free market economy has faults. This was evident prior to FDR's new deal policy in the early part of the 1900s. Wealth can concentrate among few individuals. The more wealth you have the easier it gets to get more of it. The old adage money gets money is true to our nation.We depend on our government to act as a balance to monetary powers. When government steps out of the way of big business bad things happen. During the late 1800s and early 1900s individual owners of companies were able to expand their wealth into many areas of industry, real estate, and other hard assets. With the power they had, unchecked by government regulation, they exploited American workers. Low wages, long hours, and child labor were used to increase profits. Decreasing the human cost was the way to make money. How far did the Robber Barons go? People died by the thousands. Many of them children. Starved, homeless, sick and killed in unclean, unsafe, sweat shops. It ended when regulations and law changed workers rights. Government stopped the exploitation. Unions were formed and workers organized. Our ancestors fought hard for a good way of life. A forty hour work week (unheard of today), paid overtime(slowly getting removed), social security(gone its spent), pension programs(replaced with 401k that runs out in a few years putting elderly people back to work), and a host of other regulations and protections that ensured a good standard of living without having to work three or four jobs per family. As you already may see many of the protections that were in place to stop the exploitation of Robber Barons have slowly been taken away while the people sustain a good life with credit. It's run its course and we can no longer hide the fact that people can't keep up anymore to pay for billion dollar lifestyles of the fortunate few. The methods have changed but the idea is the same, save on human cost to maximise the money in my pocket. Ship jobs to slave like countries like Mexico, China, India, and Taiwan. Explore and develop new markets at the expense of the American people. We have let our way of life be diminished slowly over the past few decades. In Europe life remains the same as people have fought attempts of big business to influence government. They have for the first time since WW II passed us in living standard. Long paid vacations, universal health care, guaranteed jobs, normal working hours and more. Is life as opulent? No. But the people live within their means and find happiness in having time and health opposed to a 65 inch TV and two ton tank for chip and dip runs to the super mart.

The Fix- Bottom out. We will only act it seems when we can no longer ignore. We can count on it getting in our face soon enough. We also have one thing on our side. American Spirit. The spirit of the worlds best brought together in one place to form and reform a nation. In time that spirit will win out. Lets hope we learn not to forget.

Many of the points here are simplified and if anyone would like to expand on the complexities of the general explanations feel free.