Posted by
CKHustler on Saturday, April 25, 2009 2:33:07 AM
So, I was gathering information on our welfare and education system, when I felt an urge to write on our mortgage crisis in detail. Im listening to this book by Mark Levin called 'Liberty and Tyranny:A Conservative Manifesto' and he mentioned something that I did not know about the housing crisis. I heard about it, but did not understand it. It really opened my eyes to how incredibly screwed we all are lol. FYI, I recommend that book to anyone who reads. Spectacular book.
It all starts with derivatives. If you do not know what they are, they are, as used by the banks, allowing outside companies to invest in the mortgages banks loan. For example, AIG could pay Bank of America 200k for a loan worth 250k based on the risk of the loan. AIG can then make 50k off the loan if it pays off and the bank gets a quick 200k back for it. You ask why a bank would do that? Well, it all starts with the CRA bill.
The bill:
CRA bill: Clinton
Notice part B:"
It is the purpose of this chapter to require each
appropriate Federal financial supervisory agency to use its authority
when examining financial institutions, to encourage such institutions
to help meet the credit needs of the local communities in which they
are chartered consistent with the safe and sound operation of such
institutions."
What does that entail? One example, is that if banks wanted to merge, their CRA score would need to be high enough.(City Journal) Or if a bank wanted to buy another bank, their CRA score would need to be high enough. There are some other things I have heard, such as the interest rate from the fed to that bank being worse based on their score, but I cannot verify that, so it is hearsay.
Here is also another example: IBDeditorials
"April 1998
HUD announced a $2.1 billion settlement with AccuBanc Mortgage Corp.
for alleged discrimination against minority loan applicants."
Lawsuits are now being done to banks who don't have a high enough CRA score. Would that be motivation enough?
So lets start after the CRA bill has been passed shall we?
Banks are now beginning to lend to higher risk persons to keep their CRA score high enough for the federal government. By doing this, it leaves less money for less risky loans and it is more likely the bank will not have the profits they would by otherwise using the money to loan to safer people. Subprime lending has already been started by the banks at this time, but they are looking for an easier way to keep their CRA score high enough without taking the risk themselves. What do they do? Create derivatives in the banking industry.
Before I go any further, it is important to note the effect subprime lending had on housing prices. Suddenly people feel they can buy more expensive homes and more people are then moving and buying homes. Housing prices begin to rise because of this.
According to that graph prices began to rise shortly after Clinton signed the CRA bill in 1995. That red line should always be fairly flat even if the blue line moves up. Housing up until 1995 was always close to the inflation rates, but what the subprime lending did was make affordable housing, not affordable. Without this bubble, we do not have this crisis today, but since we do, it is important to know to what extent our trouble has expanded.
Lets imagine for a moment that derivatives were not in existence during this crisis. What is the outcome? Banks are forced to loan within their means and while the economy was booming, all was fine and dandy, until 2006. Starting in 2006 (mysteriously the year democrats took over congress) the economy leveled and the prices of housing began to fall. Also the price of gas was hitting all-time highs which put extra stress on the average person. With the prices of housing falling, people began to get upside down in their loans and with other prices rising due to oil costs, they could not make their payments. What happens, but defaults begin to rise. Not just the higher risk loans, but loans from the average household. Banks are now caught in a trap where they have no money and people are not paying in as they should anymore. Banks collapse, but the problem is only within the banks means and only found in the banking industry. It is hard, but manageable.
Lets bring Derivatives back into the equation. What happens now?
So, we are at the phase where banks are trying to find easy ways to avoid the risk and keep their CRA score high for the federal government. They start allowing other companies to invest in the mortgages for profits. Sure the banks take a minor hit on each one, but they turn around and loan the money anyways and their CRA score is raised at a small loss. The banks also don't have to worry about the risk of those mortgages, so in the end, they probably come out even on the money side, and their CRA score is much higher for it. As we move to 2006, all is fine and other companies are making profits as loans are paying off so far. As the housing bubble bursts though, risky and non-risky loans start defaulting as they would have without derivatives. What is the problem now? Banks are stuck with these loans and are going into major debt as they would have. A problem added on top is other companies who invested in the mortgages, are now underwater as well. AIG was a major investor in these loans and look how that has panned out for them. Instead of the problem being concentrated, it is spread out. The banks were able to lend more money due to the investors paying off the loans immediately, so they turned around and made more loans. The banks are in just as much trouble as if derivatives did not exist, however we have loads of debt spread out among many companies now.
Just how much trouble are we in?
I have heard numbers as high as 1 quadrillion, or 1000 Trillion, but I will use a more credible number, though not less scary.
According to Warren Buffet we have a $516 Trillion derivative market waiting to burst on us.
Derivatives New Ticking Time Bomb
There isn't enough money in the world to pay this off. This is why the government MUST stay away.
This has two scenarios.
1)Government gets involved
2)Government stays an observer and repeals laws that caused this
1)
If the government gets involved they are putting the entire country on the hook for this money and it is impossible to pay back. It will inevitably end in bankruptcy for our country and possibly anarchy with all our welfare programs running dry. Is there another scenario? I do not believe I see one. The housing bubble has still got a long way to fall until prices are back where they should be and I don't see it stopping before that time. I showed you that video of Beck where we are still at an inflation price of 170k and we need to fall to 100k for prices to be even with inflation. As the prices continue to fall, our economy cannot turn around. The people will be in too much debt for the economy to flourish as it did before, because we will have no money.
2)
The government stays on the sidelines. This is preferable, though we will still have some rough times. The banking and companies invested in the loans, will crumble, but the country will not be on the hook for it. They will be able to rebuild because all the debt is circular in a way and once one falls, it is a house of cards, but the debt will not be the same kind of debt like if we owed China all those trillions. Declaring bankruptcy and dissolving is the best way to go as it dives our economy into a depression, but it removes the toxic debt that would be hanging over us. Our country would not need to declare bankruptcy in this case and our country can be allowed to recover.
Neither case is a necessarily good scenario, but tough decisions need to be made. I know Obama can't even decide whether he is for, or against going after Bush's administration on torture, but he needs to be a leader right now.
In my ideal scenario, the government would lower taxes and spend less. The people then have more money to spend, which would hold the economy at least steady. The people would also have enough money to pay their loans and thereby being a sort of "bailout" to the banks, though the money is not stolen from the people, but their principles on their houses is being paid off. With payments coming in the banks are able to stay afloat and possibly find a way to slowly fix the problem. The debt is not spread across the country where the average person must pay for it. Imagine how much money the banks would get in this scenario? Our GDP the past couple years was something around 13 trillion I believe. What portion of your paycheck goes to your house? I know many people are paying over $1000 per month on their house, so Ill use that number, even though I believe it to be pretty low. $12,000 a year is probably close to a quarter of the average household spending. With a GDP of 13 trillion and 10 trillion of it in the private sector, I would venture to say that banks would get about 2.5 trillion from the people paying their mortgages. Its a natural bailout and our freedoms are not trampled. It is easy to see why %5 of loans defaulting is killing the banks. %5 of 2.5 trillion is 125 billion. That is where our problem would probably lie if derivatives were not in the equation.
One last thing I want to look at is what would have happened if the CRA bill had not been passed? The subprime lending markets would not have been introduced and housing prices would not have skyrocketed. The housing bubble would therefore have nothing to burst and we would not have this problem. I don't think anyone can deny that the CRA bill caused housing prices to rise and rising housing prices is the main ingredient to this entire debacle.
"All that is necessary for evil to triumph is for good men to do nothing" Edmund Burke