The current crisis explained:
Over the last 10 years, rising real estate prices fueled economic growth.
Housing prices went up because demand was higher.
Demand was higher because interest rates were low and more people were approved for mortgages.
As prices rose, people used home equity loans and lines of credit to buy lots and lots of stuff -- cars, big screen TVs, plane tickets, ipods. This made the business that sell these things very happy.
At the same time, the financial geniuses on Wall Street created securities -- bonds, essentially -- based on all these mortgages. People who bought these securities expected to get paid a certain amount of money, as the holders of the mortgages paid their monthly bills.
Now, real estate prices are going down.
People who planned on using the equity in their houses to pay all their bills can't do that now, which means that they can't buy the cars, ipods and TVs they used to.
And some of the bills those folks can't pay is the mortgage bill. Millions of people are being forced into bankruptcy, which has predictably terrible consequences for holders of mortgage-backed securities.
Nobody wants to buy or sell securities based on mortgages when foreclosures are through the roof, and as a result, nobody knows what the securities are worth. If a bank or brokerage sunk billions into these 'toxic' securities, (and many did) their balance sheet is ... unhealthy.
People talking about 'recovery' and a 'short recession' are missing some very fundamental points. The stream of wealth behind the economic health growth of the last few years is gone, and its not coming back.
This is because nobody, not even the federal government can compel house values to rise, short of nationalizing the entire economy and setting the price for land. (No, Jack. This is not a good idea.)
And now that we've realized -- belatedly -- that wanting a house A LOT does not qualify you to pay the mortgage, we're going to be a little more cautious about handing out no-interest, no-down payment, no-documentation jumbo mortgages.
That's probably a good thing, since making bets that people will pay bills they can't possibly afford is dumb, and centering gigantic chunks of your economy around that notion is even dumber.
But it means that we're going to have to find something to take the place that all the vanishing dumbness left us.
We've done it before with radio, television, the automobile, manufacturing, and the internet.
I can't wait to see where we end up.
Tuesday, November 25, 2008
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4 comments:
Hey, I saw that. :P Believe me, I am just about the *last* person in favor of "nationalizing the entire economy and setting the price for land" (but I know that this characterization is standard in the right-wing playbook; anyone who suggests something as "radical" as trying to eliminate the bloated middle-man of health insurance corporations from our health care system must be a Stalinist).
That being said, I would like to point out that where I live, in Sweden (where the economy is *not* nationalized and the price for land is *not* set by the government), people aren't being hit by the economic crisis the way people in the US are, since the sort of predatory lending that's been going on the past decades in the US just hasn't happened here, at least not to the same extent. Maybe it's because Sweden was burned by a burst housing bubble of its own in the early 90s.
I think its great that Sweden has avoided the real estate crash that so many other countries are struggling with.
There are probably a lot of reasons for this -- cultural, economic, political-- but 'one bitten, twice shy' probably has a lot to do with it.
As to health insurance -- the concept itself is probably nearly as old as money, and certainly as old as trade. You pay a little money every month so that when something really bad happens, you assume less risk.
As long as there's a variety of insurance products available, this system works pretty well, and on the face of it isn't evil.
The tangled mess we're looking at now is pretty awful, and certainly beyond my capacity to understand or solve. I have the strong feeling, though, that decades of fat political contributions by insurance companies have resulted in a system that operates to their benefit far more than mine.
My personal preference would be to cut this Gordian Knot by making health care more responsive to the patient with market forces. I'm not talking so much about deregulation as much as different approaches to regulation.
Why do I only have (affordable) insurance options through my job? Why do I only get to buy insurance from providers in my own state?
There's a great deal of variation in price across state lines, so why can't I buy insurance from a company in New York, or New Hampshire or California if they are cheaper than the ones in CT? Why do all the plans have me paying for things I don't need?
Without any actual proof -- I haven't had time to do justice to the research -- I have the feeling that the answers to these questions has a lot more to do with making money for insurance companies than it does with providing me with a variety of competitive health care options.
The problem is not the mortgages themselves. After all, it is still only a small percentage of mortgages that are in or near default. The problem is securitized debt such as CDOs, and derivatives based on those CDOs (e.g. credit default swaps) whose volatility is much higher than the underlying debt. You can thank wall street for inventing all that crap to generate massive sales fees for themselves. Goldman Sachs was even shorting the damn things in their own portfolio at the same time they were telling their clients what a good investment they were. Bastards.
Hi, Nick. Thanks for reading. I believe I mentioned those, but they are an aspect of the current problem -- which is the fact that much of the economic growth of the last 10 or 15 years was based on home equity and the assumption that real estate values would keep rising. That turned out to be ... unwise.
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