Whose mess?

I had planned on writing a post about our current economic situation. In doing a lot of research, I've found that it would be more than one post's worth of material. I may still post what I've typed (in parts), but in a nutshell here are some interesting bites:

An entree from the New York Times, 2004.

A dash of conflict of interest

A dollop of truth.

And a small video helping to go with it:


This is for desert. Like any desert, take your time with it...pause (literally, with the pause button) often, because the best pieces go by pretty fast:


Government interference in the mid 90's (forcing banks to lend to people with bad credit) caused demand for housing to go up. Basic economics: as demand goes up, prices increase. The "solution" meant the "affordable housing" was no longer affordable for those trying to by later.

For those who had already purchased, the house they bought (via the easy loans) went up in value due to the higher demand/prices created by the easy money. Thus, many of those home owners went back to the banks to dig into the equity - equity based on the artificially inflated new value of their home.

For example, say someone bought a house in 1996 for $100,000 (no money down, all financed...yes, the government mandate forced banks to offer no-money-down home loans to people with poor credit in some situations). Then in 1999, because of the higher demand for housing (again, caused by the easy loans), the value of that same house jumps to $180,000, suddenly the buyer has a little over 80,000 in equity! So he refinances his home to cash-out, buy a car, go on a vacation, whatever.

Unfortunately, many of these loans were variable-rate...so, as the prime rate increased sharply (2003-2006) in an attempt to curb inflation...inflation caused by all the extra "easy money" people were borrowing...mortgage payments on a large number of bad-credit loans also went up. The "favor" given to people with bad credit, ended up being their undoing. They bought houses on variable rate loans when rates were very low. Very low rates have little room to go anywhere but up. (You can't have negative interest rates. Banks won't pay you to take out a loan, unless, of course, you're a politician.)

That's all for now. I'll post more of my take later this week.