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How We Got In This Basket I

October 5, 2008

The following is a four part series on the history and reasons behind the current financial crisis. It was my goal to examine the issue from all sides without emotional or political bias. The 4 part essay that follows is the end result of weeks of research in an attempt to understand this very complex problem. It was my goal to understand the factors that brought this about without blaming any one person or party. There is plenty of blame to go around on all sides, and enough failed policy to provide years worth of kindling. I think that solutions for problems this large cannot be reached by pointing fingers in any one direction. Instead, they come from understanding how the current situation has developed, and all of the factors that contributed to it. It is almost impossible to fix something without first inspecting it.

Part I – Introduction

Like many Americans, when I first heard of the idea of giving a $700 billion bailout to Wall Street, I was livid. “What?”, I thought, “Why should we have to bail out these corporate fat cats and risk all this taxpayer money? Can’t we just let people reap what they’ve sewn? And even if we have to use our money to make these loans good, then why don’t we just bail out the individual homeowners, and let the corporate greed take the losses it’s created?”

But as things progressed, and I did a little more research, I began to understand that the problem we face now is not so much that these loans are defaulting at unacceptably high rates. Yes, that is part of the problem, and was definitely the first widely reported finite indicator (along with shrinking home values) of the fallout that was beginning. And if those bad loans were turned into good loans years ago, and the market slowed in an orderly fashion, it might have helped. But it has all gotten so much bigger. 

It is my personal belief that before attempting to understand the problems of today, we must understand the problems faced by those who came before us, and how people reacted to them. So, the next step was to learn about financial crises of the past, beginning with the Panic of 1909 up through the dot com bubble of the 90s. Don’t worry, no history lecture here. The info is readily available on the net. If you really care to understand the full history of it, just start Googling. Education is readily available, and cheaper than ever. You just have to be willing to look a little further to make sure the information you’re getting comes from reliable sources. Don’t just check the source, check the sources the source used.

After getting a basic enough understanding on the crises of past, and the reactions to them, I decided it was time to delve head first into the modern day. For those interested in getting some more analysis of past crises, try Googling “Keynsian Economics”, “Friedman Schwartz”, and/or “Great Depression” in various combinations. Also, add “Bernanke” to that equation. Our current Fed Chairman, who’s importance in this crisis is undeniable, has given a few speeches on these topics. Many of his views stem from these theories. But please, read a few rebuttals to them as well. 

What I’ve found says to me that we’ve been letting this basket get woven around us for a while. In essence, this is all related to unfettered deregulation. It’s been going on for years. This does not mean deregulation is always a bad thing. There are many convincing arguments for a market that is not overly regulated. Deregulation without oversight, however, has a track record of ending poorly.

The deregulations of the late 1970s and 1980s are the very ones that created the ability of lenders to issue the current subprime loans that are part of the problem. It was the writing of things like NINJA, 100% (and later 120% and more) interest loans, no downpayment loans, ARMs and the like that has lead to increasing numbers of defaults and foreclosures. If you haven’t taken the time to understand what all these are, I’d recommend it. Helps to understand where it’s all coming from. Alt-A loans also enter into the equation, but there is a distinction between true Alt-A loans and subprime loans.

There are many other factors in the mortgage fallout. Inflating housing prices, the ever increasing buying and eventual sales of investment property by speculators, and the loosening and computerization of underwriting standards for riskier loans have all contributed to the subprime crisis. The market was flooded. It could not maintain, and the bubble burst. Values began to fall.

It is impossible to refinance a loan on which the principle (based on purchase price of the property) is greater than the current market value of the house. Due to a market that was increasingly based on speculation, some loans were given betting that refinancing would be possible after the 2 year period of the initial terms expired. As refinancing became increasingly impossible, and the lighter initial terms of loans began to expire, these new homeowners faced greatly increased payments. Defaults and foreclosures ensued, feeding the cycle of dropping values. And around and around went the merry-go-round, feeding its own downfall.

But I began to wonder…if this is really the cause of the crisis we’re in, and this is the bad paper, why are we talking about bailing out Wall Street? Just doesn’t make sense, right? And what made the banks think they could safely make these loans in the first place? The reason, from what I can see, is because this isn’t remotely the worst of the bad paper. Nor were the ’80s the end of our flings with unchecked deregulation.

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10 comments

  1. I took the pledge – Have you?
    Well the congress has done it.
    As of the morning of te bail out vote in the House of Representatives, polls showed that the American people were 74% against any bail out for the Wall Street fat cats. We wanted a fix from the bottom up and not from the top down. Fix ‘Main Street’ not Wall Street we told them. They didn’t do it.
    However they did agree with the bloated $700 billion the Senate passed for their greedy Wall Street friends with another $150 Billion of Pork. So now our children are on the hook for at least $850 billion and no one can tell us if it will work or will be the last.
    Meanwhile, ‘We The People’ continue to lose our jobs and homes.
    Our elected representatives have chosen to ignore us, ‘We The People’ whom they swore to represent.
    They think we are stupid. They think we don’t have the guts to clean house. They think ‘they know better’ than we on ‘Main Street’ do.
    So…
    I have taken the Pledge:
    I, (LILLIAN JOHNSON), will NOT vote for any incumbent in the upcoming election regardless of party or who the opposition may be. I intend to do my part in ‘throwing the bums out’ in Washington that continue spending my money on those that have wrecked our economy rather than the people who sent them there. This is my solemn pledge.
    Mail this to your Representative and Senators, to all your friends and all news media, both local and national. Email this to all the talking heads on the cable outlets, Lou Dobbs, Bill O’Reilly, Keith Olbermann, Chris Matthews, Alan Colmes, Sean Hannity, Rush Limbaugh and with every blog and talk show host you know of.
    Urge everyone you meet to take the Pledge.
    This the only way we, the American People, will ever take back our own government.
    They keep telling us that the only power we have is the vote. So… For once let’s use it!!!!!
    Believe me… if we turn them all out THERE WILL BE CHANGE!!!!
    Do we have the guts? Do you???
    If not, then you don’t have any right to complain if they continue to screw us over.


  2. I approved the above comment because I will not censor discourse. Although I had serious misgivings about it, since it is so obviously a form letter response. Lizzy, if you read this I would like to know – did you read what you are commenting on? In the post, I point out a number of ways in which the “throw the bums out” mentality is part of the problem with our system. Simply throwing out the incumbents does nothing to change the problems with the way the Washington system works. What good, in your opinion, is getting rid of all the incumbent congress people going to do? Anyone who is running for office is already a politician who plays the political game. If they weren’t, they wouldn’t have any chance of defeating the sitting politician. To exchange one set of “bums” for a new set of “bums” does little to bring about real change.

    I would propose to you that, instead of spending time posting a form letter based on an emotional response to current events, your time might be better spent attempting to bring about reform of the system. We can start with a campaign to disallow the earmarking of legislation. And I’m not talking about earmark spending, which has become a highly politicized issue. I’m talking about earmarking legislation that has already been voted down by tacking it onto bills that are politically impossible to vote against. If we continue to allow legislators to attach bad legislation to bills that cannot be voted down, we continue to ask for problems. We cannot continue to allow legislators to play politics with our future.


  3. Let me see if I can some of your questions that you asked. How by voting out the incumbent congressman’s going to bring us change? How is exchanging the old set of politicans with a new set going to do for us.
    Well, lets start by saying we elected the politicans to take our wants and needs on issues to take to Washington DC so they can hear from its people. And they have done just the opposite. They do as everyone in Washington wants them to do..their friends that has done them favors ask them to vote for this bill to pass because they had done a favor for them. Even though their people are against this, they do it anyhow because some wheres down the road he’ll need a favor again from these friends. This is called the “GOOD OLE BOYS CLUB”.
    By ousting all the incumbents we let new and fresh ideas in. We will have shown the new set going in that the people of this country is not going to allow their friends to come before us anymore. We voted you in…we can vote you out. Believe me that alone will be an eye opener for most of them. Holding them accountable will be a real big change and a power for us the American People.
    Sen. Robert Byrd from West Virginia will be 91 years old in November. He has held the Senate seat for that state for 49 years. More years than most Americans have been alive. Can you honestly say that you think he has fresh ideas. Christ when he went to school there were no computers, cell phones, tv’s, ect. Cars weren’t all that present…Horse and buggy was though.
    And just how many favors do you think he might have received in all those years sitting in that seat?? And just how many favors do you think he has given out in all those years?? Just how much of “DIRTY POLITICS” do you think he has learnt in all those years (tricks of the trade)???
    If you need to have anything a little clearer or you have another question….please feel free to visit my site or leave a comment like you did and I will be glad to try and answer them for you…THANKS


  4. I do still have further questions. I think I posted them as a comment on one the posts at your blog, but I’ll ask them more clearly here. If, as you say, the “Good Ole Boys Club” is such a problem, is this not the same “Good Ole Boys Club” that exists on the state level? The candidates of both parties are already members of that club. They have to be. If they are not, they will never get the financing needed for even a state level campaign. So, how does switching out members of the same club really fix anything? Also, doesn’t doing this pose the risk of simply letting the status quo be maintained? Personally, I find it doubtful that most Americans will suddenly start taking an interest and paying attention to their representatives and decisions because of this. Therefore, even if this changing of the guard were to occur, I don’t see how, after a few years of complacency, the system would be fundamentally any different. So, my final question to you…in pushing this “throw the bums out” mentality, do you not run a great risk of simply allowing people to feel that they have done their part and return to life as usual when the only thing that has changed is the face of the system? it seems to me this could easily end up being more of an opiate for the masses than a vehicle for change.


  5. Yes dear it is the same “GOOD OLE BOYS CLUB” that is at the state level of government too. See, I did get something across to you.
    See they don’t need millions or billions to run a campaign on. That millions and billions they are spending on campaigns could be better used. Like health care for the people who don’t have it or can’t afford it, better education for our children, more jobs for americans, more fuel and bio fuel, better infrastruction for our country and the list goes on and on.
    I have a few questions for you now…if you don’t mind. Why do you feel they need the “GOOD OLE BOYS CLUB”?? Do you belong to it?? For frankly you sound like you do.
    How do you figure that the status quo will be maintained if we have all new people in there?? By ousting the status quo we get read of it.
    A good job for you is to look up the oil companies profits, their ceo’s profit, the wall street ceo’s profits, all the contributions and gifts all or most politicans in Washington DC has gotten from Freddy Mac/Fannie Mae, and the rest of the failing financial insitutions. There is more “CRIME” than you can imagine in this. Believe me, we haven’t seen it all yet?? I believe our politicans have been raping wall street dry for years like they have been the American People.
    How many of our Politicans do you think have their hands in the oil companies pockets?? Why do you think we are paying $4.00+ for a gallon of gas??
    Where is all of our jobs going?? Overseas and Why?? Who did that??


  6. You seem to misunderstand my sentiments. I have gone through many of the same stages as you have. I’ve been outraged at the way the system works. I’ve been adamant that the system is so broken, it must be torn down to its basic structure and rebuilt. I’ve fought for third parties, and argued that the two party system is so corrupted that it is no longer a viable system of government. And I do not rebut for a moment that the political system is heavily influenced by big money from big corporations and special interests. Nor do I suggest for a moment that this has all been done in the best interest of all of us here on “Main Street”. I simply do not agree that replacing one side of a coin with the other side of the same coin is a good answer.

    I do not feel they need the Good Ol’ Boys club, nor can I consider myself a member. I’d love to be one…maybe then I could pay off my student loans and other debts and consider purchasing a house instead of sinking money into rent every month. All sarcasm aside, I’ve seen many of the figures you speak of. And I’ve followed those same trends further. The Federal Reserve was created through an act by a man (Nelson Aldrich) who had VERY close ties to the financial barons of this country. His daughter married a Rockefeller, and JP Morgan was a close friend. Yes, the system is run by money. It always has been. But I don’t see how the “throw the bums out” campaign changes that.

    The idea that currently seems most valid to me, found through a lot of research into both historic and current issues, is that as long as we have a system of barter, the unit of currency in that system will always hold great power and sway. This can be supported by history going back literally thousands of years. The money changers of biblical times are only one of the more commonly known examples. People have fought against this corruption for thousands of years. And we’ve never won. It stands to reason, based on all precedent I can find, that the Good Ol’ Boy system will not be brought down by a changing of the guard. Pessimistically, it will never be brought down. But the optimist in me thinks that maybe, if we can find ways of reforming it, at the very least the two sides of the Good Ol’ Boy Coin will be pitted against each other in a game with enough rules that we are protected. This is why I say the “throw the bums out” cry I’m hearing from so many is, ultimately, nothing more than a misdirection of energy and a misdirection of the cultural mind.


  7. And I still would like to know if you’ve read all 4 parts of the essay I wrote. If you haven’t, please do. I think it might facilitate further debate. Please understand, it was written with great care and intent taken to not place blame, but to point out what occurred and bring light to what parts of the system allowed the elements that caused the failure to pass unchecked. It is my stance that blame is too intangible a thing to be constructively used in fixing what ails us. Blame is debatable, and everyone has their own take on who’s at fault and why they aren’t. But there can be no debate that the system of oversight failed to prevent what happened. There can be no debate that it needs repair. I’ll leave the blame to others.


  8. No I haven’t but I will tomorrow morning. I do have an open mind. I didn’t not graduate from high school..did not go to college..and don’t know any one at all in politics. But, I am not dumb or stupid.
    I have learned so much from a bad life. My dad died when I was 7 (I was the oldest of 3), I was married at the age of 16. Married 3 times with 8 children that I raised mostly by myself. I worked and was not on State or Federal Welfare in any way.
    All my children did graduate from High School. One owns a Bakery, one is in college for a RN, two are serving this country in the US Navy, and the other 4 all work and are going a good as anyone could expect them to in the times of our economy.
    I agree whole heartly that the 2 party system has ruined this country. The Electoral College is nothing more than a laugh. Government is broken. But, everyone needs to start working on weeding out the asses and getting new ideas in there. Believe me I know this isn’t going to be easy or done over night. But, by doing nothing…we leave our children and grandchildren one hell of a big problem.
    Money is the root of all evil, crime is so bad within our government..And I won’t be surprised if one hell of a scandal in Washington don’t arise from all this. We haven’t seen the end of this yet.
    But, thank you for the offer to go and read the other 3 articles that goes with this one and I will promise to do just that.


  9. You’ll hear no disrespect from me for lack of “official education”, so please don’t ever feel it needs to be defended. The closest things to “degrees” that I hold are an equivalency degree from when I dropped out of high school, and a trade school degree for “audio engineering”. I spent about 5 years in community college, and I consider the experience more than worthwhile, but I never got a degree. I believe I had enough credits for one, but I never really cared about the paper, so I never applied to get it. You could say that I have a problem with the idea that education is only what is taught to you in a classroom by a certified teacher and can be measured by standardized testing. But that’s a whole different can of worms.

    I greatly respect and appreciate what you have been through in your life and the children you have raised, but I also feel that you should never feel the need to use that experience to prove that you are an intelligent, learned person. I think we are intelligent by design, and that intelligence is demonstrated every time we ask questions. It is exercised when we search for answers. And you obviously ask questions, and don’t seem to believe you’ve found all the answers. That’s all the proof of your intelligence I need; no life experience or piece of paper is required.


  10. Check this link out…I put it up this morning..
    http://www.brillig.com/debt_clock/ see we need to do something fast before it is too late.



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