can someone please describe the economy to me in layman's terms?
peacocoaNMO
Posts: 99
ok, so i was an english major in college so i have to admit all this is a little over my head. i know there are a lot of bright people in here who can explain this to me (not too condescendingly) how the fuck did we get here?, whose fault is it?, how the fuck do we get out of it?, etc. thank you.
p.s.
if you ever need help with some walt whitman or john milton feel free to ask.
p.s.
if you ever need help with some walt whitman or john milton feel free to ask.
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was like a picture
of a sunny day
“We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses.”
― Abraham Lincoln
I'm going to try to be as simplistic as possible, partly because you asked for that, partly cause I don't feel like typing....
The housing boom went bust (irrational exuberance #2)
This really hit subprime borrowers hard
It also hit housing-related jobs
Mortgage-backed securities (owned by pretty much everyone) became a hell of alot more risky
Credit markets got shook and credit was not available to subprime and even some prime rate borrowers, lending tightened
housing got even worse
MEW (mortgage equity withdraw) turned negative hitting consumption
Meanwhile, oil prices hit ridiculous new highs (more money out of our pockets to fuel and not consumption) forcing the FED to concentrate on inflation and not cut rates... so consumption continued to suffer even more
more jobs were lost (constuction.... then retail.... then finance/bus service)
The credit problem filtered into the business world
And here we are.
1. Banks give mortgages out to people who cannot pay the mortgages; these banks didn't do the proper credit checks, etc.
2. Banks start getting in financial trouble, foreclosing etc because they're not recieving the money they should be from the people they lended to.
3. Larger investment financial banks (Lehman Bros, Freddie and Fannie, etc) buy up all these bad mortgages, and then put them up for sale on the market. So far, it's a winning situation for everyone, except for the people out of their homes. The smaller banks don't have to worry about the mortgages, and the larger banks make a bigger profit by selling.
4. However, these larger banks did something very stupid; by selling these bad mortgages and resting their financial stability upon them, they were standing their future up on wet paper; it was bound to break, because they were selling bad mortgages in the first place; how can you rely on something that's non-existent forever? And eventually, these banks couldn't sustain the chance they had taken, and they go under.
5. And when one goes under, a domino effect begins. And players on Wall Street of finance, which is above all a confidence game, are freaked out, which leads the Dow to plummet.
Who's at fault? Alot of people. The people who took out mortgages, the small banks who didn't do a proper credit check, the larger investment banks who bought up these mortgages and sold them on Wall St., President Bush and Congress for not legislating and enforcing tougher regulation on Wall Street.
I think that's it as far as I know. I'm sure I'm leaving alot out.
EDIT: This is leaving out alot of what saveuplife mentioned, price of oil, etc. I was just trying to address, as best I could, this crisis with the foreclosures and the bailout from Washington for Wall Street.
No Income, No Job, no Assets? where would you like us to send the check for your new home sir?
now all of the banks have a ton of bad debt on their hands and homes that are worth shit.
the bailout is again socializing the losses (meaning tax payers pay for it) while during the heyday of the housing boom, the profits were all privatized by the corporations.
good times.
Now, imagine that we (taxpayers) are all at a restaurant together.. Some of us ate too much, and don't have the money to pay for our share of the meal. Since we are all at the same table, they'd make all of us responsible for the people who don't have the dough to pay, so the rest of us have to pay the the bill, even though the others were the one's with the full stomaches.
Anyone gonna try and get themselves a foreclosed house at a bargain price?
For the most part, I think you are right. But, what started things going down was really the peak of housing. As soon as prices started lowering it became harder for subprime borrowers to refinance ect ect. Speculators bailed.... which hit housing harder.
Also, the main problem was securitization like MBS. People were buying and selling groups of mortgages that securitized into an MBS. They were traded so often and had groups (tranches) or different mortgages, so the fine-print (who's mortgage was this and how risky are they) was lost to the buyer. Once the real estate party seemed to be coming to end, people got scared. They started wondering about the fine-print and they couldn't trace it back to the actual people who owned the mortgage (who should have never gotten it in the first place).
Basically, in everyday language, people in housing both buyers and sellers acted like drunken sailors... until the party slowed, then everyone started jumping ship. People who were left were sitting there with no house (foreclosure) and no job (mortgage industry failures).... this has since filtered into the financial industry and done the exact same thing except the borrowers here are corporations and lenders are banks./
First and foremost, I blame the lending institutions for APPROVING those loans to begin with. They should know better if they used any kind of underwriting procedures for approval. You can't approve someone with no money down, no money in the bank and expect these people to be good enough with their finances that they can make their payments when some life experience changes something for them. If you take some poor schmuck, tell him he can afford the house and the payment, he's going to believe it because he's wrapped up in his little piece of the American dream.
I blame the lending institution.
I'm saying this as a real estate escrow officer.
I have to agree, here. A lot of people blame the people who borrowed the money... I lay the bulk of the responsibility on the people who LOANED the money.
Why?
I remember when I bought my first home... i left it in primarily in the hands of Bank Loan officers, realtors and escrow officers to explain to me how it all works. I did NOT question what they had to say... because THEY were the experts in this situation, not me. I have a feeling the the bulk of first time home buyers were in the same boat I was in... relying on the 'experts' to figure it out and explain it to me.
...
Regarding the present day... these so-called 'experts' made money on the deal. There was no oversight to check that things were working the way they are supposed to and a lot of people were making money, selling these loans to other banks. It was a case of no one watching or caring what the inmates were doing... and expecting them to act cordially.
Hail, Hail!!!
Because honestly, I bought a house in 2005, that I could fucking afford with my current job. If I lose this job and don't find another one quickly, guess what, I lose the house. I am prepared for this. It will suck, and I will be unhappy for a period of time, but hey, I rolled the dice and moved from being a renter to a home owner. It was my choice to play the game.
It's bad enough the rest of these fucking assholes have caused my house value to stagnate. Now I have to participate in bailing them out?
Fuck that fucking shit. I help enough people in my day to day life, and contribute to charities regularly. Fucking welfare fucks.
So... to get back on track, WHAT is stopping us from saying, "Fuck you. Let the banks fail." ??
Please, someone. Answer me this.
and reveling in it's loyalty. It's made by forming coalitions
over specific principles, goals, and policies.
http://i36.tinypic.com/66j31x.jpg
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Yeah.
But it would be easier if you would just go watch The Money Masters.
Because once you see that movie, you WILL UNDERSTAND WHY.
It is because the government is run by the same interests that run the banks.
The Federal Reserve is set up by and large to ensure that the large banks maintain their monopoly, and to virtualy guarantee that they are bailed out.
That was the point of the system:
1. Print up free money to give to the banks, actually better than free, the GOVERNMENT OWES INTEREST on all that money. The American people are PAYING INTEREST FOR CASH which they could print for free themselves.
2. Allow the manipulation of interest rates to let bankers manipulate policy by "blackmailing" the economy, and to allow periods of excessive profit, followed by periods of contraction which leads to consolidation of wealth back at the top (what is happening now).
3. Guarantee the banks from loss at the expense of the people.
TO THE ORIGINAL POSTER:
Sure. In simplest terms, what is happening to the economy can be described as DELEVERAGING. Everything else is secondary. This is fundamentaly nothing more than a massive cycle of credit unwinding.
If I opened it now would you not understand?
“Credit expansion is the governments’ foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.”
“The final outcome of the credit expansion is general impoverishment.”
How is your Savings/Retirement Accounts? Are you investing in Mutual Funds for your retirement?
...
My guess... your investment portfolio is riddled with these stocks.
Hail, Hail!!!
Also... in 2005... the value of your house was highly over-inflated (based on the 2005 market prices). You are probably paying way more than your hous'e actual worth... like most homeowners.
But, don't look at that (price)... look at the value of your home at it relates to you.. not how much it's worth in dollars and cents.
Hail, Hail!!!
http://www.dailykos.com/storyonly/2008/9/21/9322/74248/245/602838
To get on their feet until they got another job, people began to get 2nd and 3rd mortgages on their homes and unwisely many got the interest rate loans. Many got stuck with bank loans in the form of a credit cards worth $20,000 and $25,000 with an interest rateof 21%. People low on cash relied on credit cards and refinancing and the banks kept lending and people kept borrowing. It's easy to point a finger and blame the lowest man on the totem pole, the homeowner.
Banks let the practice go on and on over the years then called in those bad debits on a massive scale. All this time Bush wasn't raising taxes, he was still spending money, more money than we were putting back into the economy. That is your simplified trickle down effect of a bad economy catching up with bad decisions.
Hey.
I was thinking about this at the gym.
I know "deleveraging" is a pretty convoluted term to push on a lib arts maj.
So here it is in plain english.
You know how some people are getting fucked because they bought a house for $500,000 but now it is only worth $250,000?
They lost $250,000 and since they probably had no more than 20% down on it (and likely ZERO) they now OWE THE BANK $250,000 ???
Yeah well THE REAL PROBLEM IS THE BANKS.
For every poor fuck who know owes the bank $250,000,
THE BANK IS NOW OUT BETWEEN 2.5 MILLION (2,500,000) and 25 MILLION (25,000,000) DOLLARS!
THAT is what "deleveraging" is, and THAT is why the economy is fucked.
In "real" terms, the economy actually isn't THAT bad ... but in terms of FISCAL concerns, it is catastrophic.
The largest financial institutions in our country operate on leveraged terms that START around 10 to 1.
For every dollar YOU borrow from them, THEY lend out TEN more that they don't really have, they borrow it from the government based on using YOUR one dollar as THEIR collateral, or as they call it ... "reserves".
But even worse, many of these modern investment packaging schemes worked on leverage of up to ONE HUNDRED to ONE.
Meaning if YOU default on a loan, every ONE DOLLAR you owe the bank is now causing the bank to owe HIS bookies ONE HUNDRED dollars.
EVEN WORSE THAN THAT, those 100 dollars over that 1 are probably all tied up in investments themselves which now must be "CALLED" ... that is what the term "MARGIN CALL" means ... it means the investor (the banks here) went below his margin limit (so if he could purchase $100 investment with $1 and his $1 falls to $.50 he now is in a position where $50 of that $100 is being "called" on "margin call" and MUST BE SOLD IMMEDIATELY) ...
THAT IS WHY THE EQUITY MARKETS ARE TUMBLING SO VIOLENTLY.
Because everytime some poor old institution gets called on their margin, they must sell like a bandit to cover their asses.
And what is REALLY bad is that so many of the banks assets at this point are "TOXIC", meaning NO ONE will buy them ... they are shit ... only the government would buy them, and only for cheap ... so many of the banks assets are so bad, that they are being force due to margin calls to SELL ALL THEIR GOOD ASSETS at depressed prices (since everyone is selling, prices keep tumbling) and the banks are then at EVEN WORSE positions ... because they are now losing money one what should have been good investments, because they are essentialy distressed sellers ... and now THEY ONLY HAVE BAD LOANS ON THEIR BOOKS.
That is, in rather large nutshell, what is going on.
Hope it helps.
If I opened it now would you not understand?
The government for easing trading, lending and regulation laws which set the climate for instability which eventually catches up with the big banks and businesses and then trickle into "normal" society as inflation, debt, bailouts (government handouts of taxpayer monies to private business) and rise in cost of living.
The companies which use lending tactics and de-regulation as a way to incorpoate new prospective profits from clients and businesses which shouldn't be getting credit.
Our society (as a whole), which one thing this economic meltdown has shown is that, how many people are living outsides of their means of living. Sure there are plenty of average joe's being effected by this, but credit in our society is merely an easy means to buy things you can't really afford. If not for credit (and failure to pay debt back), it really shows how out of whack our economic stability and irrational our economy truly is.
A great documentary about credit and debt in the US is "Maxed Out".
Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example. Crime is contagious. If the government becomes a law-breaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy. - Louis Brandeis
Your homework assignment:
Re-Watch 'It's a Wondeful Life'. The part where George Bailey tries to calm the people as they run on the bank (Building and Loan) during the 1929 Crash. And see what happens when George isn't there to calm them and the people decide to buy into Potter's offer.
...
Hail, Hail!!!
Ya, but that's the opposite of letting the banks fail. Potter = "Teh" Fed
Still.. listen to what George Bailey says... the money isn't in the vault.. it's in the homes of your neighbors.
Letting the banks lose means huge losses in your funds that have bought into what they were selling. Your retirement and savings are at risk.
Hail, Hail!!!
Post 9/11 market conditions were dismal due to decreased consumer spending, which arose out of widespread fear/panic. This was exacerbated by the tech bubble burst.
To kick-start the economy, the fed cut interest rates. The federal interest rate is the rate at which financial institutions can borrow from the government.
When financial institutions can borrow from the gov at a lower rate, they can then lend that money to consumers at a lower rate.
This jump-started the housing market.
Eventually, subprime lending, interest-only loans, negative amortization loans, and other long-term lending arrangement began to make their way into the typical mortgage arrangement.
This increased demand, which further pumped the housing market.
Suddenly people were getting filthy rich from the massive equity that their homes now had due to the increased demand. Those people were selling off their homes and reinvesting in more homes, and so on and so forth.
Enter books like Rich Dad Poor Dad, TV shows like Flip This House, and good old American greed, and millions of people were going head over heels into debt just to buy property because they were sure they could profit in the six digits within a year.
This is the foundation for the current problem, not subprime lending. All of that hyper-inflation eventually caved in on itself regardless of the details.
The simple fact is that a 3 bedroom middle class suburbia home is not supposed to cost a half million dollars. Eventually that bubble will burst, which it ultimately did.
The "subprime lending" blame is merely a scapegoat to draw attention away from the real problem, which is low interest rates.
Nobody wants to see interest rates go up because they don't want to lose equity in their homes and they want to keep investing with low rates, or they have variable rates and don't want to pay more interest.
AGAIN: Anyone who says subprime lending is responsible for the current mess is misled.
http://forums.pearljam.com/showthread.php?t=272825
Just like "junk bond scandals" in the mid to late 80's had NOTHING to do with the REAL problem behind the "Savings and Loan Crisis".
It is the same now as it was then.
Again.
Low interest, and manipulated rates by a CENTRAL BANK that funnel cheap money to Wall Street to be placed IN RISKY INVESTMENTS that are bound to collapse at some point and cause a "bubble burst". Then the name of the game becomes "public good" and "too big to fail".
If I opened it now would you not understand?
It is also the banks foremost responsibility to ensure that the loan can actually be paid back before lending the money.
This wasn't happening....anyone and their dog working part time at McDonalds could get a mortgage no questions asked.
and reveling in it's loyalty. It's made by forming coalitions
over specific principles, goals, and policies.
http://i36.tinypic.com/66j31x.jpg
(\__/)
( o.O)
(")_(")
But here is the thing that is the main issue I have with the economy......
and I do not know who started it; or where it began, but the thing is that the world is a mess when credit card companies can legally charge you 32% interest when you send another card a late payment, but cd's (the type you can save for in a bank), only earn like 2 to 3 % interest. That is so insane......and I know that we all have the right to go to school and try to earn a living at the career we choose, but the truth is that there is a small fraction of the US that are in the top percentage of the wealth in the US and most of that is old money, handed down from generation to generation, so the people we know (or the ones in our time here anyway) aren't even the ones that have earned the money to begin with.
Together we will float like angels.........
In the moment that you left the room, the album started skipping, goodbye to beauty shared with the ones that you love.........
You actually have no idea what's going on, and your earlier copy/paste from zeitgeist about deleveraging sort of proves it.
I know you want to participate, but you are way over your head here.
Go play unrelated analogies in another thread, please. Thank you.
http://forums.pearljam.com/showthread.php?t=272825