It’s all about politics and money. Or so everyone tells me. Personally I’m pretty sure at least some of it is about bagels. So today’s rant was going to be about bagels. Except that then I remembered there isn’t a whole lot to say about bagels aside from how great they are. So I resorted to politics and money as a way to pass the time.
Let’s start with some slightly more familiar ground, money. What do I know about high finance? Not an awful lot. But apparently more than a large chunk of the American public, because I cunningly realised that nothing does not equal something. For months I have been reading articles decrying predatory lending practices, and bemoaning the evils of persuasive mortgage brokers and careless underwriters. The housing bubble burst and immediately everyone wanted to construct a large sign that read “blame” and point it somewhere in the other direction.
So what happened? Well, as far as I’m aware, this happened…
The US government wanted to avoid propagating the post depression mentality of the mid-twentieth century, a mentality in which people hid their money under the mattress in times of uncertainty. So they actively encouraged public spending and the easy extension of personal credit. They wanted to make it as easy as possible for Americans to buy things, whether or not they could immediately afford those things. Was this wise? Fuck no. But hiding your money under a mattress isn’t very clever either in a global economy.
Level of credit became a form of prestige in America, and still is. People play tricks in order to raise their credit rating, even occasionally checking it themselves to see how they are doing. Actually having the money to pay for something became less important than someone _thinking_ you had the money to pay for it. So began the housing boom.
As more credit was extended more people could now afford more houses, and the price of housing began to rise with the demand. People began not only to buy homes but to invest in housing. This trend remained steady long enough for mortgage brokers to come up with a wonderful new idea. People with insufficient credit to buy the house they wanted should buy it anyway, and be given a mortgage with a disproportionately low rate for the first x years. After x years, the value of the house will have increased sufficiently for you to re-finance and use the difference to lever yourself out of the hole you calmly placed yourself in x years previously. These were sub-prime mortgages. Essentially, they are a gamble that your house will increase in value.
For the ignorant or merely the stupid, this was almost like magic. The key seemed to be having a house. Once you had actually secured a mortgage and gotten a house everything would somehow work out ok whether you could afford the house or not. So some people who were particularly desperate began to lie on their applications. As if the margin for bankruptcy the brokers were using wasn’t slim enough, they were now unknowingly participating in certain financial doom. The underwriters, who were supposed to be verifying facts like “ability to repay” were taking the word of applicants on far too many points, they were encouraged to be lenient by the government and brokers alike and they indulged in this all too frequently.
These mortgages, termed as assets, were put into pools by financial institutions, and then carved up into small units called mortgage backed securities. A certain percentage of these were known to be sub-prime, and so a percentage of _those_ was assumed likely to default. Except that now we repeat the pooling and splicing exercise multiple times, with multiple sets of mortgages, and now we have no fucking idea what percentages we are looking at anymore without resorting to quantum physics equations. The bonds were valued by all accounts fairly optimistically, and made their way out into the financial world, which worked just fine as long as everyone thought they were worth something.
Then house prices stopped rising. Gradually sub-primers approaching the end of their easy low-payment term realised that they had no way out of the imminent crippling monthly payments. Their home was not worth enough to cover re-financing to a payment they could afford. People began to lose their homes to foreclosure, which further decreased the price of housing, thus exacerbating the crisis. Were the economy not so intertwined with everything the story would end here with a lot of distraught and bankrupt people who had hopefully learned that spending money you don’t have can be a really stupid idea.
However when a huge percentage of the mortgages in the securities started to reveal their worthlessness there was (to use a technical banking term) an unholy fucking shitstorm. Imagine if you found out that the money you had in your pocket was suddenly only worth a third of what you thought it was. This is pretty much what happened to several large banks. Institutions which relied heavily on trading in MBS like Bear Stearns and Northern Rock lost huge amount of liquidity in days, and were unable to support their own positions in the market for long enough to recover. When the market loses confidence in a bank it suddenly costs that bank far more to trade than it did the previous day, every transaction needs to be more heavily backed with collateral than before. So banks started to drop, first NR, then Bear, and the latest casualties have been Lehmann Brothers and Merrill.Lynch.
The US government just created $700 billion worth of “economic rescue” for some of the bigger institutions that were going under. Is that good? No, it’s mostly shit. But I don’t see a better course of action out there, and I am open to suggestions. For the institutions they are saving to go bankrupt would have economic repercussions far worse than what we’ve seen so far, but some schools of thought say that’s what’s needed. A proper recession, and a real recovery. Frankly, I’m not comparing this to the crash of ’29 until I see someone jump out a window. Though I hear they reinforce them nowadays.
So to every underwriter who didn’t bother doing his job, to every mortgage broker who made a quick commission persuading some idiot to buy a home he couldn’t afford, and to every dumbass fucking moron who can’t multiply sufficiently well to see that he will never be able to pay that much money per month if he lives to be a thousand, I leave this message:
You fucking worthless cunts are the reason my morning bagel costs 19 extra cents. Rot in hell.