Econmic Meltdown

So here we are in the throes of an economic crisis. But, how did we get here? This is a brief over view of what happened as I see it. With a bit more research on the internet, you can dig even deeper if you chose.

In March 2007, the United States' subprime mortgage industry collapsed due to higher-than-expected home foreclosure rates, with more than 25 subprime lenders declaring bankruptcy, announcing significant losses, or putting themselves up for sale.

The national median home price is poised for its first annual decline since the Great Depression, and the National Association of Realtors reported that supply of unsold homes is at a record 4.2 million.

Because of this, borrowers can't refinance as they no longer have the equity in their homes that they had in 2005 or 2006.

Why…

Mortgage fraud

In 2004, the Federal Bureau of Investigation warned of an "epidemic" in mortgage fraud, an important credit risk of nonprime mortgage lending, which, they said, could lead to "a problem that could have as much impact as the Savings and Loan crisis".
The Financial Crisis Inquiry Commission reported in January 2011 that: "...mortgage fraud...flourished in an environment of collapsing lending standards and lax regulation. The number of suspicious activity reports—reports of possible financial crimes filed by depository banks and their affiliates—related to mortgage fraud grew 20-fold between 1996 and 2005 and then more than doubled again between 2005 and 2009. One study places the losses resulting from fraud on mortgage loans made between 2005 and 2007 at $112 billion. Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities."

New York State prosecutors are examining whether eight banks hoodwinked credit ratings agencies, to inflate the grades of subprime-linked investments. The Securities and Exchange Commission, the Justice Department, the United States attorney’s office and more are examining how banks created, rated, sold and traded mortgage securities that turned out to be some of the worst investments ever devised. As of 2010, virtually all of the investigations, criminal as well as civil, are in their early stages

Securitization practices

The traditional mortgage model involved a bank originating a loan to the borrower/homeowner and retaining the credit (default) risk. With the advent of securitization, the traditional model has given way to the "originate to distribute" model, in which banks essentially sell the mortgages and distribute credit risk to investors through mortgage-backed securities (MBS) and collateralized debt obligations (CDO). Securitization meant that those issuing mortgages were no longer required to hold them to maturity. By selling the mortgages to investors, the originating banks replenished their funds, enabling them to issue more loans and generating transaction fees. This created a moral hazard in which an increased focus on processing mortgage transactions was incentivized but ensuring their credit quality was not.

Inaccurate credit ratings

Credit rating agencies are now under scrutiny for having given investment-grade ratings to MBS based on risky subprime mortgage loans. These high ratings enabled these mortgage-backed securities to be sold to investors, thereby financing the housing boom.
The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms.

Government policies

Both government failed regulation and deregulation contributed to the crisis. In testimony before Congress both the Securities and Exchange Commission (SEC) and Alan Greenspan conceded failure in allowing the self-regulation of investment banks

Then came "The Bailout".

The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector that was signed into law by U.S. President George W. Bush on October 3, 2008. It was a component of the government's measures in 2008 to address the subprime mortgage crisis. The initial bailout was approximately $700 billion.

Less than two months after Congress and President George W. Bush agreed to send $700 billion to the banking industry to "rescue" Wall Street, it was revealed that those very same banks have been using the money to pay out more than $18 billion in bonuses to top executives.

It’s estimated that the average American family will contribute $7,000 to the very companies which took "the destabilizing risks that undermined the global economy."
It's common sense: giving money to people who have made poor choices and driven their companies into the ground will only result in more poor choices. Before the bailout, senior financial executives were making billions in bonuses. After the bailout, senior financial executives were making billions in bonuses

On December 8th 2008 the Bush administration said it would lend $17.4 billion to General Motors Corp. and Chrysler LLC.

Fast forward to 7/24/2011 when the following fact were published buy the New York Times.

http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html


“Through April 30, the government has made commitments of about $12.2 trillion and spent $2.5 trillion…”

Please click the link above to get the detailed picture.

First let’s think about $14 trillion dollars. How much is that anyway? That would be
$14,000,000,000,000. That’s right 14 followed by twelve zeros. A million is a number followed by six zeros (1,000,000). $14 trillion is $14,000 million.

Let’s break that down. On April 1, 2010 the US Census reported the US population to be 308,745,538 people. Time to break out that snazzy calculator your computer has. $14 trillion dollars would be enough money to give EVERY man, woman, and child is the United Stated of America $45,344.79 EACH. So a family of four would roughly get $200,000. Do you think that would have stimulated the economy a bit?

So, how did this all start? In my opinion it was a group of very greedy corporations and individuals that had a scheme to circumvent the system. They had come up with a plan to line their pockets with our money, with no thoughts or remorse for the consequences.

And what will come of it all? Probably not much. The folks responsible will never be held accountable. Some government agency may try, but it will be the equivalent of a witch hunt. A few underlings may have to fall on their swords, but what will that do for us. Nothing. We’ll still be in the economic crapper. Employment will still be high (which doesn’t count those that have dropped off the roles or the under employed). Houses will still foreclose, with their values lower than they have been in years. The number of people of food stamps will still rise and the lines at the local churches and food banks will grow longer with people trying to get food for their families. We’ll continue to struggle to survive for decades to come, while the corporate leaders will continue to make millions in salaries and most likely billions in bonuses.