My thoughts on our economic crisis
I haven't blogged about the situation we find ourselves in with the economy yet so today I thought I'd give you my thoughts in a more detailed post than I usually write... never thought my minor in finance would ever be put to use but here goes...
How did we get here? Well, I believe that after the dot com bubble burst, which was due to the evaporation of major paper gains on the backs of companies that had no idea how to make money using the Internet, the Federal Reserve under Greenspan and Bush 2.0's administration (along with help from Phil Gramm in the Senate to loosen lending restrictions) created the environment that was allowed to fester to put us where we are today. Let me break it down... to pull us out of the recession created by the dot com bust, Greenspan and the fed began an aggressive lowering of the Fed Funds rate (the rate that determines borrowing) and then kept that rate at 1% from the beginning of 2004 through the middle of 2005. Now, this wasn't the problem in and of itself but not recognizing the effects this would have on the lending environment combined with relaxing the regulation of the lending institutions at the same time, did set the stage for the perfect storm we find ourselve in now. Greenspan and Bush 2.0 were being warned that the sub-prime sunami was coming but they felt that the ever rising real estate prices would bail them out. So instead of regulate some of the lending requirements, they decided to let the banks have their way and lend anyway they wanted (1/1, 1/3, 1/5, 1/7, 1/10 year ARMs, no money down loans, no doc loans, etc.). And since the Fed Funds rate stayed at 1% for so long, inflation was rising and people were refinancing their homes under these new lax standards to get money out of their equity to pay for the rising costs of goods. Then when their ARMs reset, they couldn't afford the new payments, forclosures rose and housing prices began dropping which in turn put more and more people with conforming loans "under water" (owing more on your home than its worth) on their homes since their neighbors homes were in foreclosure.
Borrowers also share some of the blame... but given the savvy businessmen running the lending institutions, I believe it is their responsiblity to turn away those borrowers who have a high risk of not repaying their loans instead of creating specialty products to sell to these less savvy customers who don't know what they're getting themselves into. This is where government could have regulated the process to protect these borrowers.
This lending doesn't just concern housing either... it also allowed the leverage that brokerage houses were able to get to make even bigger bets on the market. This is what brought down the big banks... being able to make big bets in the market with less and less money down... and when the markets turned, they went belly up because they couldn't make their margin calls.
Again, as I've stated on this blog many times before, going to the extreme put us in the situation that we find ourselve in today. Since Bush 2.0 and McCain and many other far right Republicans like them want NO, ZERO, ZIP government regulation on business, we now find the tax payers on the hook with Fannie, Freddie, Bear Sterns and now AIG. The extreme belief in no government regulation has now created the biggest government takeovers of our lifetime... funny how that works, isn't it? Don't get me wrong, I'm a free market capitalist but I don't take it to the extreme of believing that we shouldn't regulate our banking, lending and investing environments... not too hot, not too cold but just right... a balance.
McCain yesterday stated that he would like to form a commission along the lines of the 9/11 commission to study the problems and how we got in this situation... FYI, when politicians offer such a plan, its meant to kick the can down the road. McCain should read this blog post to get an idea of the problem and how we got here... he doesn't need a commission that would take 6 months to a year from now to return with their verdict. Obama, on the other hand, is out today with a 2 minute commercial (shown below) detailing the exact steps in his plan... and a commission isn't one of them.
How did we get here? Well, I believe that after the dot com bubble burst, which was due to the evaporation of major paper gains on the backs of companies that had no idea how to make money using the Internet, the Federal Reserve under Greenspan and Bush 2.0's administration (along with help from Phil Gramm in the Senate to loosen lending restrictions) created the environment that was allowed to fester to put us where we are today. Let me break it down... to pull us out of the recession created by the dot com bust, Greenspan and the fed began an aggressive lowering of the Fed Funds rate (the rate that determines borrowing) and then kept that rate at 1% from the beginning of 2004 through the middle of 2005. Now, this wasn't the problem in and of itself but not recognizing the effects this would have on the lending environment combined with relaxing the regulation of the lending institutions at the same time, did set the stage for the perfect storm we find ourselve in now. Greenspan and Bush 2.0 were being warned that the sub-prime sunami was coming but they felt that the ever rising real estate prices would bail them out. So instead of regulate some of the lending requirements, they decided to let the banks have their way and lend anyway they wanted (1/1, 1/3, 1/5, 1/7, 1/10 year ARMs, no money down loans, no doc loans, etc.). And since the Fed Funds rate stayed at 1% for so long, inflation was rising and people were refinancing their homes under these new lax standards to get money out of their equity to pay for the rising costs of goods. Then when their ARMs reset, they couldn't afford the new payments, forclosures rose and housing prices began dropping which in turn put more and more people with conforming loans "under water" (owing more on your home than its worth) on their homes since their neighbors homes were in foreclosure.
Borrowers also share some of the blame... but given the savvy businessmen running the lending institutions, I believe it is their responsiblity to turn away those borrowers who have a high risk of not repaying their loans instead of creating specialty products to sell to these less savvy customers who don't know what they're getting themselves into. This is where government could have regulated the process to protect these borrowers.
This lending doesn't just concern housing either... it also allowed the leverage that brokerage houses were able to get to make even bigger bets on the market. This is what brought down the big banks... being able to make big bets in the market with less and less money down... and when the markets turned, they went belly up because they couldn't make their margin calls.
Again, as I've stated on this blog many times before, going to the extreme put us in the situation that we find ourselve in today. Since Bush 2.0 and McCain and many other far right Republicans like them want NO, ZERO, ZIP government regulation on business, we now find the tax payers on the hook with Fannie, Freddie, Bear Sterns and now AIG. The extreme belief in no government regulation has now created the biggest government takeovers of our lifetime... funny how that works, isn't it? Don't get me wrong, I'm a free market capitalist but I don't take it to the extreme of believing that we shouldn't regulate our banking, lending and investing environments... not too hot, not too cold but just right... a balance.
McCain yesterday stated that he would like to form a commission along the lines of the 9/11 commission to study the problems and how we got in this situation... FYI, when politicians offer such a plan, its meant to kick the can down the road. McCain should read this blog post to get an idea of the problem and how we got here... he doesn't need a commission that would take 6 months to a year from now to return with their verdict. Obama, on the other hand, is out today with a 2 minute commercial (shown below) detailing the exact steps in his plan... and a commission isn't one of them.
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