Wikinvest Wire

Explaining the financial crisis to a nation of third graders

Wednesday, September 24, 2008

They're sure talking about "root cause" a lot these days in Washington, though, with only a few exceptions such as Ron Paul (R-Texas) and maybe Tom Feeney (R-Florida), they're really not even getting close to the source of the current problems.

Aside from a few hearty souls, the Bush Administration and nearly all of Congress are still avoiding the underlying questions that, come to think of it, they may not even be asking themselves in private, which, come to think of it, is an even more disturbing thought.

That is, whether or not the U.S. financial system is so fundamentally flawed - based on a credit expansion which mustn't stop but which can proceed no further - that it can no longer survive even with a trillion dollars of government money to plug all the known leaks.

To hear the discussion dumbed-down so third graders might be able to make some sense of it just makes the situation more surreal. To wit, tonight's address by Pesident Bush:

Most importantly, my administration is working with Congress to address the root cause behind much of the instability in our markets.

Financial assets related to home mortgages have lost value during the house decline, and the banks holding these assets have restricted credit. As a result, our entire economy is in danger.
Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions.

Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

Optimism about housing values also led to a boom in home construction. Eventually, the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell, and this created a problem.

Borrowers with adjustable-rate mortgages, who had been planning to sell or refinance their homes at a higher price, were stuck with homes worth less than expected, along with mortgage payments they could not afford.

As a result, many mortgage-holders began to default. These widespread defaults had effects far beyond the housing market.

See, in today’s mortgage industry, home loans are often packaged together...
I don't know whether to laugh or cry.

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Anonymous said...

Yes, pathetic wasn't it ?
It's all the housing market's fault.
Nothing to do with extremely low to non-existent interest rates, or cheerleading the use of ARMs. Oh no, nothing to do with it.

Jim Driscoll said...

I counted two big lies in the shrub's address:

1) We might even make money on the deal. No, we won't. It's a float fund - that means that they pay too much for something, sell it at a loss, then use the proceeds to pay too much for something else. Repeat until the money's gone.

2) Fannie may did this. No, it didn't. The run up in subprime started in 2002, Fannie didn't hop on that train until 2006.

He also didn't mention how his administration actually caused this, by failing to enforce existing regulations, like the one against excessive leverage in the investment banks, or blocking states from regulating the mortgage industry.

I really hate that guy.

Anonymous said...

What was really hilarious about President Shitstain's little book report was the undertone: Like, um, I dunno, dude -- this shit just, kinda like, happened, y'know? Now c'mon, hurry up, help me flush this stash quick before the cops come in.
-- sglover

Nick said...

Contrary to what the main stream media says, wall street as a whole (capitalism) should not be blamed for the actions and policies set forth by OUR congress. There are, in fact, corrupt men in wall street who partnered with corrupt men in government to engineer a win-win situation at the expense of the taxpayer. Capitalism (and our nation or any nation) will only survive when the good and virtuous people are running it. Which means, come this November, you must vote for good men and women who stand by principle and uphold our constitution and not just give lip service to causes that seem noble and just.

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