US Economy: How We Got Here

icegoat63

Son of Liberty
V.I.P.
#1
The Wall Street crisis has been caused by plunging housing prices. So despite the billions of dollars being thrown at the problem, experts say more trouble lies ahead.

The nation's financial system is in the midst of a massive shakeup and many on Wall Street and in Washington are pointing fingers and looking for someone to blame.

But in the end, it all comes back to one issue - housing.

Earlier this decade, it was much easier to get a mortgage. Home prices soared about 85% from 1996 through 2006 in inflation-adjusted dollars, creating a bubble.

Then the bubble popped. And the fallout isn't over yet, experts say.

In the past two weeks, the government took over Fannie Mae and Freddie Mac, Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America.

If all that weren't enough, the Federal Reserve announced late Tuesday night that it was loaning $85 billion to insurer American International Group.

None of this would have happened if the housing market had not imploded, leaving all these firms with staggering losses from their investments tied to mortgages.

"These institutions, which weathered all kinds of calamities before, including depressions, are being knocked out," said Lakshman Achuthan, the managing director of the Economic Cycle Research Institute. "It's a testament to the significance of the problem we have here."

Thus, experts agree that there are likely to be future shocks to the financial system until the housing market finally hits bottom.

Even Treasury Secretary Henry Paulson, the administration's point man in the many rescue discussions of the past month, admits this.

"The housing correction poses the biggest risk to our economy," Paulson said the day he announced the Fannie and Freddie seizure. "Our economy and our markets will not recover until the bulk of this housing correction is behind us."

The Problem of Falling Home Prices


But because of the depth of the housing problems, it may take a long time before real estate prices head higher again. Here's why.

Home prices, while sharply off from the 2006 peaks, are still high in comparison to long-term gains in income, rents or overall prices, suggesting that they still have a way to fall, according to experts.

The reason housing is wreaking havoc even on insurers like AIG and big investment banks, who do not make mortgage loans, is that during the boom, trillions of dollars of mortgages were packaged together into securities that promised to pay investors with the proceeds of those loan payments.

Those securities paid better rates than other types of assets during the boom years. So many investors from around the globe poured as much money as they could into those securities.

Faced with this demand, lenders starting making more loans to riskier borrowers, including people who might not be able to afford their mortgage payments in the future and even many with no proof of income.

When prices were rising, this wasn't a problem. The risk of loan foreclosure or default was limited because many homeowners were able to sell their house for more than they owed and make a profit.

But once prices topped out and began falling, loan defaults and foreclosures started shooting higher as homeowners found it more difficult to sell their house. This created problems not just for subprime borrowers but even for those with good credit and income.

When foreclosures rose, the value of the various types of securities tied to mortgages started to fall, causing huge losses up and down Wall Street. It also made banks less eager to extend credit because of the risks involved.


A Downward Spiral

This credit crunch in of itself slowed the economy, leading to job losses and more defaults, feeding a downward spiral that has been difficult to stop.

"A really bad situation -- a home price bubble bursting -- was made significantly worse when the recession began," said Achuthan. "Now we have to let this thing play out."

Some experts even argue that the steps being taken to rescue firms like AIG could make a recovery in housing and the broader economy more difficult, as financial firms and investors become more reluctant to lend money.

"We are certainly taking credit and squeezing it tighter and tighter," said Kevin Giddis, managing director of investment bank Morgan Keegan. "Housing needs buyers. Buyers need credit."

Achuthan said that even though rates for mortgages and other types of loans have fallen in the last two weeks, those loans are becoming more difficult for many consumers and businesses to get because banks are severely tightening their lending standards.

And if housing prices do fall further, that will only cause more losses in the financial sector and perhaps more failures of banks, insurers and securities firms.

"I would hesitate to say the worst is behind us," Achuthan said.

So even with perhaps hundreds of billions of tax dollars going to AIG, Fannie and Freddie, one expert said the only real solution to the housing problem is for the correction in housing to finish running its course.

"We want home prices to return to normal," said Barry Ritholtz, CEO of Fusion IQ and author of the upcoming book "Bailout Nation."

"Until that happens, you can throw as much money at the market as you want at the situation....and it ain't going to make any difference," Ritholtz said.
Source

Ouch yeah so thats a bad deal.
 

pro2A

Hell, It's about time!
#2
The housing problem began back with Carter in 1979, and was put on steroids by Clinton. We can blame both parties for this mess. Case and point why the Government needs to keep is fucking nose out of private enterprise.
 

Mirage

Administrator
Staff member
V.I.P.
#3
Personally I think credit card companies and extended mortgage companies and banks are largely to blame.

Simply put, people who already have debt shouldn't be allowed to borrow more money, period. People who can't afford their mortgages shouldn't feel like victims. After all they signed the mortgage papers. If people would do shorter mortgages with a bigger down payment, or simply buy a smaller house and scale as their savings allow most people wouldn't be having problems with their house payments right now.

The single biggest reason for the economic downfall of late is the American mentality of buy now, pay later.

Don't spend what you don't have. That goes for the government too.
 

icegoat63

Son of Liberty
V.I.P.
#4
Well that and I cant vouch for the rest of the states but I personally have friends who thought they were making a killing a while back when they bought some of these track homes that popped up. They are my age.... not necessarily ready to make a commitment as big as a house just yet and they were taking 110% loans on houses.

I dunno who got to their head and convinced them that they should borrow more than what the house is worth, supposedly for furniture or whatever. But none the less. I do agree, way to much money going out and just not enough coming back in especially after all the foreclosures
 

pro2A

Hell, It's about time!
#5
Personally I think credit card companies and extended mortgage companies and banks are largely to blame.
The housing market issue is generally a liberal policy and a self inflicted wound by our government. The government back in Clinton’s time demanded that banks loan to unqualified people, to help “every American own a home”. This was actually Carters idea (law), but Clinton pushed it. Well these people began to default when inflation went up because they were trapped with adjustable rate mortgages. These are the same people in the inner cities on welfare, low paying jobs, living paycheck to paycheck. So a slight increase in their mortgage was enough to overdo it for these people. They lost their homes, and one thing led to another and the housing market went to shit because unqualified people kept defaulting left and right when their mortgages went up. Then the government turned around and blamed the banks and fined them and jacked taxes up as punishment… then people wonder why their interest’s rates rose even more. Then more, more houses were defaulted on and lost etc… The Government is solely at fault here, they created the problem, now they are trying to clean up the mess. Like I said, case and point why government needs to stay out of private enterprise.
 
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Swiftstrike

Registered Member
#6
Personally I think credit card companies and extended mortgage companies and banks are largely to blame.

Simply put, people who already have debt shouldn't be allowed to borrow more money, period. People who can't afford their mortgages shouldn't feel like victims. After all they signed the mortgage papers. If people would do shorter mortgages with a bigger down payment, or simply buy a smaller house and scale as their savings allow most people wouldn't be having problems with their house payments right now.

The single biggest reason for the economic downfall of late is the American mentality of buy now, pay later.

Don't spend what you don't have. That goes for the government too.

I agree nearly 100% with this post. Although largely the Banks are the ones that over extented their Mortgage lending to individuals both are to blame.

Now I have sympathy for the family that signed their papers for their house and then their house loses 25% of its value and then their rates go up tripling their mortgage payment. The people hurt worst by this are the middle-class families who bought homes 5-10 years back.
 

Kazmarov

For a Free Scotland
#7
The housing market issue is generally a liberal policy and a self inflicted wound by our government. The government back in Clinton’s time demanded that banks loan to unqualified people,
The deregulation that led to the subprime mortgage crisis to affect large national banking and insurance institutions was part of the 1998 Gramm Act, passed by Senator Phil Gramm, who was until about three months ago McCain's top economic advisor.

Carter sure pushed home ownership, but the reason mortgages became a key investment item (and why banks got loaded down with tens of billions of dollars of them), is due to Republcan deregulation- which removed most of the safeguards in the Class-Steagall act of the 1930's.