fearlesshistory

In the inter-connected world of finance, there is no such thing as an isolated incident. Take for example the current financial crisis, and we’ll take it from the top.

Deregulation under the Bush, the Clinton, the Bush administrations led to increased lending practices across the board (don’t pile on Fannie May and Freddie Mac, together they only account for 20% of the bad loans made, but I digress). The theory went that if a renter can become a house owner they will have made a huge leap in terms of prosperity; land values have historically gone only up, after all. Land ownership allows the homeowner to tap into “equity” in case of emergencies, at least in theory. So, loans were made to people with ever-decreasing credit qualifications, which meant that there were more people buying homes. More people buying home drove up prices for new (and existing) homes across the board. An economist wondered why people making $80,000 a year were buying $1,000,000 homes, well, this is why: market forces. Land values were further overvalued by unscrupulous assayers and realtors who earn somewhere between 4% and 7%  of a home’s price. This cost was passed on to the buyer who - more often than not - was talked into an ARM (Adjustable Rate Mortgage) with a balloon payment due in 5 to 10 years.The reasoning was that with the (magically) added stability of owning a home, the owner would be able to refinance at a better rate later on down the line for a better rate before the balloon payment took effect. This worked in theory as long as prices continued to go up. We all know now they didn’t.

With no money down, the buyer of the home was not really out any substantial loss when the home was foreclosed upon. Also, the original loan broker had already sold off the loan, so there was no reason to try to negotiate better terms. In fact, these mortgages were even bet against by investors through complicated schemes and their insurance was bundled with these risky mrotgages as well as other stocks and bonds. these were calles Synthetic or Composite derivatives as well as other names. People snapped them up because there was no way to lose, right? Wrong. As the mortgage defaults went from a trickle to a stream and are now becoming a flood (you know a Tsunami is just around the corner), those composite/synthetics began to be tainted. Nobody wanted to buy them now - why would you, only a fool would.

Concurrently, banks had increasingly less money to pay their debts, which meant that their credit ratings were going into the toilet. Investment banks, particularly, were hard hit since they do not have the deposits of members to fall back upon. Lehman Brothers was the first to fall and has arguable set the tone for Wall Street since. No money coming in means no money being loaned at ANY rate.

No money being loaned at any rate means the possibility of a farmer in, say, Brazil or Kansas, being able to purchase the seeds, fertilizer, and equipment they need to plant radishes, turnips, broccoli, watermelon, blueberries, and so forth dries up. No money to buy seeds means no money to plant seeds, which means no little seeds becoming fruits and vegetables to come to American people’s doors. The flood of food slows to a trickle, forcing prices upwards. As for why farmer can’t just grow food from the seeds of the previous year’s crop? Oh, it’s because investors - desiring ever increasing profits - have motivated seed companies to develop “hybrid” seeds that produce offspring that can not reproduce . Farmers must continually buy increasingly expensive seeds in order to remain farmers - don’t be fooled, even the “organic” produce you buy will most likely not be able to grow into a new plant. Only “heirloom” vegetables will; but can you find them at the store?

Credit trickles short circuit the consumer’s ability to get credit which means fewer cars are being bought, fewer appliances are being bought, and fewer homes are being bought. Manufacturing and construction jobs begin to dry up. More people lose their jobs, are laid off, or are victims of “downsizing.” Consumers tighten their wallets and purchase less, so the flow of money in retail slows down even more. Retail lays off and cuts jobs, delivery companies restrict their deliveries, and importers-exporters slow their purchases from overseas and to overseas.

Automotive manufacturers (of all nations), for instance, are caught in this suddenly dry spell and their thin margins of profit evaporate. A few hundred, or maybe a thousand, workers are laid off - say from a factory outside of Dayton, Ohio. The idling of that plant means that fewer components are required from sub-contractors. Automotive body paint is in less demand, the paint company lays off a few hundred people, or maybe a thousand. The small ball bearing manufacturing plant in Bucyrus, Ohio, begins to lay off a few hundred people, or a thousand. The tire manufacturers, the companies that make springs and struts, shock absorbers, gas tanks, steel, automotive glass, electronics for the on-board computer, and hundreds of other little parts, all the way down to the company that makes the little caps for valve stems on tires lays off a few hundred, or a thousand, workers.

Laid off workers begin to live on credit cards to purchase food (since that is essentially the only thing credit card companies can not seize when one inevitably declares bankruptcy) . Credit card payments fall by the wayside as consumers prioritize their needs; food, shelter, clothes, utilities, car payment, healthcare costs, credit card payment…Credit card companies owe merchants for the items people bought on those credit cards, but are not getting the revenue for those payments so the retailer (and supermarkets) go unpaid or are paid very late. Credit card companies lower the available credit across the board to minimize losses, but it is too late, those who could used their limits up ASAP.

401(k)s and IRAs are dipped into next to stave off oblivion. Less money in Wall street means corporations can borrow less money (that’s what a stock is, after all) and leads to more “downsizing” which trickles into the service industry; customer service, technical support, accounting, etc. which means normally stable jobs are being downsized and/or shipped overseas.

Unemployment rises 1% or so; 1% of 170 or 180 million = 1.7 to 1.8 million out of work and unable to make payments on their credit cards or house or car or school loans (since federal grants have consistently dried up over the past few decades). The increase in unemployment (a Socialist idea) increases, as does the applications for medicare in, say, Pittsburgh or Austin. Increased strain on the welfare infrastructure taxes the local governments who under the 1996 Personal Responsibility and Work Opportunity Reconciliation Act, local governments are responsible for medicaid and unemployment and welfare.

Financial corporations have less money and default on their debts as well. Their credit having been used to back municipal bonds which causes normally-stable bonds to look ugly and risky. Municipalities rely on their ability to borrow; from the smallest town in rural Alaska to New York City, municipalities take out loans at attractive interest rates to generate money to pay for vital necessities (because Americans want low taxes, don’t they?). Because the price of providing clean water, treating sewage, paying the garbage men, paying police and running jails, paying firemen and upkeeping police and fire equipment, paying county clerks, and city judges, and meter maids, and street sweepers, and the guys who fix the traffic lights, and guys to fill in the pot holes, and the guys (and machinery) to pave the roads, and hospitals, and colleges, and primary schools, and high schools, and to pay teachers, and to pay janitors, and…you get the picture…is expensive, city leaders have the choice of not providing one (or more) of these, or taking out loans. But the trickle of credit means they can take loans; guess what gives.

Consumer confidence trickles down to nothing, leaving investors to worry about the sales in retail store, of durable goods, of new houses, and the stock market slips further, tightening the noose. Unemployment rises meaning less jobs and more applicants. Market forces dictate that a plethora of skilled talent demands lower pay than a scarcity of skilled talent; those who are employed are hired at significantly lower wages than previously, leading to further tightening of the belt; time to prioritize the expenses.

So with millions more people out of work, and with decreasing values of land, and with increasing credit card debt, and increasing risk of loan defaults, and decreasing retirement assets, and increasing food costs, and increasing demand for social programs…

What would you do?

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