Report: Recession More Than Just a Subprime Mortgage Crisis

Thank you Captain Obvious.

No. This recession STARTED BECAUSE Nancy Pelosi grabbed power in 2006, STOPPED oil research and offshore development drilling in early 2007, which DROVE UP oil and gas prices in mid-2007 thourgh Oct 2008, which STOPPED economic growth in mid-2007 and early 2008.

THAT in turn killed automobile, trucking, commerce, and manufacturing (deliberately) and THAT caused the mortgage and housing and banking problems of summer 2008.

Exactly as designed by the democrats.

To see this crisis as a subprime crisis only is not to see the forest for the trees. But it’s been repeated so many times now (mostly by politicians who needed a scapegoat to point to in the beginning) that noone will ever be willing to call it anything else.

I have been saying for a long time that subprime was simply the first link to break in a horrendously over-stretched chain of ALL KINDS of debt... subprime, Alt-A, prime, mortgage, car, credit card, commercial buildings, corporate debt, municipal debt, federal debt and on and on. All of that debt was further magnfied over and over and over by credit default swaps and derivatives.

There were about 1 Trillion in Alt-A negative amortization mortgages done. It is estimated that 70% or more of those will default this year and next year. (search youtube for “The Mortgage Meltdown CBS”). Will we then switch to calling this the “Alt-A” crisis?

What about all of the Interest Only loans that are going to default? Or the “prime” loans or the FHA loans or the VA loans that are going to default? How about when cities default on their municipal debts? Will we just keep renaming the crisis? We can keep it simple by calling it what it is in general... a DEBT crisis.

There was much too much debt of all types, which caused the biggest asset bubble in history... not just a bubble in houses... a bubble in EVERYTHING... too many cars produced, too many people hired to produce the excess inventory (yes, a jobs bubble!), stock prices that were too high, 401K accounts that were bloated by overpriced stocks, etc, etc.

Cities, states and the feds based their spending on tax revenues that have fallen through the floor and are not coming back anytime soon.

Debt, debt and more debt. That is what caused this crisis.

We didn’t “pay it forward” as the saying goes. We “charged it forward”... and now we have to pay it back.

But, Soros said Obama kept America from a recession! I’m confused! [/sarc]

"Debt, debt and more debt. That is what caused this crisis."

It is the politicians that caused this crisis. The national credit card has become the congressional meal ticket. How can they get re-elected if they can't promise us everything we want and then pay for it with money that doesn't exist? This is the end result of mixing democracy with fiat money in the presence of bankers. It's kind of like mixing gasoline with matches in the presence of 8 year olds.

The public got drunk on debt too (we owe 14 TRILLION in home mortgage and other consumer debt... up from 3.4 trillion in 1990).

You are right though, the markets got drunk, but it was the gov’t who was the bartender (as Peter Schiff likes to say).

Its kinda like a perfect storm, with lots of contributing factors. When they talk about the credit markets seizing up and then go into the inane babel about loans for cars, and small business-that’s not exactly the real story.

Banks make money by lending, and they will do so if they conclude that they will get their money back.

EXPLANATION OF THE PHRASE “Credit Markets Seized Up”:

The real story in the credit market is the Interbank lending and other transactions, not only in the Repo market, but other areas such as Fed Funds market, wire transfers,and check clearing for example.

These transactions are in the millions of dollars, and there are hundreds and hundreds of them daily.

Naturally, a bank does not want to have large amounts of money on deposit with some other institution, that may go belly up overnight, and they loose their money. Hence, the usual money flow quits moving. This is what is meant by the credit markets seizing up.

DISCUSSION OF MARK TO MARKET:

Mark to Market rules also exacerbated the problem. If there is no buyer for a security, the market value is zero, in spite of intrinsic value (unknown). If you can not sell your house, because no one qualifies for a loan, does that mean you house's value is zero? Being forced to mark such securities to zero further eroded the amount of capital in the financial institutions.

MARKET DISCIPLINE IS NECESSARY TO CAPITALIST SYSTEM

The system at the extremes, is ruled by greed and fear. There will always be boom and bust, no matter how regulated. The bust is known as “market discipline” it is necessary. The key to survival is a cushion which helps to absorb the shock, and avoids rapid implosion of the system.

For example, traditional mortgages had required around 20% down payment. This protected the bank in the case of default, since they could foreclose, and resell without loss (or at least less loss).

They also had to put a certain amount into the loan/loss provision based on the historical default rate for the loan.

EXAMPLE OF INTERFERENCE WITH MARKET DISCIPLINE

The lending standards for home loans deteriorated(including no money down), partly because Fannie/Freddie were willing to accept such loans. The bank made the loan, and turned around and “sold” it to these institutions, they then had money to lend again, and the loan was off their books.

This helped remove incentives to cautious lending(no consequences for poor judgement-No market discipline on the originating financial institution).

These type of loans would have been non-conforming loans in the past, Fannie/Freddie would not have accepted them, the bank would have had to retain the loans on their books, and put money in reserves in case of default.

The amount of money available to lend would have been reduced, so the loan volume would not have grown so huge, and would not have been concentrated in quasi government agencies.

TO SURVIVE THE MARKET DISCIPLINE(BUST)

Cushions for lending is just one area to help financial institutions to survive. A few others are noted below:

The Fed requires the banks to keep reserves based on their various forms of deposits. This is another cushion which helps protect the system.

The Fed failed to apply standards for reserves, and cushions for non-traditional products and off balance sheet risks(even when the amounts involved became huge). So when the inevitable bust occurred, there was simply not enough cushion to avoid failure/meltdown of entire system.

The ultimate market discipline, is the failure of a bank, or other corporation. We allow this sometimes. But the concept of TOO BIG TO FAIL is yet another attempt to avoid market discipline, and does not encourage such institutions to behave responsibly.

It also allows the large banks to gobble up smaller banks at cheap prices further exacerbating the problem.

This only a brief explanation of some of the many issues, and not meant to be an all-inclusive dissertation of every aspect-that would take more pages than the health care bill.LOL

For anyone not knowing what the subprime mortgage crises is,
it was brought about because the dems forced banks to make loans to “minorities” that they could NEVER hope to pay off.
Of course that had nothing to do with causing this meltdown.