Tuesday, September 30, 2008

Economics

As the resident banker in almost all the blog circles I'm a part of, I feel the need to say a few things about the happenings in the financial world. While some of this might be opinion and commentary, I remind you I'm in the midst of this fire. Daily I dissect the information as presented to me and my colleagues, and then repeatedly share and teach and ensure and encourage my clients/customers to what it all means to them. I get on-the-hour updates to the financial condition of the dollar and everything that means to the world as a whole. I'm in the belly of this thing; and in this day and age that's a heavy place to be. So while my rant may be opinion driven, know it comes from an educated position.

For those of you unfamiliar with how America reached this point, here's a quick lesson in global finance.
1)Banks sell loans. Loans make money from the interest they charge. Banks lend or borrow from other banks using that interest income as collateral. Loans are put into packages and traded on the stock market as securities. (A good example is a duplex that has rental income. The fact that the building has the potential to earn money, like interest on a loan, is the reason someone purchases the duplex. Buying a number of duplexes would increase your income potential.)

2)The next part of that equation is the high mortgage defaults. Banks sold Adjustable Rate Mortgages (ARM's) when lending rates were low. They were attractive to people because the payments were low and affordable. But when the rates rose the monthly payments rose as well and quickly became unaffordable. When payments aren't made, the house goes into foreclosure and the loan into default. Going back to point #1, those bundled loan securities were now losing value due to the defaults which means they no longer had the potential to earn money. As a result, banks stopped lending to other banks because they couldn't trust their loan packages.

3)Before the mortgage crisis, loan packages which had been turned into securities were very profitable. As a result they became the bulk of many investment portfolios. Companies, individuals, and governments used them to loan, buy, sell, trade, and speculate. When the packages started collapsing because the loans were defaulting, it created a spiral that affected everyone. Some of those companies collapsed because they weren't diversified (split evenly) enough, and thus started the closing and bailing out of so many.

***Warning: Opinions beginning***
Much of the blame for this has been leveled at the banks and the government for pushing these ARM's. And without reserve I know banks wholly took advantage of many people just to make a buck. They swindled people like travelling salesman of old (and doctors bedding down with pharmaceutical companies today.) They shined a rainbow on the positives and hid the negatives behind smoke screens. At the root of all companies who deal with other people's money should be the ideal of ethics. We should be an industry of trust. The banks that pushed ARM's (and the government who provided incentives for those sales) violated and destroyed that trust.

That said, I am thoroughly disgusted that everyone is so quick to blame others for their problems. True, banks were throwing out mud that looked like gold, but that does NOT take away the fact that the consumer didn't take responsibility for themselves. If I walk in front of a train it is not the trains fault --because it didn't stop-- that I died; rather it is purely on me. I am tired of people crying foul when patience and good judgement would have spared them from any ill results.

When Ell and I bought our log house, the developer we bought it from penciled off a tract of land from the property we thought we were getting. We didn't see it (because we didn't inspect the final documents) and a couple years later we lost a large portion of land we thought was ours. This pissed me off like nothing ever had before in my life. I contacted a real estate attorney and threatened to sue the developer for taking advantage of us and stealing our land. I didn't though, because in the end what happened was my fault for not being careful. You can chalk it up to young, ignorant stupidity, but that doesn't take away the fact that what happened could have been prevented if I'd had patience and better judgement.

Please know I'm not defending banks here. Nor am I saying there aren't crooks and thieves in this crazy world. But I've had just about all I can take with the no-responsibility, pass the buck, it's not my fault mentality this country lives in. Add onto that the sheep attitudes so many have because they refuse to pursue thinking for themselves. I have no compassion for people who won't pull themselves up from problems or admit their own errors. I am sick of where we sit as citizens and am convinced these attitudes will destroy our country if we don't combat them. Wake up people. Read, listen, inspect, review. What happens to you is a result of your own actions.

Thanks for letting me rant.

6 Comments:

Blogger Adrienne said...

Thank-you so much!

I was working at a bank 8-9 years ago when no closing cost, prime+, no principal loans were going out the door like hotcakes.

Everybody and their brother got one and I said then, "I wonder what happens in ten years when the interest rates have risen considerably and these loans balloon." All those vacations and toys aren't going to get you very far in paying off a $100,000.00 in principal.

Granted, we were right in the fray of people getting them - but we used it to buy our house, it made the payment affordable until Adam finished school and we got on our feet. We had a plan, and we only borrowed what we needed - we didn't max out our equity, leaving us screwed.

Now, I also agree that some of these banks could have foreseen the trouble that was going to come and perhaps should have lended a bit more intelligently, but I still think the people taking them are mostly guilty.

And why, may I ask, is this thing all the government's fault? And why should our taxes go to bail out the numerous people that I personally know, and the large scale of people that I don't know, that were morons and now can't pay their bills?

Too much said. I'm just glad someone other me has been thinking maybe the people had some responsibility.

12:12 PM  
Blogger Sam said...

Adrienne, you touched on a point I almost included in my rant: Greed. One easy fix to the mortgage crisis would have been for banks to just rewrite every mortgage that was about to default into a low rate mortgage. Sounds like common sense, right. But if banks did that they'd have to let go of mounds of high interest payments and late fees. A foreclosure here or there would be a small price to pay (they write them off anyway) to continue raping the people they "tricked" into the ARM's. Their great plan became catasrophic when all of them defaulted within the same time frame and it snowballed to an avalanche before they could get control of it. Greed blinded them and in turn is destroying (or has already destroyed) them.

(None of which takes away personal responsibility. But it would have been the first step to curbing the current mess.)

12:32 PM  
Blogger Adrienne said...

Interesting. I was just wondering to Adam last night why the banks couldn't just rewrite the loans into manageable terms and solve a good deal of this.

12:52 PM  
Blogger vak said...

Hi,

nice, review.

I have read it after Ctrl-A though, because white-on-black stuff is for nightly hunters and is quite offensive for the eyes of those living in the daylight :)

I was a bit frustrated that dooblet has't listed one special alternative for crisis:
http://dooblet.com/a/en/crisis/

namely the *war*. And I mean no civil war that is indeed listed there. just normal (external) war.

regards
Valery

6:08 PM  
Blogger Timothy The Great said...

amen brother. i would go into a big long run-on sentence about how i feel about the people living in this country of ours. but you already know my feelings on that subject.

my question to you and everyone is...how do we fix it? is a government "bail out" the way to go?

11:30 PM  
Blogger Close To Home said...

my friend Katie worked at a bank for 8 years, around there at least, and she was one who dealt with people and loans, as well...yowsers....she talked about those balloon loans...ugh....i cannot even believe those thing existed. really.
anywhoo....kinda off topic but kinda not..interesting to google "how to survive a Depression" and read the links.

10:00 PM  

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