The Financial Crisis Remedial Edition

For those of us who are not Nobel Prize winning or Ivy League educated economists here is the crux of the financial meltdown in terms we can all understand. Though there are those in the media and the McCain campaign that would have us believe that how we got to this point in history is unimportant I have always believed that those who fail to learn from their past mistakes are bound to repeat them. According to the endless line of economists that now appear hourly on our television screens the economic crisis is too complex for any of us to understand. I would like to take this opportunity to provide a simple explanation of this complex situation based on my own studies.

The financial meltdown by all accounts began with the mortgage crisis and this issue continues to fuel the loss of capital in our national and international financial institutions. So how did the mortgage crisis begin and how did it lead to our current situation? The mortgage crisis began with a noble concept, the concept was to try and provide home ownership to more Americans. It began with the Clinton Administration and continued with the Bush Administration’s “ownership society”. So how did such a noble idea lead to the financial meltdown of today? The problem is that when you open up a system flush with cash and do not provide the proper oversight the greed of some men will warp the good intentions of others. The market was flooded with capital but instead of providing the necessary oversight what little oversight that was present was removed.

The process began with the realtors; they sold houses that had inflated prices. Because of the housing market boom with the increase in capital and buyers the prices for homes were grossly inflated. A home that would have normally been valued at say 100,000 was sold at the inflated price of say 200,000. These inflated prices were based in 2 false assumptions; the first was that housing values always appreciate so that even though the prices were inflated the value would eventually catch-up to the price. The second was that the market was savvy enough to understand the intricacies of all of these new financing instruments or that the sellers did for that much. What we have since learned is that both of these assumptions were proven false. While housing values do historically tend to appreciate there have been times when they have not. Obviously like free booze at a wedding no one thought it would ever run out. It did. So we now have homes that are overpriced based on their true value, therefore any financial assumptions based on these values is flawed. It’s like you have a bank balance that shows 100 dollars when in actuality there is only 50 dollars in the account. It’s all good so long as you don’t have to pay more than 50 dollars.

The next domino was the so-called “sub-prime” buyers who the programs were originally designed to help. For those who have sterling credit and have had it their whole adult lives they have no concept of the thought process of those who do not share their credit ratings. If you have been turned down for credit for so long when you finally get the opportunity to get it, you don’t look at the terms. You are just happy to be able to buy something. Let’s face it folks our country runs on credit, without it you are considered unfit as a person. In the best of circumstances many of these “sub-prime” borrowers were put into homes with these new financing instruments they could not afford. Many of them were balloon instruments that provided affordable payments for a few years and then ballooned up to higher payments. This does not include those who were taken advantage of by predatory lenders. Many of these buyers could barely afford the payments they moved in with, so when the payments ballooned they were unable to make their mortgage payments. While this is unfortunate it doesn’t explain why our financial system went haywire. I mean we foreclose on those homes and resell them right? Wrong. Because these homes were not priced even close to their value all that inflated value was also lost with the original loan, because you are not going to be able to sell the home for that inflated price. So not only did the mortgage company lose the original loan they had an asset that was priced substantially higher than its estimated value. On a small scale these discrepancies could be off-set by other loans or fees; however on a massive scale there was no way to recoup all of these losses.

The final domino was that we allowed Wall Street to bundle these mortgages into securities and sell them. There were two problems with this idea. The first of course was that the price of the assets being held was inflated compared to their actual value. The second was the inherent incompatibility of the concept of using mortgages as securities. Let’s think about this. We sell securities in businesses; the main purpose of a business is to make money or to make a profit. The main purpose of a mortgage for most Americans is to provide a home for their family. While there are those who use their mortgages and homes to generate income and profit, this is not the case for most Americans and especially those who were in the “sub-prime” category. Many of these folks were first or second time home buyers who lacked the savvy to do so. So we have these massive security instruments tied to over-priced assets and to make matters worse we have these CEO’s and other officers who were aware of these pitfalls and pushed the situation to the brink. They not only continued to buy and sell these worthless instruments they leveraged their companies or borrowed against these assets that they knew were over-valued or in many cases questionable.

So you see on paper it all looked good. Everyone was making money and no one cared about the consequences. Then of course the day of reckoning arrived, they could no longer continue to count these worthless assets on their balance sheets. So now after all the profits have been made and all the inflated value has been sucked out of these assets these clowns come to the American public with these predictions of Armageddon if they are not rescued. They want to sell us all of these worthless assets at a profit. Do not be fooled if your home had value before this crisis it still has value. Those who should be worried are those who refinanced or bought overpriced homes in the first place. These are the homes that are seeing their value diminish as they should. Senator McCain wants us to come in and continue to prop up these over inflated homes to protect the banks. Why should I be asked to prop up the value of these people’s homes?

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You Call That A Debate?

Ever since the much anticipated on again off again debate between the two Presidential candidates, there has been a lot of concern from Democrats and pundits concerning the performance or lack thereof from Senator Obama. Many people feel that the debate was full of “moments loss” for the Senator to “take it to” McCain. Many felt that after the disastrous week McCain had that he was prime for a final knockout blow. It’s funny because I remember the week prior to the debate I was visiting my parents and jokingly said that if I were Senator Obama I would do something deliberate to anger John McCain and show that he was temperamentally unfit to be President. I had even jokingly and somewhat cruelly suggested that I would mention McCain’s adopted daughter that Bush had used to derail the McCain candidacy in 2000.

For the many people who feel that Senator Obama needs to go after McCain during the debates, I would just like to interject some thoughts from my own experience of being a black man working in a white world. The first thing that I would remind all of those people who are calling for Senator Obama to get tough with McCain is that they are already going to vote for Obama. What a supporter looks for in a candidate may not be what an undecided voter might find appealing. What many supporters don’t understand is the fine line that Senator Obama has to walk; despite all the pronouncements to the contrary we are still living in America where blacks are expected to carry themselves in certain ways when it comes to interacting with whites. While many people want to use Senator Obama’s historical candidacy as the death knell to our racist past there are many others who are not so willing to put our racist history to bed.

The latitude that many whites accord each other in interactions is not the same they accord minorities during those same interactions. Senator Obama could in fact dissect McCain very easily with facts that are surfacing daily about the ruthlessness, incompetence, and gimmickry of the McCain campaign in the news media. But what many don’t understand is that even if he were to undress McCain publically during the debates he could still be viewed as the loser by many of the undecided voters. We must not lose track of what this election and many elections in this country have boiled down to; about 20% of all eligible registered voters. Who can gauge the mindset of these voters? I mean think about it; anyone with all that has gone on in this country the last 8 years who has not made a decision about what direction they want this country to go in at this late date how can you expect to know what is going on in their minds. The worse thing that Senator Obama could do is to offend those voters by being seen as picking on this poor old white man who has sacrificed so much for his country. Whether you agree or disagree with this narrative it is the one that many Americans accept as the truth.

This election despite the pundits and media talking heads pronouncements to the contrary is Senator Obama’s to lose. Would we rather he win the debate and lose the election? Wouldn’t it be a better strategy to let the news media continue to pound the McCain campaign with daily charges of incompetence and collusion with lobbyist? While I agree that if it were me I would do more to tie McCain to the current economic crisis and the past policies of the Bush administration during the debates, but despite his seeming ineptitude Senator Obama is rising in the polls; all polls. Many of Senator Obama’s supporters would like to believe that he will be judged by the electorate based entirely on his character and his competency. I beg to disagree. We must not mistake our own judgments for the judgments of others. There are some voters who are looking for a reason not to vote for Obama. They will vote for him, albeit reluctantly. As we get closer to Election Day the McCain camp will become more desperate and will begin to try more and more gimmicks and take even more risks, as they do so they will make bigger mistakes. These mistakes will not only derail their campaign but hopefully will take down other Republicans in the process.

To all of those who are watching every twist and turn of this election through the media’s microscope I would just like to suggest you “GET OUT MORE”. Turn off the television or the computer and go out to dinner or go to a movie. The media is not going to let this election become a landslide even if is. Think about it if people begin to view this election as being over the public’s interest goes down and media outlets lose advertising dollars. They will continue to try and peak the public’s interest in this election until the final vote hoping to capture every advertising dollar they can get their greedy hands on. Keep tuned to the future debates and watch how Senator Obama methodically exposes McCain for the fraud that he is, but remember how Mondale tried to expose Reagan and those results.

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