Why are we here?

Mostly due to stagflation that occurred during the post Vietnam economy. That stagflation, where inflated prices led to a crippling lack of profit, created an atmosphere in which deregulation appeared to offer a viable solution..

And what a solution it provided. It offered hope and people responded by again putting their money up for investment, and the markets responded to the new influx of cash by growing towards more prosperous times. Ronald Reagan is usually given credit for this recovery.

This spirit of deregulation, since it appeared to work, spread out to all other fields…

One was banking… Banking works like this.. The bank borrows money on which it pays low interest, and lends out that money again at high interest… It makes its money on the spread between the high rate, and low rate.

Recognizing that the health of banks was tied up with the health of our nation, strict rules were placed on banks after the first Great Depression, to make sure no federal economic crises could occur again. One of those rules was to forbid any interest from being paid out on the capital the bank used as collateral: primarily that money which individuals placed into their checking accounts. This low cost of capital 0%, meant that the spreads would be beneficial to banks during both good and bad times, and … that banks would not have to charge as high on the upper end to achieve and cover their profit margins.

So during the 80’s the idea came up that having fake banks offer similar services could provide competition to banks and make them trimmer and healthier. We began using semi-safe money market accounts in place of checking account mechanisms and banks who had to compete against them, soon got permission to join in…. The bank was no longer paying out 0%. Nor was it’s capital safe from all financial fluctuations as it would have been had it remained depositor’s only.

Banking is risky. A bank provides safety to those lending money to it… and provides risky financial capital to those entities who borrow from it… The bank is expected to absorb all risk, and charges accordingly to cover the cost that such a risk involves.. This was typically done by buying short, and lending long…. The bank charges a low interest rate for a short period of time, because it can quickly get its money back and there is less risk of losing it. The bank will charge a higher rate on a long term loan because there is greater risk that it will not receive its money as agreed…

In the spirit of deregulation, banks began using money other than that of their depositors to make high risk loans. Since this money cost them more to buy, they made riskier loans on the high side to make up the difference.

Then came 9/11 and the collapse of the economy. Interest rates were dropped excessively low to stimulate growth. The drop in interest rates, made houses cheaper to buy and many people did.. A housing boom market was born. Since one could afford a more expensive house because of the new low rate, housing prices rose to meet that demand. If one had an existing house whose value was rising rapidly, that person could afford to borrow more. Their home, if sold, would cover whatever would be the default amount. And if a risky loan was made, the house’s rising worth would cover the defaulted loan amount and then some. In this environment it made financial sense to loan to anyone who couldn’t afford to pay the regular amount. You made money for a few years on the ARM portion and then, sold the house at auction to make even more money..

It was safe. Since it was so safe, the idea came up as to why you couldn’t buy or sell these safe investments.. Bundle the mortgages together, and find a buyer.. If a small institution had doubts about a mortgage, it sold it to a larger one. Eventually, because these investments were so safe (you’d just sell the house if it ever defaulted), the global economy invested heavily in this replacement for depositors. You paid out the low rate, and sold that to a buyer for a higher rate… and made money on the spread.

The only thing that could possibly go wrong, was if housing prices fell. Then, the house couldn’t be sold.. and the loan would go into default… Then the institution covering that default, would be the one absorbing the risk.

As ARM prices began morphing into regular interest rates, a lot of people simply walked away from their new mortgage responsibilities. As banks scrambled to sell these houses (that no one wanted), they couldn’t. As the numbers walking away grew rapidly, banks now left with a lot of properties on hand, had to sell them at bargain prices to get some cash back on the balance sheets. This impacted the price of everyone’s house. Why buy a $250,000 house on market when its neighborhood was selling at auction for $95,000?

Suddenly no home was worth an adequate amount to secure its loan. That made every mortgage basically as secure as any credit card transaction. Everyone hoped the person would make payment, but if that person defaulted, there was no way to collect upon the debt. Suddenly the institution was severely at risk.

Which meant,… just as suddenly, … the entire banking industry across the globe, was instantly based on nothing. Absolutely nothing, except the “hope” that American house payments would continue to come in….

With nothing to back up money, (it is after=all, just a piece of paper) suddenly everything, became without worth… Absolutely everything… One’s house, one’s wallet’s cash, one’s credit cards, one’s employer’s credibility, one’s paycheck, one’s accounts receivable, one’s accounts payable, one’s tax refund check… each and all of these were now based on the slim hope that perhaps everyone who found out that had no worth left, would continue making their mortgage payments out of habit… Not a reassuring dose of confidence.

Into this void steps the United States of America saying, ” We will guarantee all these loans, even though it may cost us a pretty penny, we will make sure everyone gets paid.”, The United States economy was large enough at that time, so such a statement was believable. A lot of investors large and small, closed their eyes and went to bed that night..

Socialism saved the world. Government action, not private enterprise, saved our ass. It was done by a Republican administration because it was the right thing to do. It was done by a Republican administration because it was the only thing to do…

So do us a favor, the next time you spend any money at all, whether it’s to pay a bill, pay a toll, buy something for your kids, pick something up that you always wanted, or even when you see your automated deposit hit your account… say a little prayer thanking God for socialism…. Because without it, there wouldn’t be an America right now..

And if you happen to hear someone abuse socialism in any derogatory form or fashion, do us all a favor, use your American given right to carry a gun, and shoot them* for us, …. P L E A S E ?

*(inside joke: 🙂 don’t get yourselves bent out of shape over it)