"the best advice is just to buy anything" the source of the currnt troubles, part 1 - housing

this is about the current financial crisis. i know that i might not have the specifics completely correct, but i'm confident of the general idea. This American Life's 2 radio shows on the subject, starting with "the giant pool of money" are also highly recommended.

So the problem started with the housing market. it always went up. for decades, it always went up. now, investment markets work on perception, so because people always expected it to go up they were willing to put in more money and it went up faster and faster. so then in the 90s and the early 00s, it was super duper overvalued. like, houses were being priced at waaay more than they were worth, because everyone involved, the buyer, the seller, the builder, the state and federal gov'ts, even, regarded these very high prices as essential and normal (because they'd all been making money from it--the builders could charge more, land was worth more, property tax revenue was up, the home buyers were expecting a rock-solid high return investment).

but there were more ways to make money from the always rising housing market (which, i should note, was the only sector of the economy that kept always going up in these decades, i remember during my formative years in the 90s being under the impression that although the stock market was recessing the real estate market was where the real gold was). anyway, people figured out that if they found people who didn't qualify for normal mortgage loans from legit banks, they could supply the loan themselves and then charge the person as much as they wanted in interest. people didn't care about paying tons of interest because the value of the house always went up. so anybody, regardless of how much money they had or what their job was, could rack up an enormous amount of debt and a potentially ruinous interest rate and then turn around and pay it all back in a few years along with a large profit for themselves, because the value of the house just rose that fast. remember how in perfect strangers when larry gets the idea to buy that huge house and then fix it up themselves to turn around and sell it for millions?? yeah.

so then the "bubble burst"--people had been talking for years about how the housing market was over valued, and finally homeowners started listening to them. anyway, the perception was that the houses were worth less (and i mean really, isn't this a good thing? anyone who has seen the steady disappearance of cornfields and trees in favor of urban sprawl and insta suburbs in the mideast will have to agree, except for RE people, contractors, constuction, some landowners, etc). and this might have been because of the spikes in gas prices and the perception that they weren't going down again--nobody wanted to invest tons of money in houses in the burbs because they didn't have it and would cost them in gas. so. housing values stopped going up. in fact, they started going down. unheard of! thats not good for any homeowners (although it is good for people who don't own homes, but for the last few decades EVERYONE has been encouraged to buy a home, often by the gov't, because it seemed like such a good idea / solid investment) but it made things totally untenable for those people who had put themselves in massive debt on the expectation of "free" profits. especially because as soon as the market started to sour the lenders raised the interest rates wherever they could (although of course if you had a legit mortgage from a legit bank it would prob be fixed rate, unless you were a crazy optimist and were hoping it would go down?) so now the people with no job/bad job and huge debt were suddenly faced with no home valuse to get equity loans combined with huge huge monthly payments just to make their debt remain even. so they declared bankruptcy. so the banks (or whoever) foreclosed on their home. now, when a home gets foreclosed (which means that it gets repossessed), theres a possibly automatic process where people look at ALL the homes in the area and wonder if the people who bought them and the prices they paid were actually speculative investments (because its assumed that thats what the foreclosed home must have been) and so for every one of these you have in a given area, the official value of ALL the homes decreases.

which furthers the perception that the housing market was overvalued. which makes people not want to buy homes (At least not at this time). which makes the market loose more value. which makes more people who could barely afford their homes i nthe first place declare bankruptcy...

and with the cash cow of all those profligates sacrificed at last on the altar of common sense, spending on cell phones and hybrids and SUVs and plasma TVs likewise goes down, so companies earn less and might hire less people and govt tax revenue decreases further...

Next Time:

The source of the current troubles part 2:

that money is spent!

speculation, bundling, interconnected debt and international investment