The Domino Effect: Yet Another Reminder
Well, most every pundit and blogger has been taking angles of the State of the Union address, given by President Obama on Wednesday night. During the speech, Obama talked about the bank bailouts, saying how it was “necessary, but [he] hated it”. This thing got spun so hard, I’m thinking “centrifuge”.
But to go backwards a bit, at the risk of sounding like a broken record, we need to keep this all in the proper perspective, because it’s so easy to spin this.
1) Why did the banks fail?
Well, the banks started going under when the housing market collapsed in early 2007. Since the banks were the principal financiers of these mortgages and these mortgages started going into foreclosure en masse. Simply, when banks foreclose on mortgages, they lose money.
Now these banks will hedge their bets, so they get insurance to prevent bank failure. This is where AIG comes in. The banks start falling and AIG starts paying out insurance claims, upwards to about $93 billion, which was far too much then they were able cover.
But Obama didn’t mention this when he was railing on how much he disliked bailing out the banks.
2) What caused the housing market to collapse?
Big question. But really, it boiled down to the sub-prime mortgage crisis. As you may remember, sub-prime mortgages are given to people who have a much higher degree of risk of not paying back. These are people who aren’t as apt to pay their bills.
Now they pay rent, but someone thought they should be entitled to pay a mortgage. Perhaps it was the politicians fault for promoting the idea that everyone should own their own house. Campaign speeches and public addresses giving hope to people who wouldn’t otherwise have the chance to own a house was a big part of this problem – why? Because it brings votes. Perhaps it was the fault of bankers and mortgage companies for taking advantage of the government’s effort to get more people buying houses and playing people who had no business owning a house into loans they couldn’t pay. Many of the sub-primes were Adjustable Rate Mortgages (ARM’s). As the risk went up, the interest rate went up and the ability for people to pay went down. More and more people stopped paying their mortgages, causing more demand on those who were paying. Suddenly, it was a cascade effect. Banks were getting stuck with default mortgages and collecting insurance money from AIG.
We were told over and over by Barney Frank and Maxine Waters that Fannie Mae and Freddie Mac were in no danger, yet, Greenspan warned of an impending collapse. Of course, it was funny to hear Greenspan prophetically talking about a collapse when Greenspan’s entire point in life was to watch the economy for variations and keep bubbles from forming. Perhaps retirement gave him some clarity.
No, Mr. Obama, this isn’t about the evil banks needing bailout. But you’re hoodwinking Americans by not looking back at the causes, pinning the blame on banks.
Oh, can you please tell me why Fannie and Freddie doesn’t get slammed for nice fat bonuses like all the other financiers? Oh, and where was the Fed in all of this? Yeah, it was THEM on Wall Street, not THAT ONE on Pennsylvania Avenue.