RCS Special: How We Got Into This Mess

No one likes to take responsibility any more.  It is a lost art.  Blame the other person and dirty them so much, they have to take the fall.  In 2006 our economy declined rapidly.  Starting with the housing market, Investment Banks became the scapegoat.  That started a war, Wall St. vs. Main St.  And Wall St. was the oversized bully while Main St. was the underdog that just could not compete.

 

The real problem was when Main St. looked in the mirror, they saw an inflated image of themselves rather than what they really were.

 

 Main St. wanted to be Wall St., attempted and failed in a big way.

 Here is a synopsis of how it happened.

In early 2000’s Wall St., like every business of every size wanted to find new markets to tap into and make more money.  The housing market was ripe for the picking.  These Investment Banks created a new tool allowing themselves to open new investments, sub-prime mortgages.  Sub-prime incense means, you should not have this loan but we (the bank) are going to gamble on you.  It is a high risk loan, if the risk sustains to reward, there is greater reward at the end.

Self-inflated Main St. came along and said yes to these high risks loans brushing aside the responsibility and requirements to sustain such loans.  Investment Banks boomed.

The side effect of this boom was a false housing supply shortage causing prices to skyrocket.  Left and right people were selling since it was a seller’s market and people who should not be buying were purchasing more than they should with dreams of the property value to continue upwards.  Like every day of the year, even good days, they come to an end.  At the end of the day those who had purchased more than they should felt like Wall St. cheated them and it was not their fault for signing a loan they couldn’t afford.  Slowly Main St. stopped paying the mortgage to Wall St.  “Why should I pay this mortgage if my house is not worth anything”, was a very popular question and still is.  Foreclosures started.

 

 

Before America figured out they could not afford their new found wealth in home ownership, the Investment Banks knew the reality that owning a home is not an asset, it is a liability.  And they did not want that liability.

Here is where it gets a little tricky.  To off load that liability the Investment Banks created a new tool called Debt Obligations.  Instead of one mortgage paying for itself, they grouped sub-prime mortgages together creating a pool of mortgages all paying into one box.  As Main St. paid the box would slowly fill to cover the cost of the loans.  That box was sliced into three sections and tiered.  When tier 1 filled it would over flow and start filling tier 2 and when tier 2 filled it would overflow to tier 3.

(Please accuse the amateurish picture I made to illustrate.)

 

Tier 1, was given a rating of “AAA”, theoretically the safest type of bond to invest in.  Tier 2 inherently a little more risky, was given a “BBB” rating.  And tier 3, was not rated at all because of the high risk.  Hedge funds love high risk by the way, so there was something for everyone.  Investment Banks started selling these new debt obligations to other banks and investors like hot cakes.  Investment banks were making money and passing the risk to the next guy and the hot potato risk game starts.

Inevitably, Main St. stopped paying, and foreclosures started.  The game of hot potato is over.  Those holding the liability were stuck with it.  No one wanted to buy these new debt obligations, the investment went bust and company who got caught with the potato went bankrupt.

The economic downturn starts and Main St. holds Corporate Wall St. responsible.

 

 

 

So who is the real culprit of the economic downturn?  Is it the fool that leads or the fool that follows?  Investment Banks knew what they were doing was foolish, but those who took mortgages they could not afford also did something foolish.

United We Stand, United We Fall.  We got ourselves into this together; we need to get ourselves out of this together.  The federal government is only prolonging the Band-Aid theory.  Rip it off quickly, be down with it and move on.

Under President Bush, TARP was enacted because we could not let the banking industry fail.  It would create a catastrophic economic effect.  I disagree, let those who fail, fail.  Making way for those who will create.  It is like a dead tree failing in the woods, once it is allowed to fall/fail, it opens up sunlight to reach the ground allowing several trees to grow in its place.

Under President Obama he continues the pain by trying to subsidize everything creating two problems; One: False market; Two: Out of control spending.  Are these not the exact same two points that got us into this mess?  Wall St. creating a false market and Main St.’s out of control spending.  What got us in will not get us out.

Common Sense says: If you fall into a ditch you do not get out by jumping into another ditch.  It only leaves you further in the whole.  Our country has been in the red for a long time and we are allowing Washington D.C. to jump into another ditch, also becoming more commonly known as a “double dip recession”.  We must replace those who support a double dip recession with someone who understands business practice and not theory.

 

Jared Taylor