Friday, November 19, 2010
Signs of Hope
I've heard some news lately that gives me hope that all is not forever lost and covered in lies. Two authors were interviewed about a book they had recently completed and had published. The book explains the cause of the real estate bubble and how it came to burst and create a world-wide recession. One interesting fact came out. It turns out that 75 percent of the sub-prime mortgage loans were made to persons who already owned the houses they were living in. These people were refinancing to extract some equity from their houses for purchasing new cars, vacation trips, more clothing, etc. Wages were stagnant and spending equity was keeping the economy going.
As long as house prices kept rising, no one saw any problem with these refinanced mortgages. It wasn't important that the borrowers had good incomes. They had been living in the houses and had, on paper, good credit ratings. Banks lent the money and sold the mortgages to other banks who bundled them and sold them all over the world as A-rated bonds. The rating companies, such as Moody's and Standard & Poor, cooperated in assigning the ratings. Since house prices were going to continue going up and up and up the process could be repeated forever and there was no problem.
Except, house prices started to turn down. That was a disaster that no one had expected. Suddenly consumers on stagnant incomes could no longer continue to spend the equity in their houses - they suddenly didn't have any equity - and they cut back on their buying. Suddenly we were in the midst of a recession. We're still in it.
Meanwhile, employers have learned to make do with fewer employees. If you lost your job because of the recession, you are probably not going to get it back when the recession is over. Your job has been permanently replaced by a foreign worker in Asia or by a machine. You're going to have to learn a brand new trade. Because of the recession combined with conservative ideology, the government isn't going to offer any training or education for you to make yourself fit for a new line of work. You are supposed to be self-reliant and retrain yourself by yourself.
Good day and good luck!