Monday, December 26, 2011
The Big Short #4
Every year over winter break, my family and I drive up to Menasha, Wisconsin to spend time with my grandparents and cousins. At the dinners, the adults always talked about the economy and what was wrong with America. I could hardly keep up because of my limited knowledge of the economy. I sat down with my grandpa, and interviewed him about what he thinks the main causes for the problems of the economy are. He responded, "Loans." I asked him for more specifics and he responded, "Hyper inflated bubble with the housing market." He explained that people were taking loans that were too big for them to pay off. I asked him why the banks would keep giving those people money. He immediately started to talk about a specific bill that changed the way banks gave loans drastically. In 1978, congress passed the CRA (community reinvestment act). This bill, finally enforced around the year 2000, made banks take between 5-10% of their mortgage portfolio and give it to people who would not otherwise been eligible to receive a loan. But this wasn't the big problem. Fannie May and Freddie Mac, mortgage investment underwriters, allowed banks to sell them bundles of these CRA loans. Because these loans were high risk, low reward, the banks continued to sell May and Mac their bundles. May and Mac then sold these bundles to Wall Street. The buyers of these bundles were told that the loans were in much better financial standing than they actually were. Therefore, it created a circle of buying bundles and selling them back to wall street which created a deeper and deeper financial hole. In addition, the bundles of loans were not insured by the government. This means, if the loans were to crash, the buyers would not get any insurance money. It was only a matter of time before the economy crashed.
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I'm often in the same situation at the family table. Its a little shameful, how little I actually know about how our economy works and the fine details of this recession. However, the CRA and loan issues' basic story is familiar to me. How does an economy recover from this kind of large-scale deception? I wonder what kinds of plans could possibly replace so many investments that are, as you stated, "high risk, low reward." Have you read anything about what is being done in the government, as far as stimulus plans and legislation go, to bail out those people who made loans and those banks that could not back them?
ReplyDeleteThose are all very good questions. If the government can't figure it out then I doubt I can, but I'll definitely give it a try. I think one of the base problems of the recession is the limited job market for Americans. Many of the major companies that started in America are starting to move out of the country. Often times, the workers will work for less than the American workers. Almost all of the major companies are exanding or even moving out of the country. If companies continued to grow in America, rather than move out of the country for cheaper labor, then more Americans will have stable jobs. If more Americans have stable jobs that pay them enough to create their own life, then banks wouldn't be forced to give out loans that are high risk, low reward. I think Obama's been doing a good job of stimulating the economy, however I believe he should make a bigger push to create jobs. This starts with companies having trust in the economy and staying in America. Instead of living off fake money made by past generations, Americans should begin making real money that's earned through hard work. I'm sorry it's getting repetative, but it really is a tough problem to solve when there are so many complicated pieces involved.
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